Is 14% ever worth it?

Question

I have a verbal quote for 14% of monthly rents for 3rd party property management.  I know typical rates are 8-10, sometimes I've seen 12%.  But could a PM be rock star enough to warrant a 14% rate?  I just can't see the value in it, but I've never used a PM.  My property is in a college town 3 hrs away.

Rick Albert · Answer

It depends on what is included. Typically property managers charge the following:

-Monthly percentage

-Finding new tenants

-Renewals

-Charge on top of maintenance

So even though it is 10% of the gross rent, often times it can be really as high as 18% when all is said and done. It just depends on what is included in that 14%.

Jonah Hartsburg · Answer

I worked with a PM in a different college town in Indiana that would charge 12-15% on rent, but they didn't mark up maintenance, would often visit the property to help diagnose repairs before sending out a vendor to avoid trip fees, used local handymen that were cheaper, and only charged that percentage on late fees as well. Unlike some PMs, their fees were transparent.

@Andrew Postell's point is spot on. It seems a local referral would help reveal the nuances of that company and market.

Edward Messer · Answer

Thanks for the perspective @Rick Albert.  I hadn't considered that they may be rolling in those additional items into the percentage.  Given it is a college town and my SFR would be for annual college students, it would make sense to roll the renewals, marketing, etc into the monthly rate because it would most likely being turned over every year.

I hadn't gone any further with this PM than a intro email to see if they were taking new clients and they volunteered the rate.  I wanted to get the BP community's perspective before deciding whether or not to go further with them.

And thanks too @Mel F.  The minimum rate until a certain threshold is certainly a good point too.  As well as the potential extra work with College students.

I obviously need to do some more work on this but these comments have helped point me in the right direction.  Thank you.

Mel F. · Answer

14% does seem high, but it depends on the number of doors. Is it a SFH? I've seen PMs charge a minimum per door for SFHs until you get a certain number of doors in your portfolio. Sometimes those minimums are closer to 12%+. Another factor could be whether you're renting to college students which usually requires extra "hand holding" by the PM. More details about your property would help us give a solid opinion.

Edward Messer · Answer

@Andrew Postell Great idea.  I have a yard guy who is pretty on top of things.  You can tell how much of a noob I am that I didn't even think to ask him.  Of course, I have never met him in person - we just text and Venmo.  But he'd be a good place to start.

@Kevin Sobilo I'd intend for this rental to be a college rental.  It is a 5 Bedroom that is covering my costs now - with my daughter not paying rent.  So I figure I do have some leeway on the fees if I had 5 full-paying tenants.  (I would expect that the tenants would all come in as a group for friends - it is only 1,600 sf after all.  Pretty tight for 5 strangers)

And I agree that a college rental would likely be more work, although with my daughter and her friends it has been pretty easy.  Not likely if I didn't know the tenants personally.

Thanks for your input, fellas.  Merry Christmas.

Edward Messer · Answer

I hope to bring back a picture of a hamburger like @Nathan Gesner shows above.  I am meeting with the PM company late this week.  I didn't do a great job of explaining the situation in my original post but added some color in a follow up post.  This rate is for a college rental so there would be a lot more turn over from year to year, as well as the likely need of more active management.

As many have mentioned, it will depend on the services included in the fee.  I'll hope to be able to share a lot of information this weekend after the meeting.

Stay tuned...

Andrew Postell · Answer

@Edward Messer yeah, firmly agree with the above posts.  My PM charges 6%...but they keep all the late fees.  My tenants don't really pay late so it's not that big of a deal to me.  But one of my buddies collected $13,000 in late fees last year - so he ain't using my PM ever!  Sometimes certain things fit a little better depending on what you are doing.

Also, I might suggest that if you need something on a local level it's usually better to get this from another local real estate investor.  Whether it's an electrician, or yard person, title company, Property Manager, etc. usually getting a referral from another investor in that market helps limit our risk to "unknown" people.  It's not foolproof...but it helps.  So, join some of those Indy based real estate groups on Facebook.  Some of those pages have thousands of members.  If you need something, those are a good place to get some referrals.  Just a thought.

Thanks!

Kevin Sobilo · Answer

@Edward Messer, you said this is a "college town" but you didn't say whether yours is a college rental. That could make a difference.

If you are operating a college rental and renting by the room to separate students that is MORE work than renting a whole unit to 1 tenant. That could be where the premium comes from on the rate.

Jordan Myer · Answer

Check google reviews! Best way to gauge a PM

Colleen F. · Answer

@Edward Messer that was exactly the situation in the area where I mentioned 14%.   In general college students were the PMs business and there was a different setup for summer rentals. They leased up the college students every academic year no placement fee. Tenants stayed the school year and left.  I rarely had the same students each year. You might get one with two new roommates in a subsequent year.  It was not an option in our house to rent year round.

Is 14% ever worth it?

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