Is this really the reality of property management?

[Skye Anderson]

I recently had my first call to interview a potential property manager for my first long-distance investment property and it left me a bit discouraged to learn of the reality of the costs involved.

• 3-5 weeks to rent a property (1 month's rent lost)
• 1 full months rent to lease it
• 10% of the monthly rent to "manage" it... essentially collect the rent

By my calculations this means that 3 months have to go by before the property owner ever sees any of the rent.

So let's do the math for a 1-year breakdown on a fictional property that rents for $750/m and would bring in $300/m in cash flow before property management.

Costs:

$750 (no rent while vacant)
$750 (cost to lease)
$750 (10% management fee for remaining 10 months)

$2,250

+ $3,600 (Annual Cash Flow Before PM)

- $    750 (Lost Rent While Vacant)

- $1,500 (Paid to Property Manager)      

 $1,350 (Actual Annual Cash Flow)

... and this is only if the Property Manager never does anything except for collect the rent!

Is this really the reality... that the Property Management Company makes more than the property owner?

[Steve Maginnis]

Hello @Skye Anderson.  There are a lot of points to discuss on this thread.  As a property manager for over 20 years, I have faced these arguments from investors many times.  Hopefully I can help shed some light.  Firstly, the initial vacancy is hard to avoid whether you have a professional management company or not.  When you turn over a vacant property to a PM, they have to (hopefully) inspect the unit to make sure it is up to standards, market, show, screen prospects, qualify applications and generate the paperwork to move them in.  Many tenant prospects are looking for something in advance.  They don't want to move in the day they see and apply.  Many prospects want to move within 1-3 weeks after application approval.  Of course there are those who need something right away, but most responsible tenants will be proactive and try to set something up in advance of when they need to move from their current property.  There are some PM's who will begin marketing and even showing units prior to the vacancy if all the planets align.  Most PM's today do not do this because it brings up a lot of potential issues.  Will your current tenant move when they say they will?  How much work will be needed to get it in "rent ready" condition?  If you sign a lease for the new tenant and things stall, who pays for the holdover rent for the new tenant to stay where they are?  There are a lot of potential problems.   My point is, the PM does not benefit from this vacancy.  Most companies will not charge the management fee until they place the first tenant.  Maybe they get a marketing fee.  

One month's leasing commission and 10% is fairly normal in my area.  However, if you shop around and get some referrals, you may be able to find something less expensive.  For example, we are now offering 30% leasing commission and 5% management fees.  Less than half of what you were quoted.  Shop around to find a better deal.  

The initial vacancy is simply a cost of doing business, and you should factor this in to your budget, as well as future vacancies.  @Jason D. suggested PM's want the tenants to not renew, so they can charge another "placement fee".  Perhaps some do, but it creates a lot more work that I don't feel is worth the hassle.  Most PM's charge a minimum fee when it is vacant, but is not equal to the management fee while occupied, so they lose that amount.  I would rather keep a good tenant happy , which in turns keeps the investor happy, and things run efficiently and without a lot of unnecessary work.  

I feel PM's often get a bad rep.  Yes, sometimes we get a beautiful property that runs so smoothly.  We rarely ever hear from the tenant or the investor.  Tenant pays every month, there are minimal repairs, and tenant has been in place for many years with reasonable yearly increases.  However, these are few and far between.  Many PM's have to deal with wacky tenants who call excessively about nothing, demanding owners who look to micromanage every move, constant collections efforts, no show prospects, incompetent vendors, tedious marketing efforts, software glitches, accounting nightmares, etc.  It can be extremely time consuming.  

A lot of problems could be resolved if there was a meeting of the minds regarding expectations of the owner and the property manager.  Some owners expect PM's to inspect their property for no cost every month or so, or to at least drive by.  We typically perform inspections every six months or so(for a small fee).  This inspection can only be a snapshot of how they are maintaining your unit.  Sometimes it looks good, then three months later when they move out the place is completely trashed and bug infested, as @Dennis M. noted.  If a PM company has good screening criteria, and an applicant meets those criteria, they must approve the application.  I'm sure there are plenty of families with 800 credit scores that have bed bugs and live in filth.  Sometimes someone is approved but lose their job right after they move in. Life happens.  Owner's should not blame the PM for renting to a dead beat tenant, provided they did everything they were required/should do when placing them.  There are many tricks of the trade that can benefit the PM , but that's a story for another time.   Hopefully this is not the first time they were dead beat tenants and the screening showed previous issues so they were not approved to move in your unit. 

Finally I feel a good PM helps protect you legally.  There may be a lot of legalities you are not aware of that the company practices daily.  I've seen many Landlords get their rear handed to them in eviction court because they had non legal leases, etc.  In some cases, the Landlord was stuck because the tenant did not have to move or pay until the Landlord was able to correct some infraction.  Nightmares.  They can also help protect you from Federal Fair Housing claims.  Of course, there are plenty of PM's who get caught for violations.  This is another reason to do your homework and find a company you feel comfortable with and is willing to work with you.  Oftentimes that means a smaller company.  I know that if I start to work with someone who ends up feeling I'm not meeting their expectations for some reason, I will let them out of the contract even if I did nothing wrong.  I feel it's better to leave on decent terms than have them hold a grudge or stick them with an early termination penalty.  It promotes good will.  Best of luck with your search.