Property Management Expense ?

23 Replies

How do we factor in property management expense into cashflow?  Obviously we factor in the percentage each month, but how about the bonus they get when they find a new tenant?

Hypothetically lets say a property management company is taking 8% of monthly rent and a full month's rent when they find a new tenant (quote I got today).  I do not plan on using property management (yet) as this is my first rental.  But I would like to cover all my bases and see if I would still have a profitable rental if I decided to use it.

I believe it depends highly on the neighborhood that we will be renting in.  How does this average out?

For example: The area that I am looking in is not a great area but by no means a ghetto.  $70K property.

Cash flow:

Rent - Mortgage (insurance inc) - tax - maintenance (10%) - vacancy (10%) - property management

$1100 - $320 - $225 - $120 - $120 - ? = +315 (before PM)

@Kyle M.   I take a conservative approach assuming that I will have to pay the new tenant "Leasing Fee" every year, hence I deduct 1/12 of the Leasing Fee amount from the monthly cash flow. In your example, one full month of Leasing Fee would be a negative 8.33% of the monthly rent in your cash flow. Good luck!

Rent - Mortgage (insurance inc) - tax - maintenance (10%) - vacancy (10%) - property management (8%) - Leasing Fee (8.33%)

$1100 - $320 - $225 - $120 - $120 - $88 - $92 = $155

it's amazing the fees that most property managers are charging. That is the main reason why my wife and I stated a realty company and specialize in property management.  We have 2 fees. A standard 10% management fee and an monthly accounting fee. No leasing fee, no re-leasing fee, no inspection fee, no vacancy fee. No mark up for maintenance costs. There are other company's out there that don't charge those ridiculous fees.  You need to keep shopping around. 

Keywords: Hampton roads, Virginia beach, Chesapeake, Norfolk, Portsmouth.  

Property Management seems to run about 8-10% anywhere in the country so if you use your quoted 8% as a management fee and factor in a vacancy rate that covers your lease up fee you've got it all covered. As mentioned before a first month lease up fee equates to 8.3% so if you factor in a 10% vacancy cost you'll have it covered plus a few days.

@Dick Rosen  What is a lease up fee? from the earlier posts it seems to be costing the owner of the property a months rent to to get the property rented, thats ridiculous. What has that property manager done to warrant that type of pay check.  What do you charge for a re-leasing fee? Say they tenant signs a year lease and stays for a second year?  Our business has thrived on charging two fees, a 10% management fee and a monthly accounting fee.  

@Kyle M.  @Roberto Andrade  You both need to find new property managers, in your break down the property manager is the only on making money.  in your break down that property manager is making over 16% a month on YOUR property. 8% management and you broke down lease up fee at 8.33. What other charges are they getting away with?  Do they charge you if your property is vacant ready to rent?  There has to be other companies out there and of there, keep looking

@Dick Rosen , I don't think you are correct. The 10% vacancy is for when the property is just sitting empty (~5 weeks per year). The 1 month lease up fee (8.33%), is generally an extra one time charge by the PM. In discussion with PMs in different areas I have seen, in writing, leasing fees ranging from 0% to 1 1/2 months (~12%). It really depends on the local practice. Similarly, depending on the location, I have seen PM fees from 5% to 12%. Shopping around is always a good idea but cheapest is not always best. I would rather pay more but have confidence that the PM will keep the unit occupied with the best quality tenant for the target demographic.

Not a PM myself but I have not problem seeing, depending on the property, the time to do showings, screening process and other activities associated with the lease up as an extra fee. As they say; 'Time is Money' and what the PM is selling is their expertise and time. Having said that, if the property / unit sees regular turnover (e.g. every year), the PM is not doing their job property in screening tenants.

One approach is to take the vacancy allowance you have in years that there is no turnover and bank them just this purpose (future vacancy, turnover costs, lease-up fee, etc). It takes discipline, but worth it.

On the other hand, if this is simply the nature of the property, that tenants are generally transitory, you 'simply' have to factor this as part of your deal analysis. I have been surprised how infrequently this purchase criteria is discussed on BP. Obviously, the lower the better but understanding what to expect in the local market and factoring that into your deal analysis is important.

@Eric Doud   I think you mean 16% a year (assuming annual turnover).

@Oren K.  is saying that the first months leasing fee equated to 8.33%  so Fator in a 10% vacancy cost you'll have it covered plus a few days?  That make a no sense. So really he just took away his vacancy numbers. 

I joined BP about a month ago and from what I have read it seems that a majority of the posts feel PMs are out to get everyone and take their money.  Yes, there are some PMs that are not good but there are good ones out there. 

