Property Management Fees & Their Place in My Analysis

4 Replies

Hi BP community,

I have always accounted for 10% property management when analyzing deals. I have learned this through @Brandon Turner webinars, podcasts, etc.

Now that I have seen other fees involved with hiring a property management company, it seems like that 10% will be much more. I added in leasing, renewal, and setup fees, in addition to the actual 6-10% management fee. Now after calculating, my entire property management costs are coming out to 15%-22.5% of rent, varying by company. 

Leasing fees are varying from 50-100% one month rent. Renewal fees from 35-75% one month rent and some charged every six months. Management from 6-10% and some companies charging setup fees. 

These are all expenses I will incur to have property management, therefore I feel I absolutely need to calculate these numbers into my analysis. This cuts the margins I was thinking I’d get or requires me to offer lower. 

Am I missing something? Is this usual and do people use these numbers when running their analysis? I have asked some who have said they do not include these fees in analysis. If not, why would’t you?

Hi Eric,

I think you're on the right track.  

I do include an additional 3% management fees on top of my 10% (for a total of 13%).  I don't have a lot of turn over in my units, so the 13% came in about right.  Just to help verify this amount, I set up a separate account in my bookkeeping system to hold the additional charges.  In essence, I keep "Property Management" and "Property Management additional fees" as separate accounts.  That lets me keep precise accounting of them and understand how that plays out for each property.  Over the course of a few years, you have great baselines built up and can then more effectively negotiate with your property manager to reduce these fees, especially if you have a substantial number of units.  

Along those lines, I did take the time to negotiate some of these fees up front with my PM.  So, for example, worked with them to drop the lease renewal fees when I reached 5 units.  

Keeping good track of these fees helps in accounting and understanding property expenses!  

Hey @Eric Telese great question. I too am looking for my first property and just about ready to pull the trigger. Great advice from @Joe Hines .

Joe, I'm running into the same issues as Eric where PM fees I have been budgeting for are exclusive of new lessee, renewal fees etc. Some agreements I've seen even throw a 15% surcharge on top of any R&M that needs to be done. Do you find this to be typical?

Been talking with a lot of PM's trying to find Mr Right but as its my first property, don't have much room to negotiate out of renewal fees. For someone in this position, do you have any recommendations on how to budget for this whilst having no prior history of tenant retention rates?

Another common issue I'm finding is that PM's goals are misaligned with my own. By the way these contracts are structured, they are incentivized to lease to bad tenants. What I mean by this is they make their money when a tenant leaves and they fill a new lease, they make money on late fees.

Appreciate the feedback, any other tips to help Eric and myself?

@Joe Hines that is what I’m going to start doing- tack a few extra percent on when running numbers. It’s tough to estimate an accurate yearly or monthly number with those fees.

I like the idea of keeping those two accounts separate for bookkeeping. Definitely going to keep those expenses separate and track them over the years.

Thanks for your input!

@Rich Vetter I agree. I see that some of these companies have high leasing fees and renewal fees. Either way- if they lose a tenant or renew them, they get a nice chunk. I am not trying to create a win-lose situation for anyone, especially someone I will need to put this type of trust in with my property. But, I feel the same as you where interests might not be aligned. 

Definitely would like to know if this is typical structure, and any other tips would be great!

@Rich Vetter   I always find it funny how an investor thinks his interests are misaligned with those of the property manager and they are somehow incentivized to do a bad job.  Not only is this just incorrect, it's economics 101.  PM's get paid to perform services which cost money: they do leasing, they perform maintenance oversight, they perform lease renewal negotiations, accounting, reporting, etc.  If they do a bad job or perform poorly then they get fired, plain and simple. Their interests are absolutely aligned with yours. If you don't make money, they don't make money and they get fired and they got to expend a bunch of time, effort and money for nothing. 

A good PM will guarantee their performance by replacing a bad tenant for free or at a reduced rate, PM's who offer to do lease renewals for free you should question because if they get nothing for doing the extra work of negotiating the renewal you have to ask yourself did they run an effective market analysis, did they negotiate hard to get you the maximum market rent increase for your area while keeping the tenant from leaving, or did they get you an increase at all?  Doubtful, if they weren't getting paid.  Some PM's guarantee annual rent increases (we do) but most don't.

As to maintenance oversight; most PM's actually lose a ton of money on this part of their business even at a 15% markup but it's just a cost of doing business to us. They should be able to save you much more than 15% on repair costs if they know what they are doing, have the proper vendor relationships  and negotiate pricing effectively. Add to that you are essentially getting a free GC to oversee work, quality control it, negotiate pricing, hold vendors accountable, etc.

In PM it's ALL about finding the right PM with lots of experience and who knows their stuff. In my opinion you should be cautious of small mom and pop operators who are agents working out of their car because they just don't have the scale and resources to bring to the table. Super large PM operators have the scale but then you sometimes get lost in their operation because you mean peanuts in the big scheme of things. The most important thing is the knowledge and experience and if they aren't NARPM credentialed (for single family) or IREM (for large multi-fam) you're dealing with a rookie (in my opinion).