Reasonable Property Management Fee Structure?

Landlord Forums & Rental Property Questions 28 Replies

I have a question for any members that have a good amount of experience with property managers. I apologize for the length of the post.

I currently own a property in another state and have a property manager who manages that property. For managing the property, I pay a flat 10% of gross rent per month. The PM doesn't charge me any additional fees to locate and screen tenants or when they arrange for repair services. So far, I am fairly happy with their service and this fee structure seems to be reasonable and somewhat what I expected from the little bit of reading I had done online prior to enlisting their services.

I am considering purchasing a property in another location that is about 5 hours from me. It is a small town so property management services are very limited. My dad lives in this town and is serving as my "on the ground" person to do research on the properties and PM services. He is not comfortable serving as an actual PM for me and I don't want to put him in that position if it isn't something he feels comfortable doing or is interested in learning.

The one property manager that he has located that has been responsive to our inquiries sent us the following email to describe his fee structure:
"*I would help as requested to find the properties. If the property is listed, as a realtor, I would be compensated for this by the seller. If the property is unlisted, only the following hourly rate would apply.
*I would help secure pre-leasing repairs as needed. I would too handle all in-lease complaints and coordinate repairs. For this, $30 per hour.
*I would take pictures, present a write-up on/outline of the property on craigslist after having it approved by you. I would then meet/interview potential tenants and collect the deposit and present and deliver a lease agreement. For this, I would keep 1/2 of the security deposit - the total deposit being the equivalent of one month's lease. (This is consistent with what I do for the properties I currently manage.)
*Thereafter, for being the first point of contact, I would retain 10% of the lease money per month. Should a tenant fall behind, I would work with both parties to secure remedy. "

As you can see, this PM's fee structure is significantly different from that of what I am used to with my only other PM relationship and different from what I was expecting based on what little reading I have done on the internet concerning this topic. Our attempts to get a fee quote from other PM companies for comparison purposes has turned up nothing.

So...I am turning to the vast knowledge here for thoughts on this fee structure from those of you who have a bit more experience in this than me. I look forward to hearing your thoughts.

Thanks!

Burke

In Tulsa, OK customary property management charges are:

10% of all rental income and 50% - 75% of one month's rent as a leasing commission.

Some companies charge a maintenance mark-up, most don't.

Some companies keep any late fees received, most don't.

Charges can vary from market to market. I would keep requesting quotes from other property managers in the area to get an idea of what's reasonable and customary in that local market.

Nate

Honestly, I think any PM that charges 10% of collected rent, but with no extra fee for leasing a unit or arranging repairs, has no idea how to operate a successful business and I'd question their staying power. If you've found somebody competent on these terms, terrific, but I'd watch the situation because they're working for nothing. And they're doing that for a single property?

The small town PM you referenced sounds completely reasonable, at 10% + 1/2 mth leasing fee and $30/hr for coordinating rehab. This is a reasoned person who knows how to value his time (ie. has some business sense). I always prefer to work with someone like that.

While this may be 10% of gross it may be 100% of net on most properties people are buying financed to the max.

It still boggles my mind how people can get a decent return while losing this much net. There are easier ways for better returns on cash.

Just my $0.02

I currently live near Athens, GA and own 5 SFH rental properties which one of them is in Alabama (long story). I don't handle any of my own management and I have the same fee structure you are used to, 10% gross rent. I don't pay any mark up on service or repairs and no leasing fee's.

To say that someone who doesn't charge all kinds of fee's doesn't have much business sense makes me laugh. My current property manager here in GA owns roughly 50 units mixed of single and multi family. So they may not be making much per house each month from me but it adds up when you start adding multiple properties with them renting for $1,200/month.

I have the same arrangement in Alabama with my property there. 10% gross rent and that's it. They handle all repairs only needing my approval for items over $50.