I am a PM myself and strive to treat any property that I manage as if it were my own.  A PM is there is look after your property while you are working, on vacation, looking for more real estate, etc.  I do charge a mgmt fee, a leasing fee and a renewal fee.  Any other fee that is charged is agreed upon when the client signs up with me to manage the property.  So there are no hidden fees.

These fees are necessary to cover the costs associated with managing the properties.  The PM also needs to earn a living since I am sure no one else here works for free.  If you manage your 1 or 2 units it is pretty easy to do.  Once you start managing in the 100's of properties there are some necessary expenses that a 8% monthly management fee is just not going to cover. 

Many might think that a PM just sits back and waits for the rent to come in so we can get our percentage but that is FAR from what happens.  

Remember a good PM is available in some capacity 24 hours a day 7 days a week to look after your property.  Looking at it another way a PM is making pennies per hour to look after your 50k, 100k, etc investment.  I think that is a pretty good deal.  

why should anyone pay a renewal fee for giving a PM more business? That's absurd. 

@Mike Ritter  what do you charge as a leasing fee and renewal fee?  

@Account Closed    Exactly what I am saying. The tenant want to renew the lease and the owner has to pay a fee. That's crazy. 

A renewal fee helps to align the incentives of the PM and owner. Imagine if you paid a PM a month's rent every time a unit turns over (plus suffered 2-4 weeks of vacancy on average) and paid them nothing (but their percentage) for a tenant that stays. You'd be providing incentive for the PM to find one-year-only tenants, which runs counter to the landlord's interest.

Originally posted by @Jim Sokoloff:

A renewal fee helps to align the incentives of the PM and owner. Imagine if you paid a PM a month's rent every time a unit turns over (plus suffered 2-4 weeks of vacancy on average) and paid them nothing (but their percentage) for a tenant that stays. You'd be providing incentive for the PM to find one-year-only tenants, which runs counter to the landlord's interest.

 I misunderstood, my apologies. I assumed he was taking the 8% plus a renewal fee at the resigning of the lease. I went through an agent for my 1st property and they charged me a 1x fee of 1 months rent. I even had the tenant sign a 2 year lease and still only paid 1 month which equals approximately 4% of the life of the lease. This was through Weichert Real Estate.   I manage repairs myself but they no longer get anything from me for finding the tenant, regardless if she stays for 20 years. As a PM if you find incentive in 1 year tenants you would not manage my properties and would lose all streams of income from me. I would pay someone to manage my properties not look out for their interest. 

No. You understand correctly. Some PMs take a fee on a renewal as well as on a new lease. Many times the renewal fee is lower than the new lease fee (and obviously, there's no vacancy on a renewal and usually no repairs to make the unit ready).

If you pay a man by the brick, he lays a lot of bricks. If you pay him by the hour, he works a lot of hours.

I'd look at the total cost of the PM's services more than the specific breakdown of fees, but if the monthly rate is low enough, I'd be willing to pay a lease renewal fee to my PM. 

PMs have to eat, too. They are in the PM business to make money; of course they're going to look out for their interests. The key is to make it so that their interests and your interests are aligned. Don't expect a PM to work in your interest and against theirs on a consistent basis.

@Eric Doud

I do not charge one months rent for the lease up fee as even I think that is too high.  My lease up fee is 50% of one months rent.  The lease renewal fee if $150.  I just dont send out a notice to the tenant to renew.  I research rates in the area to see if rents need to be increased (good for the owner) and I call the tenant and negotiate a higher rent if possible and try to get them to stay.  It would be in my interest to let them leave and then I can get a 50% lease fee again but I am looking out for the owner.

I understand some people do not like PMs and I am not trying to change anyone's mind.  If you can manage the property on your own I would do that and save the money.  I certainly do not want them as a client as they are the owners that cry about everything when I tell them something has to be repaired.  

@Jim Sokoloff    Good post.

Originally posted by @Mike Ritter:

I joined BP about a month ago and from what I have read it seems that a majority of the posts feel PMs are out to get everyone and take their money.  Yes, there are some PMs that are not good but there are good ones out there. 

I am a PM myself and strive to treat any property that I manage as if it were my own.  A PM is there is look after your property while you are working, on vacation, looking for more real estate, etc.  I do charge a mgmt fee, a leasing fee and a renewal fee.  Any other fee that is charged is agreed upon when the client signs up with me to manage the property.  So there are no hidden fees.

These fees are necessary to cover the costs associated with managing the properties.  The PM also needs to earn a living since I am sure no one else here works for free.  If you manage your 1 or 2 units it is pretty easy to do.  Once you start managing in the 100's of properties there are some necessary expenses that a 8% monthly management fee is just not going to cover. 

Many might think that a PM just sits back and waits for the rent to come in so we can get our percentage but that is FAR from what happens.  

