Property Management Fee Structure

[Ryan Moore]

Hi, I'm closing on a multi-family 4-plex in Phoenix and I'm starting to research property management companies.  I've noticed that some charge a flat rate vs taking a percentage of the total rental income.  The flat rate charges I've seen so far seem to push my estimated monthly PM expense up to 13 - 15% of monthly income.  A couple questions:

1) 13-15% is a high expense ratio for PM correct?

2) Are there benefits to doing a flat fee manager vs one that takes a percentage?

[Tyson Hill]

Originally posted by @Rico S.:

@Tyson Hill

Good afternoon, I am new but have been learning a lot about REI. Would you recommend someone who is new to investing manage their property themselves or hire a PM? I would like your bias opinion. Also what does PM en tell?

Thank you very much!   

 Hi Rico, 

I would absolutely consider hiring a PM under certain circumstances. What is you time worth? If you can better utilize your time in your career, that can be way more financially beneficial than the money you save with self managing. I manage a 4-plex for an attorney and he is bent on doing all repairs, painting, etc. His hourly rate is probably in the range of $300-$500, yet he spends his weekends painting to save a couple hundred bucks. Makes no sense to me :)

Secondly, tenant screening is where most self managed investors go wrong. As a PM I have all the tools to properly screen tenants.  I have processed thousands of apps. With that experience, I have gotten pretty good at avoiding evictions and bad tenants. There are little subtle things I look at that most don't consider that leads to great tenants.  I recently took over a 4-plex for a self managed investor. They had just bought it 3 months prior and rented to gypsies (12+ people in a 2 bedroom), a person who chronically gets evicted every few months and moves around, and a felon with Pit Bull dogs. All three had to be evicted. I totaled the loss of rent and eviction expense and it was north of $9000. With the clean up and repairs to re-rent the units that number was up to around $12,000. Did the owner save a few bucks by self managing? Yes, but ended up costing them thousands by doing so. 

Now if you have the time and know what you are doing, by all means, do it! But there are so many cases where investors cost themselves a dollar to save a dime. 

Last comment, not all PM companies are equal! Truth is there are more bad ones than good ones. You have to properly screen them just like you would a tenant to get the right one. 

Good luck Rico!