You won't find this everywhere but I tend to chose property managers that own their own real estate company. Why? Because a lot of them also own rental property and already handle their own management or simply have someone in their office dedicated to handling the management so adding two or three of my properties doesn't cost them anything and they get that 10% fee.

As a property manager in New Jersey I can definitely say that all fee structures vary state by state and company by company. I feel that our structure is pretty fair for everyone involved. Most investors feel they are over paying for management services because when things are going well, managing properties is one of the easiest jobs in the world. However, when the you know what hits the fan then a managers job gets a whole lot more important and difficult and they will be earning their fees many times over.

Our structure is fairly simple, 8-10% of monthly gross rent as a management fee. This is determined by what type of property we'd be working with, what type of tenant to expect and how well the client is at negotiating.

We have our own maintenance and contracting company inhouse and if we have to sub some work out then we do mark up 10%, but even with the mark up it is still below market rate. We also allow property owners the ability to hire whoever they'd like if they do not like our estimates.

The leasing fee throughout NJ is pretty standard at one months worth of rent.

In my opinion this is a fair way for both parties. Once you get into hourly billing it becomes very complicated and someone always feels like they're getting screwed.

I most agree with @William Brace on what I look for with managers. Those qualities actually do exist (maybe minus the no leasing fee part, generally).

Whatever you do, do NOT settle for just someone because they are available. A property manager can break an investment if the property isn't handled right. I'm pretty leery about that $30/hour part. No manager I've ever interviewed charges an hourly rate to do what you mention. That work should be part of their fees. If not, what are those fees for?

I wrote an article on here on property management. Not sure if it will help, but worth sending.
http://www.biggerpockets.com/renewsblog/2013/01/26/surviving-hell-property-management/

Medium hipsterinvestment logo black300dpiAli Boone, Hipster Investments | [email protected] | 310‑957‑2101 | http://goo.gl/CozQaj | CA Agent # 01911993

Well, I'll readily concede that self-employed people are free to set their own gross wage... and many do it to their extreme detriment, with little idea of the full load of time and expenses that they incur. You see it all the time with all sorts of contractors. If they want to work for $20/hr as a self employed person (which would be about $15/hr as a W-2 employee), no one is stopping them, maybe times are desperate.

But really, I dont' think anyone who has put pen to paper on the PM business (I have) could conclude that 10% w/ no additional fees is reasonable compensation.

And the gentlemen asking for $30/hr (as a self employed person, so again that's a whopping $22/hr or so equivalent to a W2 employee) to arrange for repairs is considered outlandish? Please.

Most PMs with any scale have their own maint people, and so they make 25-30% margins billing out their time. So you do end up "paying" for maintenance.

And please don't throw out the canard of the "problem-free" month where the PM does little work, you have to look at it through the cycle, all the hours spent on finding/placing tenants every year or two, serving 3-day notices, occasional eviction/setout, dealing with problems that crop up, arranging for repairs (God forbid getting multiple bids!!), taking tenant calls, sending out reports and all the time spent communicating with owners. How many average hours/mth again for that measly $100?

You PM's out there, stand up and educate! :) (I'm not one, for the record.) LOL, this is meant in good fun, but I do work very closely with two PMs and have evaluated their businesses closely.

Originally posted by David Beard:
Honestly, I think any PM that charges 10% of collected rent, but with no extra fee for leasing a unit or arranging repairs, has no idea how to operate a successful business and I'd question their staying power. If you've found somebody competent on these terms, terrific, but I'd watch the situation because they're working for nothing. And they're doing that for a single property?

The small town PM you referenced sounds completely reasonable, at 10% + 1/2 mth leasing fee and $30/hr for coordinating rehab. This is a reasoned person who knows how to value his time (ie. has some business sense). I always prefer to work with someone like that.

I think David was spot on with his observation. That does not mean that individual investors will not get good service or find that rare person who really satisfies their needs and desires as property owner by charging basically nothing, but I have not met a high quality management company that did not know how to structure their company to be profitable...and then be able to provide over-the-top service to their clients.

