One of the common questions we’re asked is how much does property management cost? What do property owners have to pay to hire a property manager? And the quick easy question to that it really depends.
How much owners have to pay depends on what they want. It depends on what the level of service is. What they’re looking for as a potential owner, as they look to hire a Philadelphia property management company, is a fee and cost structure that is transparent. Sometimes it can be hard to decipher. In this blog we’ll talk about five common fees, expenses, services, rental property owners expect to pay for when hiring a professional property management company.
- The Management Fee:
That is the fee that most companies charge for the ongoing management of the property. Those can be setup and structured in different ways. What is most typical is either a flat monthly fee, charged every single month, or a percentage of the income or a combination of both. Now which one is better? Is one better than the other? Well maybe. If it’s a flat fee, if the owner is paying the same amount every month, does that motivate the property management company to do the best job they can do on collecting the rent and maximizing the owner’s income? Probably not. But if the agency is able to collect a percentage of what they make for the owner, then that increases their motivation to make the owner more money.
Also, is the management fee going to be the same amount if the property is vacant or occupied? If the agency doesn’t do its job and doesn’t collect the due rent on a particular month, for whatever reason, should they get paid for that? Probably no, they shouldn’t. Hopefully that management fee is based off of only actual income received. If zero income is received, what should the property management company be paid? it should be zero. If the agreement is based on a flat fee, it may not be zero. The property owner is paying them every single month regardless of the quality of work they’re doing.
- Leasing Fee:
Leasing and management are very different. Most companies when they go through the leasing process, and they have completed that leasing process, they’ve completed their advertising. They’ve placed a new tenant in a property. They’ve done the marketing. They’ve done the qualifications, they provide the lease agreement on property owner’s behalf, they typically charge a leasing fee for that service. That’s fair. It should be known what that leasing fee is.
Industry wide, we’ve seen anywhere from a couple hundred dollars up to a full month’s rent on a leasing fee. Not right or wrong, but there is a need to know the service provided in exchange for that leasing fee.
Is the property management company providing a full lease agreement? What are they doing to qualify the applicant? How thoroughly are they vetting the applicant? What is their marketing program? Are they charging the owner a piece of that marketing program? Maybe they are, maybe they aren’t, and that’s fine, but the owner needs to know that.
- Lease Renewal Fee:
When the tenant comes up for lease renewal time, that’s a pretty big process, because what the property management company should be doing is an entire new analysis on that property. Determining what the current market rate is for the property, looking at what the current tenant is paying and looking at the tenant specifically. How long have they been in the property? How long has it been since their last rent increase? What kind of payment history do they have? Do they have a history of a lot of repair requests? Are they a difficult tenant? How much of a market increase will they take? Where is that fine line? What is the market doing? Is there a lot of new potential properties on the market this tenant could move to? It’s an art and a science.
The owner obviously wants to bump up that rent a little bit, but never to the point that it would cause a quality tenant to vacate. So, it’s not just as simple as saying well the market rent is an extra $100, let’s increase rent $100. While the owner doesn’t want that tenant to leave, they also don’t want to leave money on the table.
What we find for new landlords is their tendency to be scared of the tenant leaving and so they don’t want to increase the rent at all. That’s not a wise business decision. The multi-family housing industry gets this very well. Down to a science. That’s what is required from property manager. Ensuring that that quality tenant doesn’t leave, but yet that they’re able to increase, because in the last year it is most likely the real estate taxes have gone up, the homeowners association fees have gone up, the insurance expenses have gone up, so there is a need to build that into some type of rent increase to where the owner is at least netting the same amount. Otherwise, a no rent increase, doesn’t mean no net change in the income. The owner might have lost income on the net. So, there should be some type of an increase. Now very likely, the property management company may charge a fee for this process. That’s fair, but it should be known and understood by the property owner.
- Occupied Inspections:
Once a property management company has placed a tenant, how often is that company going to be inside the unit doing an inspection survey of the property? At least one time per year during the term of the lease agreement. And the tenant should be made aware of this on the front end, because if a bad tenant who’s going to come in and know on the front end that the property management company is going to be coming into the property to inspect, those bad tenants are going to walk away. They want to go find the property where nobody’s going to be watching them.
Now, there may be a cost to rental property owner to have that done. The company should be sending in some inspectors and they should be looking at everything from the top to the bottom. Checking the molding in the bathroom. Checking the caulking. Looking for unauthorized pets. Looking at the condition of the yard. It should be a pretty detailed and thorough inspection. So maybe there’s a cost involved in that.
- Cost for Maintenance:
Maintenance oversight is huge. It’s a tremendous amount of work for a property management company and sometimes they bill for that oversight. All vendors for any property management should be qualified on three criteria.
- Number one, timeliness of work. How quick are they going to get out to the property?
- Number two, is cost. What are they charging? They should be charging very competitive, low rates to the property management company because they’re getting a lot of work.
- Number three, the quality of work done.
Those are the three things that every company should be judging and the owner should be benefiting on those things, but for overseeing those vendors, for ensuring they have insurance in place, for ensuring that someone picks up the phone call that comes in at 3a.m., the property management may charge something for that. Owner needs to know what it is.
Those were five common cost structures to be involved in.
One thing to be aware of as an owner, is junk fees. To know what property management companies could potentially charge. Most companies are pretty good with that, but read the fine print. We’ve seen a lot of things like sign-up fees, termination fees. If the owner changes his mind and decides not to work with this company, are they going to charge money so that they can leave them? That’s common in this industry.
Make sure you’re not paying any fees to walk away from the relationship that you have with your property manager. Typically, in our industry, we find that you get what you pay for, but you want to be very cautious.
Property management when done well, is money well spent, but when it’s not done properly, it can end up costing you money as the owner.