How much should you pay a property management company

Question

Hey all,

Just have a question in regards to property management. I'm currently looking to invest in university housing, so I understand that these property management companies can charge a premium. That being said, I feel like the property management companies I've found thus far are charging too much. From what I've read, a owner expects to pay 8-12% of rent to a property management company. The companies we have seen so far charge 15%. We also are charged a tenant acquisition fee of $400/tenant or half of firsts month's rent, which is significant because there is a high probability we will have new tenants each year, and we're looking at properties with 8-14 bedrooms. As far as repairs, they hire their people to do the repairs and we pay them an hourly rate, ranging from $35-$115/hour. If they need to outsource, we pay for the services plus a 10% fee to the property management company. They can do any repair less then $500 without needing to notify us.

I am new to real estate investing, so this might be considered normal pricing in a niche market such as university housing, but would love to hear back from the community for confirmation of whether or not these prices are to be expected. Also am curious to see if people have been able to do more a hybrid experience, where the owner can do the marketing and find the tenants, while the property manager just manages the property. And if there are any repairs, he finds the contractors who we pay, but without giving him a percentage. Any advice will be great. Thanks!

Andrew Johnson · Answer

@David Elefant What I've found is that property management can be very regional in terms of what's "normal" in a fee structure.  Where I invest it's 10% of gross rents with no leasing/re-leasing fees.  If I were to go 45 minutes west it would be 8%.  If I go 30 minutes south it's 10% but with re-leasing fees.  I don't know why that's the case, if it's a matter of competition, people have been doing it in those markets forever, etc. but it kind of "is what it is".  I know you'll probably pay more if you go through a property management company with the stamp of a real estate company on it.  All of that said, what you really want is to at least know the fee structures of 3-4 PMs in the local area.  You'll get a sense of what "market" is and you can also ask if there's a discount if you get ___ units under management.  Often there is some kind of proration there if you ask.  Where a lot of people get burned is when a PM doesn't list 100% of their fees (like if they pass through the seat charge for Buildium or whatever tenant portal they use) and it creates distrust.  Transparency is what you're looking for first, then fee structure.  One guy's opinion...

Dave Younts · Answer

I had a property manager on my first property.  1/2 first month + $200 fee to their agent who showed it.  8% per month.  $50 fee every time they called a repairman.  They could order repairs under $500 without notifying me.

Needless to say they took advantage of the <$500 repair clause.  They ordered repairs over and over that were unnecessary.  I had a bad light switch connected to the disposal.  You had to toggle it a few times before it would work.  Tenants didn't really care but the "handyman" noticed it and replaced the disposal.  Guess what?  Still didn't work because the disposal was never the problem.  He got called back to the house and replaced the disposal again.  The whole time I am telling the management company that I know exactly what's wrong because I lived in the house for a year and I always had to flip the switch two or three times before it turned on.  I later got billed a single invoice for $850 for repairs plus $150 in management fees without ever authorizing any of the work.

The management company's showing agent also promised the tenants that I had an automatic gate opener for our wooden gate (I didn't.)  Then they expected me to pay $900 to get one installed because the tenant was threatening to break their lease.

Long story short, the management company resigned.  I had to buy a gate opener and install it and repair the relationship with the tenant.  I ended up saving more money in monthly management fees by them quiting than it cost me to buy the gate opener so I consider it breaking even.  I was able to get my money back for the disposal+installation because I had an electrician come out and prove that the handyman was an idiot.

I now pay someone to show the house, find a tenant and sign the paperwork and then self manage after that.  Once my portfolio gets large enough, I will hire someone full-time to manage my properties.  I will never again use an outside company.  It's your property, you should control everything that happens there.  No one should be able to decide how your money is spent on your house.

Andrew Johnson · Answer

@David Elefant So the seat charge was disclosed to me before signing but I use it as a typical example of what a transparent property management company will tell you.  You never want to figure out that you got charge a fee because it was on page 6 of the agreement in 8-point font.  And it was a property management agreement, not a lease.  I'm not sure if that was a typo or maybe I wasn't clear in my response.  I could be losing my mind, I'm getting old.

What I hear a lot about (when it comes to complaints) is that there is a mark-up on repairs (as noted by others) and it's not in the agreement.  Are they going to charge you "an hour of labor" to send their PM representative to let watch the locksmith change the locks.  There's nothing *wrong* with that if it's disclosed to you.  It's a cost of doing business and that cost can be passed through to your or absorbed by the PM.  You could easily get at 15% PM that absorbs the cost of a 10% PM that passes through the cost.  All other things being equal, you pay either way.

The hardest thing to gauge is their ability to market and fill you units with quality tenants.  As noted by @Joel Wilmoth nickel and dime savings mean nothing if you have a bad tenant.  You can also find forum posts on here about PMs charging $5K to turnover a unit.  Yes, it might seem high, but a "bad tenant" might put holes in the walls, abuse the carpet, etc. so you're talking about new flooring and a full repaint.  A security deposit doesn't put a dent in that.  And lost revenue due to vacancy is lost revenue.  You never get it back, it's time-based.

I'd rather have a PM that's a marketing machine and outsources maintenance (even at a higher cost) that one who just focuses on lowering the cost to rekey locks at unit turnover.  I hope that makes sense.  Just more rambling...

Joel Wilmoth · Answer

Like most businesses, there are many different property management business models.  I do not think pricing of services is the biggest problem.  It is the charges for unnecessary or trumped (this word has lost its meaning now but you know what I mean) up charges.  Transparency for the fees is to be expected.  You do not want the lowest priced manager as he very likely has no money to provide the services required.  There are many costs to running a management business.

Mark up of repairs processing repairs that are not needed, or just not communicating are the things most owners complain to me about in my 20+ years of managing.  The biggest harm I have seen toward owners from property managers is lack of screening of tenants.  You can worry about nickle and dime fees but poorly screened tenants will cost you more than any property manager services.

David Elefant · Answer

@Andrew Johnson

Yes definitely a typo, meant property management agreement. Everything you said makes a lot of sense. My partner and I are planning to invest in University housing at Syracuse University.  Since we recently graduated from this university, we felt that we had a strong acumen on the overall market rental rates. That being said, we haven't had experience in screening tenants, which I know is a make or break aspect to the overall success of the business. Hopefully we can find a hybrid property manager where we can market for the tenants, and they screen the tenants. If not, then we'll just have to prepare for this expense in our operating costs. Thanks for the advice @Joel Wilmoth, @david younts, and @Andrew Johnson.

David Elefant · Answer

@Andrew Johnson I know you mentioned the seat charge for Buildup, do you have any other examples of fees that property managers have charged that weren't on the lease in your experience.

David Elefant · Answer

Thanks everyone for the input!

How much should you pay a property management company

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