How do property managers get rewarded for increasing rent?

Question

In my opinion, one of the toughest balances in optimizing performance of a property is how high should the rent be. Too high is high turnover and too low is losing money.

I manage my properties and constantly struggle with this decision testing the market at different rents as vacancies happen. I am sure a good property manager handling some one else's property would do the same. But I don't see a mechanism in which they get paid for that effort if they just get paid a fixed percentage of rent.

In short, does a property manager role without asset management responsibility make sense? Love to hear from property managers and owners alike.

Nathan Gesner · Answer

I'm a PM and network with many across the country. Many PMs charge a leasing fee every time the unit turns over. This could be 50% - 100% of a month's rent and it's a source of profit for the PM. This creates an opportunity for the PM to make more money by letting your unit turn over more often. However, it also takes a lot of effort and I don't believe most managers would go through the hassle.

I collect a percentage of the rent income collected. If I charge 10% and the rent goes up $100 a month, that's another $10 per month earned. It doesn't sound like much but when you consider 300 units under management, it generates a nice increase over time.

The problem with our country is greed. People build a business and become successful. But they're not happy unless they can show continued growth year after year. Take appliance manufacturers as an example. We used to build refrigerators like tanks and they would last 30 - 40 years. Manufacturers were making really good money, as were the salesmen, repair technicians, etc. But manufacturers weren't happy with making really good money; they needed to show growth every year so they started using cheaper parts so they could show a 5% increase in revenue the following year. Then they decided to build them even cheaper - knowing they would break down sooner - and they could sell an entirely new fridge and increase revenue another 5%.

PM is the same way. The business owner isn't happy making $100,000 a year and growing his business through new accounts. He has to find ways to milk his customer for more and more by adding new fees. It's like the banks that used to make a lot of money serving customers with free ATM access but then they started charging $1.00 to pull money out even though the machine was cheaper than a live teller. Then it was $2.00 and $3.00. Electronic transfer saves the bank money, yet they started charging for every transaction AND they hold our money for three or more days and collect interest. They are never satisfied and will continue increasing fees while reducing services.

Oops...I started ranting.

Wesley W. · Answer

Way back when on a BP Podcast,@Brie Schmidt shared a unique way of aligning the PM's goals to the investor's.  I haven't had a chance to try it yet as I am still self managing, but it seems pretty innovative.

Account Closed · Answer

Most property managers make the most money when filling vacancies. I am not sure how this model is best for the investor. The incentive would be for the PM to be indifferent to tenant's needs, suggest higher & increasing rents to the point that tenants don't renew then benefiting from suggesting that rates be dropped "to get the vacancies filled". It doesn't take a rocket scientist to figure out human nature. My partner and I are looking at 170 units in Central Texas that has an unexplained high vacancy rate and turn over. First thing we would do is find out why and then fire the PM. The model has to reward the PM for Keeping tenants, not finding new ones.

Fred Heller · Answer

Well if your management fee is a percentage of the rent, then obviously as the rent increases, so does the PMs income. But honestly, we're talking $5 to $10 a month, which is enough to buy lunch at McDonald's once a month.There is a fine line between keeping the rents at market rates and potentially losing a tenant. I find it usually becomes a problem when the rents haven't been raised in a  long time. I keep track of the rents in the neighborhood and when I see them starting to increase, I will look at raising the rent when the lease is up. The goal is to keep the rent in line with market rates without having a huge sticker shock to the tenant.I have to take exception with the previous comment that it's in the PMs interest to have lots of vacancies, so our interests are not in line with the landlord. First of all, if I were ever in a position where my interests were in conflict with the landlord, I would resign the contract.Secondly, I HATE VACANCIES. Not only are they expensive for my client, they're also a huge pain in the rear and they consume a lot of my time. Anyone who thinks PMs love vacancies has never been a PM. I have to deal with flaky potential renters. I have to coordinate any make-ready repairs. And I have to make a lot of trips to the property to show it to the same flaky renters. Yes, I do collect the first month's rent as commission when I lease to a new tenant. But with all the headaches and time involved, it's really not worth my time. And if another broker brings the tenant, I have to split the commission with them.

Krishna Chava · Answer

Account Closed Agree with you that incentive for property managers should be to give stable long term returns to the owner. If property manager get paid a percentage of profit owner makes as opposed to percentage of gross rents, it would be fair compensation. As for your analogy of 200 unit complex, most of these are maintained by large national property management companies that charge 4% of gross rent + payroll expenses. They don't get 10% of increased rent.

Krishna Chava · Answer

@Fred Heller Thanks for insight about how property managers hate vacancies. It make sense now that you said it.

Dick Rosen · Answer

My process is first I run the comps to get the current market rent, then I adjust tenants rent 3-5% but not more than market rate. My incentive is I'm still managing the property and protecting your investment.

Krishna Chava · Answer

@Dick Rosen I know good property managers that do the right thing like you do. Increasing the rent once the rent is at 90% of market rent needs lots of hard work. A small percentage of that rent increase isn't incentive enough in itself. I feel incentive system is broken in property management model at least for SFH and small multifamily homes.

Dick Rosen · Answer

As a PM I do strive to get the highest rent for 2 reasons, first it makes the property more profitable for the owner which keeps them happy and yes I am paid a percentage of the rent so when the owner gets a raise in rent, I get a raise in my fee. If you don't have a PM that feels this way, I'd find another PM.

How do property managers get rewarded for increasing rent?

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