Understanding the Property Management Fees

If it's your first time hiring a property manager, navigating the associated costs can seem daunting. For some, it's the main factor keeping them from making the plunge.

On average, most professional property managers charge about 8-12% of the property's monthly rent. This can be quite a hefty amount for homeowners, but it's worth it considering the hassle these professionals save you from.

However, the main questions are, "What factors influence these costs?" "Are there any additional fees you should include in your budget?"

In this guide, we'll break down property management fees so you can make a more well-informed decision.

What is Property Management?

Property management involves overseeing and maintaining real estate properties on behalf of the owner. That includes various responsibilities that maximize or maintain the property's value and profitability while ensuring tenant satisfaction.

Property managers handle various aspects of property maintenance. That may include repairs, renovations, and regular upkeep, to uphold the property's condition and appeal.

Property managers can also be responsible for setting rental rates, advertising vacancies, and screening potential tenants to find suitable occupants. They collect rent, enforce lease agreements, and address any issues or concerns raised by tenants.

Lastly, property managers act as liaisons between owners and renters. They also stay updated on local housing regulations and laws to ensure compliance and mitigate legal risks for both parties.

While 45% of landlords prefer to manage their own properties, you can decide to hire a professional property management company.

How Much Does Property Management Cost?

While the exact amount may vary based on the specific property manager, here are some rough estimates to expect when paying for professionals to manage your rentals.

Monthly Management Fee

Most property managers charge a monthly management fee, outlined in your contract, along with the services covered. Monthly management fees can be set up in a few different ways.

Flat Fee

This is a fixed monthly fee typically determined by property size and services rendered. For instance, a single-family home might incur a $100 flat fee per month.

Percentage of Rent

Typically, managers collect a percentage of the monthly rent, usually 8% to 12% of the gross amount. However, a lower percentage (4% to 7%) is common for properties with ten units or more or commercial properties. On the other hand, smaller residential properties may incur higher percentages (10% or more).

Consider this: a 5% fee for a property generating $50,000 in monthly rent equals $2,500, whereas the same fee for a property generating $2,000 results in just $100, potentially insufficient to cover the management company's costs. In contrast, a 10% fee for the latter property would yield $200.

Rent Due vs. Rent Collected

Make sure your contract specifies fees based on rent collected rather than rent due. Otherwise, the manager may charge regardless of tenant payment.

Maintenance Fee

Maintenance generally involves cleaning common areas, garbage disposal, snow removal, and leaf clearing. The maintenance fee is not included as part of the management fee.

For specific repairs, the cost is deducted from a reserve repair fund—a separate account held by the landlord for property maintenance. There are several ways to manage this account:

The landlord can approve each repair deduction.
The landlord can opt to be notified only for repairs exceeding a specified amount.
The landlord can authorize the property manager to use the account as needed.

This account usually maintains a minimum balance, often equivalent to one month's rent.

Tenant Placement Fee

Tenant placement fees are another vital aspect of property management costs. It includes expenses for advertising, screening, and securing tenants.

Typically, these fees are either a percentage of the first month's rent or a flat fee, ranging from 25% to 75% of the initial rent payment.

Property managers may offer refunds for tenant placement fees in situations like lease violations or evictions. This policy encourages thorough tenant screening and reduces turnover rates in the long run.

Vacancy Fee

A property management contract might entail a vacancy fee – a one-time upfront charge equivalent to one month's rent. It could be charged per vacant unit, such as $50 per unit.

Additional Fees

Apart from the monthly management and tenant placement fees, property managers levy extra charges for various services. That may include:

Setup fees
Lease renewal fees
Maintenance fees
Eviction fees
Contract termination fees

For instance, overseeing major renovations might incur a project management fee – around 10% of the project's value.

It's crucial to account for these additional fees when setting a budget for your property management expenses. Have open conversations with potential managers about their fee structures so that you know exactly what to expect. No one likes financial surprises.

What Influences Property Management Costs?

The above-mentioned percentages are just estimates – these prices can fluctuate based on varying factors. Let's look at a few.

Property Type and Size

Property management fees can fluctuate based on the property type and size. Commercial properties generally have higher fees than residential ones, ranging from 4% to 12% of the total rent. Factors such as property size, quantity, and type all influence these fees.

For instance, overseeing a large apartment complex with numerous units may demand higher charges than managing a single-family home. When setting a property management budget, consider your property's unique requirements, including the number of units, tenants, and square footage.

Location

Location can heavily influence property management fees since different areas may demand varying levels of service. Plus, markets with fewer management companies may have higher fees than more competitive ones.

Condition of Property

The condition of a property is another factor influencing property management fees. Older properties often demand more maintenance, leading to higher costs.

Plus, the extent of maintenance and repairs directly affects management costs as it entails extra work for the property manager.

We wouldn't recommend concealing the true condition of your property to get a more affordable quote. It'll just lead to more conflicts later on. Being honest may connect you to a property management company that's willing to offer discounts.

Takeaway

Understanding property management fees is crucial for smart budgeting as a landlord and homeowner. Now that you've read our guide, you're ready to hire the right property manager to take the hassle out of homeownership. Don't forget to read the fine print before you sign any contract!