What Fee Structure Do You Pay Your Property Manager?

12 Replies

I'm looking into PMs for a new area that I'm investing in from long distance. I've never used a PM before, so I wanted to compare notes with other investors who have used one. For instance, one PM I spoke to has the following fees:

50% of first month's rent to initialize tenant (+$50 just to draw up the lease)

8%/month rents collected

$150 flat for a renewal

This comes in at about 12.5% of gross rents in year one of a tenant's lease, and then probably closer to 9% in every year they renew. Does this seem high? How does this compare to what you have seen?

Jason, for Orlando, I strongly recommend Orlando Realty and Property Management. I did some research on the options about a year ago and they were the best. So far, they're continuing to be on top of everything and doing a great job managing a tricky tenant. They charge 9% monthly, but their annual fee structure is designed to incentivize them to keep tenants more than one year. Most places do a flat fee for move-in...which means they'll make more money by getting annual turnover.

As for other areas of the country (like Washington State), it's often 100% of first month's rent plus 10% monthly. So, while the price of yours might look good, it's worth getting a better company that you pay a little more for. 

Jason,

I would try to interview 5-10 PM companies to see what everyone charges. I prefer to use flat rate PMs at about 8% of gross monthly rent collected. I've found my PMs agree that they should only get paid when renters are occupying and paying. Plus the PMs I work with know that keeping an existing tenant is easier than loosing one so if they charged me $150 to resign an existing tenant for another then I would expect the tenant to cover that cost over the year.

Overall, I prefer flat rate but it's really up to you and the area. Good luck

Jason,

 As stated, it depends on what "Normal" practice is in your area, but that is something that can be negotiated with. i would talk to a few PM companies as @Danny Randazzo suggested, to find out rates and to find one that you feel comfortable dealing with. I just switched my PM and right now i pay 7% , leasing fee of $300 and $100 renewal fee.

@Wes S. The property is actually not in the Orlando area, but thanks for the recommendation for the future.


@Danny Randazzo Yes, I like your idea to interview 5 more PMs. The one I quoted above is actually my agent in the deal, so I do feel somewhat of a sense of loyalty, but that's not going to stop me from hearing out others. However, I do wonder if there is some sort of intangible benefit to hiring him, since that also would presumably incentivize him to keep looking for deals for me (as opposed to spurning him for another PM)?

I am also 100% in agreement that the part that perturbed the most was that he gets paid more to turn the property than he does when a tenant renews. That just feels like a total misalignment of interests. Any suggestions for negotiating this into something more beneficial for us both?

@Jason L. I think you are in a good situation to negotiate if your agent is also offering PM services. I know it's hard to take away the personal connection to feel indebted to your agent to become the PM too. However that's not how the business should work. Think about your business as if you reported to shareholders and you need to do what's right for the company and the shareholders before anything else. That being said you are dealing with two different people: 1 is an agent and 1 is a PM. Is the person making a commission as the agent? If so, i bet they would like to continue to earn your business via new acquisition purchase commissions. I'd ask them what they can do from a PM perspective known if that you plan to buy X number of properties over the next 5 years. I'd then say that it can be a trial run for the first property to see if you both work well together. I'm happy to help further if you have more questions. Don't be afraid to ask for everything you want, the worst that can happen is you get a different PM. 

My question is: are they worth it?

So many people look at what the PM charges and try to find the cheapest one. However, the cheapest one may end up costing you more money in the long run due to poor management. Cheaper isn't always better so you need to consider many other factors and compare many managers.

You can start by going to www.narpm.org and search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start.

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their different staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 5% management fee but the extra fees can add up to be more than the other company that charges 10% with no add-on fees. Fees should be clearly stated, easy to understand, and justifiable. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate!

4. Review their lease agreement and addendums. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance or problem tenants. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that it is enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact they are complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

I hope this basic guide helps. If you have specific questions about property management, I'll be happy to help!

This will vary by area. For where I invest the two I use are 8 and 10 percent gross rent, one or 3/4 rent on lease up and 100-150 on lease renewal.

@Danny Randazzo  Thanks for the help. The more I've thought about it, the more I realize the getting paid more on the turn is just a complete nonstarter for me. What I may do is try to interview a few more PMs to get a feel for their fee structures. If I find a structure I like, then I might go back to the agent and give him sort of a right of first refusal to match it. At least then I can say that I tried to show some loyalty, and this method of using an actual PMs structure might be a bit more constructive than trying to negotiate points back and forth with him. If he declines, then hopefully that means I liked one of the other PMs enough to sign with them, and if that makes things awkward for him as the agent then so be it (I do think he's a good agent though).

@Nathan G. Great response. I am going to use it to ask more specific questions as I interview other PMs. I've come to realize that I need to stick to my guns and make sure my PM's interests are totally aligned with mine. I do like the agent in question as an agent, but I definitely feel his PM structure violates that latter point.

By the way, do you guys think charging $50 for the lease is also standard? I manage another property of my own not too far away, so I know first hand putting a lease/renewal together is like a 10 minute copy/paste job. Is it weird if I just say that I'll put the leases together on my own rather than pay a seperate fee for the PM to do it?

Jason,

Just as a side note; the PM does more work on the front end when it’s vacant. Marketing, showings, preparing the property for rent, dealing with HOA’s, processing the application, etc.... in addition, the Agent has to pay a referral fee out of that lease fee if another realtor brings the tenant to the table.
In addition, In Florida, the leases must be attorney prepared, so there is an additional fee. There is so much that happens behind the scene. I think a lot of people lose sight of all of that. PM is a hard job, very litigious and low pay for everything we do

I think that sounds like a very good price. Good on you for lumping all the costs. Too many investors fall for the 10% Monthly fee & don't take into account all the other fees. It can easily add 5-10% more per month average. Now, cheaper is definitely not better, but do your DD & compare with other PMs including fees & feedback.

@Jason L. @Danny Randazzo   Comment above was that it was an irritation to see the PM get paid more when a tenant non-renews, than if they renew.  Exactly!  This is why we purposefully built our initial leasing fees to be very small, often simply covering the Tenant Realtor Commission making the PM Company (us) near nothing.  

When we get a tenant renewal, there is a small commission there and that is split between the company and the Portfolio Manager handling the home.  We get paid more on a renewal with a lot less work! 

So, to your point, we look to align our interests with the owner's interests everywhere we can.  That's what I feel is fair and more PM companies should embrace.  

Good luck out there!  

In property management you get what you pay for.  Sure, you can probably find a ma and pa company that will do it for next to nothing, but it could cost you more in the long-run.  The problem is that some property managers slack off, falling short of their duties. And many just get good at taking you money and nothing else.  The good news is that there are many good ones out there...they just usually cost a little more, but at the same time they usually offer more services.  So don't be scared off just by the price.  Call around and see what each one offers.

For me, I get to know the ins and outs of the property management company I select, and I pay a little more knowing that they have the best resources and credential to make my business a success.   Of the five out of state units I own, I pay a management fee of 9.9% and leasing fee of 6.9% of annual gross rents.  Judging by the tenants that they've gotten me, and their responsiveness to my needs, I find it to be be very fair.  

Also, when looking, try to find a company that has 500 plus properties under management.  Good luck with your search.

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