How much do property managers charge, anyway?

TurboTenant examines property management fees and their structure, discusses factors affecting the cost of using a property management company, and explains what you need to consider when searching for one.

What Does a Property Manager Really Do?

Most people start investing in real estate because they want a passive income stream. In other words, it's a way to earn income without direct involvement in property management. One way to achieve a more hands-off income stream is to hire a property manager.

When you hire a property management company, they will help you with the following.

• Market your property: Finding good tenants is one of the most time-consuming parts of being a landlord. Property managers are responsible for advertising your rental across essential listing sites.
• Field applications: Once the property is listed, you'll start fielding applications. Depending on the market you're in or how desirable your property is, you could have more than you know what to do with. Then, you've got to screen them all, as well.
• Set rent: By understanding the local market, property management companies can set competitive rental rates within the area to help you maximize revenue.
• Collect rent: Collecting and depositing rent checks should be a thing of the past. Most property management companies use technology that allows tenants to pay rent online. Ultimately, you get paid quicker with no added work.
• Manage maintenance and repairs: Property managers handle tenants' maintenance and repair requests, eliminating late-night phone calls when something breaks.
• Sign and manage leases: One of the more time-intensive administrative tasks is lease agreement management. Property managers help landlords streamline the leasing process, from ensuring legal compliance to renewal.
• Show properties: One of the more hands-on tasks property owners must complete is showing properties to interested renters. The schedules of everyone involved can be chaotic, and property managers help bring order to your calendar.
• Fill move-in/move-out checklists: Filling out property condition reports before and after a tenant moves in can be time-consuming and lead to security deposit disputes. Property managers help smooth out the process.

So, How Much Do Property Managers Charge?

Understanding how much property managers change is instrumental in determining whether it's worth it to hire one.

That said, it's important to understand that property management fees aren't cheap. Your cost depends on how much work they do and how they structure their fees.

Here's a breakdown of most property management companies' two pricing models.

Fixed property management fee

The first method some property management companies use is a fixed fee. Companies typically base their fees on several different factors, including:

• Number of units
• Square footage
• Services provided

If you're researching a property management company that charges a fixed fee, you can expect to pay anywhere from $100 to $200 per unit. However, this amount can fluctuate depending on your location.

Working with a fixed property management fee might sound simple, but there can be a significant drawback. Property managers are unlikely to be motivated to rent your units for the best possible price.

Percentage of rent collected

The other method for pricing property management fees is using a percentage of the rent. In other words, the property manager will receive an agreed-upon percentage of the rental income each month in exchange for their services.

Most property managers using this method charge anywhere from 8% to 12%. For example, let's assume you rent an apartment for $1,500 per month, and the property management fee is 10%. The property manager would receive $150 monthly directly from your rental income. With more units, you pay more fees.

Now, you might wonder how much do property managers charge if you're working on a percentage of rent collected and there's a vacancy. In this case, many property management companies will switch to a flat monthly rate until they lease the unit.

In short, many real estate investors prefer to pay a percentage of the rental income. This method incentivizes property managers to maximize each unit's rental income.

Other Types of Property Management Fees

The monthly fee real estate owners pay a property management company tends to cover most day-to-day expenses. However, some property management companies could charge one-time and a la carte fees. Here are some that you should be aware of.

Contract setup fee

Once you agree to the monthly property management fee, the company will need to set up your account. Setup tasks include creating an account ledger for your bookkeeping needs and helping to obtain any necessary licenses. The fee depends on the management company and location but typically costs between $300 and $500.

Inspection fees

Inspecting each of your units once a year is a good idea to identify potential wear and tear before it becomes a more significant issue. Some property managers include this in their regular fee, but some might not. Instead, you will receive a bill after the inspection, which could be a couple hundred dollars per unit, depending on the size.

Repairs and maintenance fees

The most significant fee that you'll face is when repairs and maintenance occur. The management company is going to coordinate the work with a contractor and then make a payment to them on your behalf. However, for this type of work work, they will typically mark up the repair or maintenance expense by 10% to 15%. That means a $1,000 repair service could cost you $1,100 or more.

Advertising fee

Something property managers are good at is knowing where to look to find quality tenants. This expertise comes at a cost. Some will charge a leasing fee of $100 to $200 each time they need to lease a unit. However, others might include this in their regular monthly cost.