I have consulted with a lot of property management companies and the best of the best are set up as business service providers and most have a structure to capture at least three revenue streams and provide a great service to their clients for each. I say at least three because most of the companies that I really admire and their clients do as well have more than three revenue streams. Those have been my observations of property management companies from all corners of the country.

Chris

Medium memphis invest logo mdh 12 4 14Chris Clothier, Memphis Invest, GP | 901‑751‑7191 | http://www.memphisinvest.com | Podcast Guest on Show #224

I've worked with several different property managers in different states. My favorite company charges 8%, no leasing fees but a $150 fee per year (properties 1-10, higher fee if more than 10), schedules repairs, and sends me estimates of turnover costs to see if I want their people to do the work. If I choose to turn it over myself, they are fine with that, but will not try to lease it until I'm finished. They are a large firm in Raleigh, very professional, and I've been happy with them. In WA State, however, best I could find was 8% per month, $400 fee plus advertising costs (was around $100) to lease it (this is on a $2000/month rental), they schedule repairs, but anything extra not tenant related (ex., escort an appraiser or schedule outside trim painting) they want $40 per hour. I've never had to use them for anything extra, but they said it happens occasionally, and they had a guy try to get them to be a contractor for an addition for the regular 8% fee because the owner scheduled the work while the tenant still lived there, so they now specify. The one manager who charged me 1/2 month's rent plus 8% for each new tenant had way more turnover, which figures as they actually make more money if they find a new tenant each year. The other ones actually say they want it to benefit them to find and keep good quality tenants, and they do a good job of it.

Lynn m., going slightly off topic, how is the Raleigh mkt in terms of returns? It is supposed to be a fast growing area economically. Thanks

I have property managers in five different states and three separate PMs in California. I pay NONE of them 10% and I would NEVER hire one that charged me 10%. All my managers in CA and CO do NOT charge for finding a new tenant.

One PM of mine charges a flat rate "per door" no matter how much the rent it, which actually makes more sense. It doesn't cost any more to manage a house that rents for $750 than it does for a house that rents for $1,000 (and sometimes the cheaper rental is more work than the expensive one).

So much of the Real Estate Field is based on Commission that it is a difficult to break that tradition. Having been involved with over 5,000 transactions, I can tell you that a $50,000 sale is usually more difficult than a $500,000 sale, yet I make a LOT more on the $500,000 sale.

I have owned my own Property Management Company and I have used Property Managers since 1982. My biggest issues are keeping the property rented with quality tenants, collecting rent and pursuing late payers and keeping the property in good shape (annual inspections.) And I am willing to fire property managers if the need arises, I have fired four in the last five years.

There should be plenty of managers, good managers, willing to manage for 7 or 8%, you just need to research.

Hi Burke,

My advice may not be what you asked for, but it might be what you need. I have been a commercial real estate investor and developer for 20 years. What I learned early on is that the simplest approach to most things in life (known by most as "KISS" - Keep It Simple Stupid") including real estate investing, is the best approach. Where I am going with this is that you might want to ask yourself if the hassles of acquiring a (potentially) management-intensive property so far from home are worth the time and the risk. My experience tells me that they are not. While there is nothing wrong with owning real estate outside of your area, such real estate should ideally offer "arm-chair" investment characteristics where the burden of property-related maintenance issues falls on the tenant. Properties such as these are known as NNN (triple net) investment properties. With this type of property, the location of the property and the location of the property management company is irrelevant because there is no actual "management" to deal with. And happily, there is precious little vacancy in such properties. So, the "property" management company simply becomes a "cash" management company and their fees are reduced accordingly (to usually around 3% to 5% of the gross rent). Now, these properties will be more expensive to buy, but they will be virtually transparent to you and require very little involvement on your part. Another thing to consider, and what we do at my company, is to pool capital of like-minded investors to purchase larger, higher-quality assets that form a very stable real estate investment base, and then we arrange the property management. Anyway, something to think about... In any event I would steer clear of deals such as the one you are considering if you want to add dollars to your portfolio and years to your life! But hey, that's just me.

