Fishers, IN · Member since 2013 · 19 posts · 1 vote
I'm learning that it's typical for property management companies to keep the first month's rent as a fee after placing a new tenant in the property. Yet it doesn't seem like I ever see that figured in the breakdown of the projected cash flow. There is always the 8% or so figured in for vacancy, and about 10% for management, so wouldn't each vacancy also have a fee of one month of rent along with it? And I'm referring to the projected numbers that a turnkey company or wholesaler would provide, for example. If you had a new tenant every year, that would be one month of rent plus whatever vacancy time you had which would be a significant impact on the cash flow. Am I missing this somewhere or does everyone just know to add this in when doing their own due diligence? Or, is it so dependent on the management company that it's not included by default?
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
I just bump the percentage a little in my analysis, figuring that if the agency's flat rate is, say, 10%, then my actual management costs will be more like 12%. (your numbers may vary of course, but you're thinking along the right lines already)
A whole month's rent to do a turnover is a lot, IMO, unless you have very low-priced rentals, where they're doing a lot of work for a little $. I would try to negotiate that down . Some companies do half a months rent, some no additional charge at all.
Property Manager · Costa Mesa, CA · Member since 2012 · 23 posts · 8 votes
12y
Hello David,
It is always good to see what your management company is going to charge for Management and Leasing before you sign with them (if you choose to). 10% is just a rough number I see a lot of investors use, however if they use a management company it is usually more.
For example, if the management company is keeping the first months rent, that means that they are charging your 8.3% of the total value of the lease. If they charge 6% on a monthly basis for the management of the unit, then you would want to adjust your numbers to 14.3%.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
A turnkey rental analysis or information from the seller or their agent that doesn't consider all actual costs? Surely you jest. :-) Really, all you need to know from the seller is the price. If they provide rent, you need to independently verify it. Assume all other number provided are understated.
This is why I like the 50% rule. 50% of the gross scheduled rents go to expenses, vacancy, and capital. No slicing the onion and then shaving those slices thinner and thinner.
In order to account for the lease-up cost you have to make some assumption about the frequency of vacancies. I just assume once per year. So, if the fee is a full months rent (ouch, half a month is typical here) then that is 1/12 of a years rent. Which is 8.3%. If the manager gets 10% of collected rents plus a month to deal with a vacancy that manager is going to cost you about 18% of your gross rents.