Remember a good PM is available in some capacity 24 hours a day 7 days a week to look after your property.  Looking at it another way a PM is making pennies per hour to look after your 50k, 100k, etc investment.  I think that is a pretty good deal.  

 Thanks for the other perspective Mike. I guess my issue here is you justify charging a renewal fee by talking about what you do as far as a management cost. Doesn't the monthly management fee cover you looking out for people's properties while they're away? 

Also you say you're making pennies per hour to look after the property? I am also assuming here but it sounds like you are counting your "on call" hours as work. Not many people get paid for being on call unless they actually have to go in and do work. if you're looking after 100's of properties how do you look after them all at once and give the proper attention to each individual property. 

We started our  property management company due to the fact  we could not find a reasonable property management company that wouldn't fee us to death with renewal and signing fees. Havering to use there venders for repairs  and the list goes on. We manage just under 200 properties right now and we are growing every month   Our company doesn't get paid until the owner gets paid. It's incentive for us to work harder for the customer which is the owner of the property. 

Keywords: Hampton roads, Virginia beach, norfolk, Portsmouth, Chesapeake. 

@Mike Benner

I cannot look over 100's of properties by myself of course.  Other staff members would be needed to make sure needs of the tenants/owners are met.

@Eric Doud

I do not charge an owner anything until the unit is occupied and rent is received.  If it is vacant I do not get paid and I rarely mark up maintenance.  Great to hear that you are growing and maybe we can discuss a few strategies some time.  

Originally posted by @Eric Doud:

@Dick Rosen What is a lease up fee? from the earlier posts it seems to be costing the owner of the property a months rent to to get the property rented, thats ridiculous. What has that property manager done to warrant that type of pay check.  What do you charge for a re-leasing fee? Say they tenant signs a year lease and stays for a second year?  Our business has thrived on charging two fees, a 10% management fee and a monthly accounting fee.  

Lease up fee is what your referring to as the first "months rent for getting the property rented". It's a commission that covers all of my marketing, gas, time, screening efforts, showings and half of it is usually offered to other agents if they bring the new tenant to me. In some cases yes, it may not be warranted but then there are other times that I may drive to a property multiple times with multiple no shows for an extended period of time... that's why it is earned and deserved.

For releasing a tenant that I've already got in place I charge a flat $100 to sign them up for another term.

I'm guessing that at the end of the year your probably charging about the same thing in dollars? I'm at 8% and you're at 10% and I don't any accounting fee, seems to me that's what the 8-10% is for?

Everyone does it different, in Minnesota my leasing agent charges 1st months rent for a new lease up, in Arizona the standard is 6% of gross lease, some people have flat fees for management some use a percentage with a minimum and maximum flat fee.

Originally posted by @Mike Benner:

why should anyone pay a renewal fee for giving a PM more business? That's absurd. 

Would you rather have your PM chase away your tenants every year, good or bad, so that you can pay for another turnover and another lease up fee? If your PM brings in a good tenant, you'll want to keep him!

i just called a company that is 10% per month fee and full month rent but they separate the two departments.  One dept charges a full month rent and gets the commission for it, a different department handles the maintenance.  By separating the two it seems like it limits the problem that you mentioned above.  In general are realestate companies good PM's?

I just signed a 1 year contract with a PM company to manage 50 apt units. Here's there structure:

*6% of collected rent roll

*$250 (1) year lease signing fee (IF the tenant fails to pay within the 1 year term, they will fill the unit again and NOT charge the $250 charge. They guarantee the tenant they place for (1) year.

*$125 lease renewel fee

*7% on outside vendors (they will reach out to 3 companies to give bids & I am able to pick the vendor)....They charge me 7% of the total bill as their fee for calling contractors and getting bids for me. Keep in mind, they have great networks of vendors who do give the company better deals considering they keep the work coming. So ultimately I benefit from that too! 

*They charge me any postage fees (minor .20 cent fees)

*They DO NOT charge for attending eviction courts but of course I am to pay for an atty (if I don't want to attend) and court costs

*I pay $16 for all applications that come through (screening process)

*They have a maintenance crew that charges $37 per hour. They can handle several tasks (only go to the site when work orders or 2-3 minimum) For example, changing a toilet, fixing a refrigerator or anything other work they charge $37 across the board. 

*They have a Cloud software where I can see on a hourly basis of any maintenance orders, rents collected, tenant details etc... it's an amazing software (expense for the company!)

*When I took over the property, my manager called and setup ALL the utilities. They pay all the bills for my property EXCEPT my mortgage, I handle that! They direct deposit my month class flow remainder on the 5th of every month!

They also gave me a 30 day grace period in case they didn't meet my initial needs. Was it a game changer, no. However, knowing I still had a chance to back out if I wanted to was reassuring for me as I was leery when searching for the right PM team. 

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