Is this fair ask from the broker?

Question

The broker I a working with to buy a property also has a PM company. They are asking for 1 month rent to market and find the tenant plus 9-10% fees to manage it.

It seems too much but I am new to this and would like to know the views from pros on this forum.

I do not expect more than $1100 mo on an $120k investment so this is a big query from cash flow standpoint and all help is appreciated.

Jim K. · Answer

The quote you were given is also pretty standard in my area.

My take on this as a self-managing DIY landlord is pretty simple and largely math-based.

I am unwilling to rent out a property where I know I will spend more than 1 hour a month on management aspects on the rental. In even my cheapest C-class rentals, I've never hit that ceiling in management time per unit. My average is a little less than 8 actual management hours a year, with quarterly inspections that include furnace filter changes and CO2/smoke detector battery changes. But let's run the numbers for 12 hours annually.

The primary thing that makes that small expenditure of time every month possible is the right tenant. So should I turn that aspect of the whole affair, tenant selection, over to a 3rd-party PM? How wise is that?

Look at the management math. $110/month(10% of the rent) x 11  + $1100 (1 month's rent) = $2310 for a year's management. I'll estimate it will take a property manager six total hours of work to advertise the property, file the application, show the property, run a background check, and travel get the lease signed. So that's 12 hours during the year plus 6 hours to place the tenant for 18 hours total work for $2310, and that's a bit more than $128/hour.

And the major maintenance issues would still fall on me, and if I used the PM's recommendation, of course he'd get quotes from contractors he sourced himself. It is inconceivable that the PM's sourcing would not come at a price in the form of some sort of kickback, sweetener, or outright switch, where one of the PM's own people would do the work while the on-paper contractor would just sign off on it.

Forget the slimy maintenance aspect, and just focus on the actual management hours, though.

$128/hour for a 40-hour workweek and 2 weeks off a year comes out to $21,333/month, $256,000/year. Until I'm bringing in that much in self-managed rental income, I'm not hiring a PM, and when I do, it's going to be an in-house employee I pay $30/hour maximum with employment costs to find the tenants, make the calls, walk the properties, and deal with the complaints.

James Wise · Answer

@Yatin Dalvi @Mark Trebor

That is a fairly standard price point for the type of asset you've got. Seeing as your rent is above $1k/mo you may be able to get your monthly rental amount capped at $100/mo per unit but everything is very market competitive.

As for that pricing structure being "highway robbery" that is a wildly naive statement. If you actually talk to those who run large Property Management businesses as well as other big names in the Real Estate industry who are familiar with the ins & outs of the biz you would find out that Property Management is actually the thinnest margin aspect of the Real Estate industry.

Depending on the size of the Management company's portfolio & infrastructure that pricing structure will usually lead to a NET PROFIT LOSS for the company until they scale large enough to cover their staff & infrastructure.

Mike McCarthy · Answer

@Yatin Dalvi regardless of the pricing, make sure you vet the company from a PM perspective. There are a lot of brokers who do PM on the side - and not so well. Anyone can collect rent and hire a plumber when you need it. You need to find a really good PM who will keep tabs on the tenants and your property.

I’m sure there are some good Broker/PMs about there - but I guarantee they aren’t all good.

Mark Trebor · Answer

@Jim K. - well said! I summarized what you said with "highway robbery".  Big PM's have lots of over head so there's probably one guy making allot of money and a bunch of minions working for $15/hour rifling through your tenants stuff.

A small guy starting out I think you really need to self manage, hiring a PM you are just looking to get taken advantage of.

Mark Trebor · Answer

That sounds about right for my area in the midwest.  Its highway robbery that's why I self manage.

Nathan Gesner · Answer

Rates vary across the nation. You need to do your research and determine if these prices are common in your market or if they are charging far more. More importantly, you need to determine if the charges are justified and if they give you the best bang for your buck. The most expensive property manager may be the one that puts the most money in your pocket.

Yatin Dalvi · Answer

Thank you for your insights. This helped to clear a lot of misunderstandings I had. For now I may be better of just trying to manage things myself and hope that nothing breaks in near term or atleast until I can find some reliable handy guy.

Sam Shueh · Answer

In our area the PMs do not get paid unless it is rented. From there on it is 8% or less.  Some charge 1 month rent to place the tenants you take over the rest.

Steve Vaughan · Answer

Keep in mind, they are paid whether they place a good tenant or not.  Most just accept the first minimally qualified applicant. Faster for them and they are paid either way.

Ask them to spread the fill-fees over the tenancy.  Tenant vacates early, stops paying? So will the fill drip. They may be more careful with tenant selection that way.

Russell Brazil · Answer

Thats pretty standard.  On higher rent values you see 8%. 10% on lower rent values.

Also for perspective, I think the average property management profit margin for an owner/operator  is less than 10%.  So in your case with 1 leasing fee every other year,.....actual profit for a property management company from you would be $185 per year or so.

Is this fair ask from the broker?

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