Best of luck!

David

What they asked for and what they'll take are two different things. Just counter back with 10% flat fee and no additional leasing. Depending on the rent, its easy money. That is assuming your unit is renting for 1,000 a month or more.

If they are a PM, then they probably won't budge. But being in a small town there can't be that many rentals there to begin with. My guess is they do that on the side and are an agent by trade.

Either way, $100 a month to take one or two phone calls every 3 months is easy money. And then all he has to do is show it every 2 or 3 years? Come on.

You can find somebody in a small town to do that all day long. My wife would do it in a heartbeat. But I'm sure we're not in the right zip code. :-)

And, btw, just because they're a professional PM doesn't mean they're any better at keeping them rented than anybody else. If anything, I think the professionals tend to be a little lower on the totem pole at keeping vacancies higher because their incentive is for them to have plenty of turnover.

Thats why the flat fee has always made more sense to me. Their incentive is to put a good tenant in there thats going to pay and stay.

Do to low multi-unit inventory locally, we've started looking fo properties in another city. We have also started making contact with PM firms in that city. One of the firms charges 1% of the purchase price or the assessed value of the property; whichever is greater as their property management fee.

Most PM companies in our are charge between 7 & 10% of the gross revenue pending on the size of your holdings. Additionally, those who charge the lower percentages, tend to charge more for placement fees.

I have since added this pricing scheme based on purchase/assessed value to my modelling software and have been pleasantly surprised to find it actually cheaper than 10% of rental revenu on several of the properties we've evaluated.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

@David Hollingsworth talks about the "hassle" of owning properties out of your area. I live in CA and own SFR's in CA, CO, TX, OK, and TN. Most of the properties I have NEVER seen, nor do I want to see them. I am not a handyman, tour guide or real estate hobbyist, this is about MAKING MONEY. He is right that NNN leases are ideal ways to make money, but when my last commercial property, right here in Orange County, CA stayed vacant for 2 and half years, I sold it. I can drive you around OC and show you literally MILLIONS of square feet of VACANT NNN properties, many of them being vacant for over 10 years. On my last SFR vacancy, in OK, the old tenant moved out April 15th and the new tenant moved in April 22nd. Not a bad vacancy period. (On a side note, the commercial property I sold 4 years ago is STILL VACANT and the five SFR's I purchased with the proceeds have paid rents to me of $336,000.00 since then and they are all OUTSIDE of CA).

While my CAP rate is nothing to shout out about, my appreciation, even in this market has been very good. I paid $120,000 for houses two years ago that are now worth $150,000, plus getting $1,300 a month rent.

Every Real Estate Investor should find a niche they enjoy, whether flipping, buy and hold, residential, commercial, raw land, development, etc.... Personally, I wish all my properties were on a different planet, as far away as possible. Most of my PMs do a Direct Deposit and the ONLY decision I have to make is to approve larger repairs and to review new tenant applications. Thus I spend most of my time looking for new deals.

Owning rental property out of one's geographical area is no different than owning stock in a company whose factory you have never visited. Just like a stock, a piece of Real Estate has it's financials. You trust that the CEO and management team will manage the company of a stock you own, so you trust that the PM will manage your house because that is a monthly income for them as well as you. If a stock doesn't perform, you sell it and buy something else, just like when a PM doesn't perform, you fire them and hire someone else.

Real Estate investors need to get out of the mindset that they have to be able to drive by their investment all the time. Make sure your PM does an annual or semi annual inspection while changing out SD batteries, HVAC filters and does an inspection, that is what you pay them to do. Plus they can take a few Smart Phone pictures and text them to you immediately if you want. And sit back in your armchair and watch the money come into your bank account in droves.

