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?