Understanding The Basics Of Property Management

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Many buy and hold real estate investors decide early on that managing their own rental properties simply isn’t worth the time and effort. This is especially true for investors that own properties outside of their immediate geographic area. While there are pros and cons to managing your own properties, ultimately it comes down to personal preference and capacity. Some people would rather be more hands on and save a few bucks while others gladly shell out a small percentage of their income to let somebody else manage the property.

For those investors that opt to outsource the management to a property management company, knowing what questions to ask and what charges to expect is an important part of making a good hiring decision. In almost any market, you’ll find numerous property managers of all shapes, sizes and colors. For those investors less familiar with how property management companies work, here is a basic checklist to help get you started:

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Leasing:

How much does the property management company charge to place a new tenant in the property? I’ve found that anywhere from half a months rent up to a full months rent is fairly standard. Be sure to find out how the property manager advertises for a tenant. A property manager with a lower leasing fee may not spend as much on advertising or may not offer a co-op for other agents representing potential renters. Saving a few dollars on leasing may actually cost you more in vacancy if it takes longer for the property manager to place a tenant in the property. Also, it’s important to understand how the property manager screens applicants. At a minimum a property manager should:

  1. Verify Income
  2. Obtain credit report (look for prior judgments, eviction history, credit history)
  3. Run criminal background check
  4. Have a stated debt to income approach (ie. rent amount cannot represent more than 33% of tenants gross income)
  5. Check rental references to understand rental history

Management Fee:

All property managers charge a certain monthly percentage for managing the property. This is typically somewhere between 8% and 10% of the gross monthly rent. An important question to ask the property manager is whether this fee is only charged against actual rent collected or if it is charged monthly regardless of whether a tenant is in the property. It’s also important to understand what services are included within this management fee. Some of the fees listed below may actually be included as part of the management fee and not charged independently.

Renewal Fee:

This is a fee most property managers charge to handle the paperwork associated with renewing the contract for the tenant for another year (or more). This fee is typically anywhere from a few hundred dollars up to a half month’s rent. While this may seem like an unnecessary fee, I’ve found that a good property manager can save you thousands of dollars in vacancy and turn-over expenses if they are good at keeping tenants in the property for multiple years.

Eviction Fee:

These are fees associated with filing the eviction and handling the corresponding court proceedings. I’ve found that this really varies from one property manager to the next. Some property managers simply pass on the actual filing costs, but manage the eviction as part of their management services. Most, however, charge a few hundred dollars (on top of the filing fees) to handle the eviction and court appearances.

Repair Escrow:

Most property managers ask the investor for a maximum dollar amount that the investor would be willing to spend for maintenance/repairs without having to provide specific approval. This is really to help insulate the investor from having to make insignificant decisions that could easily be made by the property manager. To accomplish this, most property managers hold between $200 and $400 in a repair escrow specifically for these types of maintenance requests.

Repairs:

I actually think this is one of the most important aspects to property management. You may find a property manager that beats the competition in almost every other category, but if they don’t have a good, affordable solution for repairs and turn-over expenses, you may still end up spending more money. Some property manager simply outsource the maintenance to third party contractors that may charge high handyman rates, while others have handymen on staff that can make repairs and handle turn-overs at a very affordable cost. It’s important to know and understand this distinction when interviewing property management companies.

Inspections/ Trip Charge:

For many investors, it’s important that somebody get their eyes on the property at least two or three times a year to make sure the tenant is taking care of the property and ensure there are no major issues. Most property managers include drive-by’s as part of the management fee, but may charge for a specific inspection or trip charge (of $50 to $100) to go into the property and make assessments as to the condition of the property.

Insurance:

While most investors don’t equate home-owners insurance with property management, there are now a handful of companies that actually offer homeowners insurance as an additional benefit. I’ve found that the premiums are fairly competitive with other landlord policies, but since the policy belongs to the property management company, any claims against it do not negatively impact the investor personally (i.e higher rates on personal insurance because of claim history). Also, I’ve found that many of these master policies available through the property management company do not make exclusions for vacancy. Whereas most landlord policies lose coverage once the property has been vacant for 30 days, a master policy will stay in effect regardless of vacancy.

While different markets are going to have different nuances associated with how property management is done, understanding the basics (above) is important in selecting a property management company. Whether it’s a single real estate agent with a portfolio of 30 properties or a large firm with over 1000, ultimately you have to be comfortable with who you choose and trust that they will do right by you. The great thing about a free market and competition in this industry, is if the first company you select doesn’t work out as well as you had hoped, you can always change companies!
Photo Credit: Alba Soler Photography

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

17 Comments

  1. Thanks for the great read! I’ve been walking through this just recently with a primary converted to rental that is in a different price range than my other rentals. It is hard to let go and let someone else take care of my business in this aspect, but it is definitely worth it to grow and stretch. Your article touched on several main areas that before calling around I didn’t even know they charged for or included. I’ve always heard “1st month’s rent & 10%” but not much is mentioned about eviction fees, renewal fees, or whether they get paid when I don’t (vacancy). Thanks again!

  2. Meghan Keith-Hynes on

    Excellent and timely article, Ken, as I am embarking on the great Property Management Quest! After 6 years managing my own SFR’s in my own backyard, I am ready to expand and invest out-of-state. I will incorporate these suggestions in my search…many thanks…

  3. You wrote:
    “4. Have a stated debt to income approach (ie. rent amount cannot represent more than 33% of tenants gross income)”

    What you described in words is NOT what debt to income is. A tenant can have 1/3 of gross income going to rent and STILL have excess debt payments that will consume more than 50% of gross income. I have seen applications where just the car payments were as much as the rent; imagine food, clothing, utilities, fuel, etc. So the “back end ratio” is just as important.

    http://en.wikipedia.org/wiki/Debt-to-income_ratio

    • Ken Corsini

      Steve, you are right, there is a difference between the front end ratio (only housing expense) compared to the back end ration (housing plus all other debts). The point I was trying to make is that a good property manager understands this and has rationale behind what constitutes an approved tenant.

