What do you REALLY pay for Property Management?

[Joel Fine]

I'm somewhat new to Real Estate investing, so I analyze lots of deals as a way to learn. I want my analyses to be as accurate as I can get them.

I've been concerned about the accuracy of my estimate for Property Management expense. At first I was using 10% because in many metros, that's what PM's take from the monthly rent roll, but then I realized that was only part of the story.

• Each time a tenant moves out, a PM charges 1 month's rent to place a new tenant. If tenants stay on average for 2 years, that's an extra 1/24 (one month out of 24) of rental income going to the PM. 1/24 = 4.2%.
• Most PMs charge a renewal fee if a tenant re-ups. Again using the average 2 year stay, that means the PM is collecting that fee every other year (think of it as: in even years, the tenant re-ups; in odd years, new tenant). Let's say that's another $100 on a $800/month unit. That's 1/8 of a month's rent, every 24 months - another 0.5%.
• Each time a tenant re-ups, I'll want an inspection of the property. Call that $75 - again, every other year. Add 0.4%.

So we're looking at

• Base fee: 10%
• Tenant placement: 4.2%
• Renewal fee: 0.5%
• Inspection fee: 0.4%
• Total: 10+4.2+0.5+0.4 = 15.1%

Of course, this will vary across markets and between PM's. In some areas PMs charge less than 10%, or less than a full month's rent for a tenant placement. And if your tenants stay longer than 2 years, then your placement fees will hit less often.

But the point stands: the base rate is only a part of the net cost of PM service.

I'd love to hear from other BP'ers: what do YOU use for PM cost in your analyses (or what are you actually paying). Anyone?

[Doug McVinua]

@Joel Fine Not all Property Managers charge fee structures like you're experiencing. Good, caring PM's exist that want owners to be successful while still making an honest dollar.

I was with an attorney for a very large flat fee ($75.00 per month) PM firm one day and he was proud to convey that the average gross per door was $250 per month and the average tenant duration was 8 months. $75.00 per month is clearly total BS marketing and if I had an 8 month tenant duration I would be pissed as an owner.

I take great pride in the service we provide with only 2 fee's to owners, a lease up fee and a % per month. The lease up fee is needed as it's actually a lot of time to market, show, screen, lease and do the move-in etc. I don't consider the leasing fee a profit center given the value of my time, prepping the property, showings, lease, move-in and then the first month or two is generally higher service volume with a new tenant.

I believe in most situations we are far better off keeping the tenant happy enough to want to stay put and avoid the turnover. Unless a tenant is bad it's much better for the owner to renew and the owner is who I owe my fiduciary. Yes, I have a right to an income but my obligation and fiduciary is with the owner. The needs of the owner come before mine so in good faith I never turn a property over unless it needs it. I have one right now that I just don't like the tenant and agreed to do a lease up for free because it helps me, the owner was indifferent. It's an easy lease up and won't cause vacancy and I get rid of a difficult tenant that is a time sucker.

PM industry gurus for years have been promoting the fee's as additional income. I like income don't get me wrong but I'm happy taking my % per month with good owners that own decent properties and let us do our job.

Another fee to be careful of is the PM charging the tenant a monthly fee. In AZ I believe that fee drives away many good tenants. Many good tenants are smart and realize the owner should be paying the PM fee so they avoid those properties so now the ones charging the tenants are left with a less than desirable pool of tenants. The owner thinking they are saving money is likely losing money as they get a lower quality tenant and all the issues that go with them.

Sorry for rant, it's early on a Saturday and I need more coffee!!! lol