But don't pay higher than 8% management fees.

I just got off the telephone with someone proposing to manage some rental houses for me.

For the sake of a round-numbers look - this is how I understand their proposal - per house. 

Gross Rent:  750 per month / 9000 annual

Less                                     $700 lease fee for new tenant
Less           $75.                   $900
Less                          $350. for an existing lease's renewal

 -------------------------------------------------------------
                                          $1600 for first year management  
Then                       $1250 for each year that the same tenant stays

That looks like the best-case Management Cost is about 18% the first year and about 14% for each year of same-tenant occupancy after that.

How's that sound to you all ?



stephen

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Try to find a property manager that you do not need to sign a year agreement with. And put everything in writing and make sure you put it in writing that if some reason, the property manager don't followed the rules. You set forward they are fired.


Joe Gore

As a property manager, I have to say that @David Beard knows what he is talking about. It is rarely the case that we just take a phone call every 3 months and just sit back and collect commission. There are so many things to deal with on a daily basis. The $80 to $150 per month we make on most houses is nothing. If your management company is not charging leasing fees and maybe mark-ups on maintenance, they are not able to hire effective people that will do a great job. And an hourly fee for additional work, such as overseeing remodels, etc. that have nothing to do with tenants, is only fair.

It just seems that so many of you think property managers do very little for the vast amount of money you are paying them. In my opinion, anyone that works for 7 or 8% doesn't know what they are doing, or isn't doing it very well.

@Michelle L,

I am sure that you have good insurance just in case you did something wrong. We see a lot of property managers here in Dallas get bent out of shape when you ask to see a copy of their insurance. Most investors and landlords fail to vet the property managers, and the property manager will rob them blind.


Joe Gore

As a fellow property manager, I completely agree with @Michelle (and @David). We are business people, same as everyone else, and we would simply not be able to stay in business if we solely depended on the monthly management fee.

If you break down our 'hourly pay' based on just management fee, factoring in maintenance/repairs and showings and fielding tenant calls-we would be out of business-end of story. If you want your property manager to be exceptional, then you want them to be successful, and the only way to be successful is if they're compensated accordingly.

IF I do add a service fee for maintenance, there's an extremely good reason for it-I personally inspect all the work, I negotiate hard with my 'power team' of trusted property maintenance workers to ensure the best price, and make sure the tenants (who are the paying customer!) are satisfied and comfortable with everything. It truly is a service fee because I am definitely providing a valuable service.

Quality property managers should always be able to justify their fees (whether it be a finder's fee, maintenance service charge or management fee), and deserve to be compensated accordingly, I truly believe 'you get what you pay for'.

Rebecca Lebowitz, Blue Axis Property Management | 585‑216‑5989 | NY Agent # 10311206284

A reasonable fee depends on what they do. It is 8-12% in this area. They don't say they mark up maintenance but they do. For those of you who do property management do you send reports to the owner on what you have done with the property? Not just collecting rents but inspections showings etc. It is hard to get showing information. I talk to my tenants and they say they never contact the PM. I talk to the current tenants on a unit that is supposed to be shown and they say what showing. Yet the impression I get from the PM is that there is lots of calls/showings. Just wondering if a good PM would be providing info on this.

Originally posted by @Joe Gore:

@Michelle L,

I am sure that you have good insurance just in case you did something wrong. We see a lot of property managers here in Dallas get bent out of shape when you ask to see a copy of their insurance. Most investors and landlords fail to vet the property managers, and the property manager will rob them blind.


Joe Gore


 

This new Bigger Pockets isn't working well for me. <g>

stephen
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Originally posted by @Stephen S.:
Originally posted by @Joe Gore:

@Michelle L,

I am sure that you have good insurance just in case you did something wrong. We see a lot of property managers here in Dallas get bent out of shape when you ask to see a copy of their insurance. Most investors and landlords fail to vet the property managers, and the property manager will rob them blind.


Joe Gore