      • What would be the good cutoff for the back end debt to income ratio? I see people require rent not to exceed 1/3 income all the time, if back end debt ratio greater than 75% of take home income, the tenant might not meet all the financial obligations if s/he is not careful about the spending.

  4. I’m just starting out, and I want to make sure I have a couple years under my belt of managing my own properties so I can have at least “advanced amateur” knowledge of what it takes to manage a property. Otherwise how will I know if my property manager is doing it all wrong?

    Of course, since my first purchase was a triplex and I’m living in one of the units, “managing the property” overlaps a lot with “maintaining my own house,” but eventually, especially if I ever move out and rent out the unit I’m living in now, I’ll have a strong idea what the property manager ought to be doing!

    • Ken Corsini

      Lindsay – I agree that if you’re going to live in the same complex, it definitely makes sense to manage it yourself. If and when you do decide to move, you’ll have gained a ton of knowledge and experience having done it yourself.

  5. Kent, Thanks for elaborating on the different fees charged by property managers. I am curious though, if I am the only one who has a problem with how property managers are compensated. The goal of owning rental property is to make a return on your investment, but the manager’s compensation has nothing to do with how profitable the rental is. In fact, It appears to be opposite. The manager is incentivized to let someone move out and place another tenant because they get half or a whole month’s rent from it. If someone gets evicted, so what, they charge a fee for that too, and then get another month’s rent to place a new one. So there is little incentive to find good tenants and then keep them. Then what if a repair needs to be done. They have no incentive to shop around for someone who will do good quality work at a reasonable price because they will just charge the owner for it. Basically the manger gets paid no matter what. I have to wonder if the method of compensation is why so many landlords have trouble finding a good management company.
    Does anyone have a management agreement that make them more accountable for the success of the investment?

      • Hugh, I hear you that property managers might not have the right incentives in their agreement and there are a lot of crappy managers, but lets face it, not all owners are renting out their properties for profit; some out of pure necessity who are underwater but can’t sell for some reason. Things like evictions happen regardless of how well one screens. It’s not necessarily the property manager’s fault the tenant needed to be evicted, so why should they be on the hook to do more work for the same pay? I’m sure they would rather just do less work with easy tenants than go through an eviction but they need to be compensated for this extra work. if you want to talk about injustices of our capitalist system, just look at the legal system where attorneys can bill hourly and you have no idea how productive they are being with their time/energy. It’s imperfect but the system needs to be worth it for the property managers too or else there wouldn’t be a market for property managers in the first place…

      • Ken Corsini

        Hugh, you bring up a valid argument, but one that most property managers would refute. Many property managers aren’t going to charge for to place another tenant if they original tenant they placed gets evicted within the first 6-9 months. Also, I promise that a few hundred bucks that may be charged for an eviction is not worth the hassle to a property manager … they would MUCH rather have a smooth, easy-going tenant that requires little attention than have to deal with the headache of an eviction and replacing a tenant.

        I agree with Jeff, we live in a capitalist environment that simply isn’t perfect. However, the beauty of capitalism is competition …. most property managers aren’t going to stay in business if they have constant turn-over and high fees.

    • Hugh, others have answered your question with some of the same things I would have said. I have been both a customer of property management, as well as owned my own property management company. I will tell you that for me, the monthly management fee was our bread and butter, and we were much more interested in keeping our properties rented and keeping the monthly fees coming in, which in turn kept our landlord clients happy, than dealing with re-leasing a unit and all the work that goes with it (advertising, showings, screenings, agreement preparation, move in duties, etc.). Despite the leasing fee, having the consistent monthly income was more beneficial to our business.

      And Ken hit the nail on the head. Our clients would not be clients very long if we were constantly having tenant turnover, for whatever reason.

      I do want to address your statement, however, “manager’s compensation has nothing to do with how profitable the rental is.” No it doesn’t, nor should it. How profitable the rental is entirely depends on the investor. Your PM had no say in what purchase price you paid, how much money you put down, what your mortgage payment is, what market rental rates are, average area vacancy rates, how much cap ex expenses cost, etc. etc. The only one ultimately responsible for the profitability of your rental is you, the investor. When you buy you should account for PM and repair expenses based on market data, that way you are not relying on a PM to make you profitable.

      If you do a good job of interviewing PM’s, and/or get referrals from others to good ones, you should be just fine. If you have a PM who appears lazy and unmotivated to go the extra mile for you (i.e properly screen tenants or find contractors who offer discounts to their clients for repairs), then it’s time to find a new PM. A PM is a member of your team – just like an attorney, CPA, or insurance agent. Certainly you expect them to do their utmost to make you successful and save you money where they can, but you cannot hold them responsible if the investment is not profitable. That burden lies entirely with you.

  6. Great article giving a nice primer on all the big aspects of property management.
    I think there are a lot of good points people getting started may not think of.
    I especially like the point about repairs. If they don’t have in house solutions for small stuff or outside resources with preferred pricing they can end up costing more than a company with a discounted fee structure.

  7. There is a lot that goes into property management. It is good to know and understand all of the basics and the facts about property management before you decide to get into the business, for you and the tenant.

  8. Kevin Trumbull

    Wow this was quite eye opening. I’m a new investor and it seemed like the common figure out there was 10%, but now I’m thinking I should use something like 18% (10% + 1 month) in my calculations. Thanks for the great article!

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