Don't pay a property manager to advertise your rental.

Tenant selection fee

One of the most essential jobs for a property manager is finding potential tenants and negotiating a signed lease. The extent of this job will determine the cost. Typically, property managers handle everything from tenant selection and interviews to running screening reports.

Depending on the property manager, they might charge a flat rate of $100 or $200 each time they need to screen tenants. They could also charge a percentage of the first month's rent. For example, depending on the work required, they could charge anywhere from 50% to 100% of the first month's rent.

Lease renewal fee

Any real estate investor aims to have long-term tenants. Extended tenancies reduce vacancies and help increase revenue. It also means that a more expensive tenant search is not needed. Even though there is usually some paperwork involved when resigning a tenant to a lease extension, the cost is minimal, no more than $50 or $100.

Eviction fees

The last thing you want to go through as a landlord is an eviction. Evictions are typically the result of unpaid rent, which costs you rent each month. Unfortunately, an eviction can also be costly, beyond lost income. If the property manager handles the entire eviction, it could cost $500 or more. If you're dealing with a squatter, the cost could be even higher after court costs and lawyer fees.

Vacancy fees

If one of your units is vacant, the property manager has more work to do than when there is a tenant. They need to constantly monitor the property to ensure there are no emergencies, such as water leaks or security issues. In short, vacancy fees could cost up to $100 per month.

Late payment fees

Most lease agreements stipulate that a fee will be assessed if a tenant is late on their rent payment. Unfortunately, the property manager receives a portion of this fee, usually 25% to 50%. That fee covers the costs of finding the tenant and paying the past-due rent.

Early termination fee

When you agree to work with a property management company, you can expect to have a contract for a certain period of time—usually 12 months. You could face an early termination fee if you end the agreement before the contract ends. An exception would be if the property manager breached their contract. For example, they could have simply stopped performing their duties.

Is Hiring a Property Manager Worth It?

Most real estate investors are looking to be as hands-off as possible. They want to collect their income and not be involved with the day-to-day minutiae of managing properties. It's even more true if you're looking to add more and more properties to your portfolio.

One thing to consider when deciding whether to hire a property manager is the cost.

How Much Is Your Time Worth?

Time has value. While hiring a property manager will cost you money each month, take the time to understand if the fees are worth it to you.

Is it worth $100 a month to know you won't receive a phone call or text at 3 am when a pipe starts leaking in the kitchen? Do you want to collect rent payments from tenants each month, or would you prefer that to be done for you?

Understanding the value of your time can go a long way toward determining whether to hire a property manager.

Can You Afford a Property Manager?

Another significant consideration is whether or not you can afford to have a property manager. You might have small monthly margins depending on the property and your situation. If a property manager significantly impacts your profit, it probably doesn't make sense to hire one.

Before proceeding, take the time to understand your numbers and determine whether you can afford a property manager.

What Are Your Property Management Needs?

If you're investing in property outside your home city, you might not have an option besides using a property management company. However, if you live in the city where you are investing, you might be able to take on some or all of the management responsibilities yourself.

Factors Affecting Property Management Fees

As you're comparing how much property managers charge in your area, consider several factors that can affect the price. The effects could be more significant with one property manager over others.

Here are a few factors to be aware of as you go through the process.

• Property size: The square footage of your property impacts your property management costs. Larger homes cost more.
• Property location: Property management will also be more expensive if you live in a high-cost area.
• Type of property: The type of property you own will impact the fee structure. Single-family, multi-family, and short-term rentals all have different fee structures.
• Services received: You will pay more for all-inclusive property management services than services like tenant screening or lease renewals.
• Competition: If you're hiring a property management company in a smaller city, there could be fewer choices. This lack of competition can keep prices higher than if several companies are trying to earn your business.
• Experience and reputation: If a property management company has been in business for a while, that experience might come at a higher price tag. However, it can also mean better service.

Deciding Whether to Hire a Property Manager or Do It Yourself

Hiring a property manager or managing things yourself is a big decision. Understanding how much property managers charge will be a good first step for most people to figure out. It will allow them to determine whether the expense makes sense for their budget.

However, if you're considering doing things yourself, it's important to understand that your time is valuable. Instead of spending an hour coordinating the repair of a broken appliance, you could spend it doing something else that offers greater value. To maximize your time, consider using software to automate the mundane and get more of your hours back.