Real Estate & Investing

Richard Mark asked:


When you hire a property management company to serve as the liaison between yourself and your tenants, you want to be sure you’re getting the best possible property management services for the money. The services a property management company provides can range from ala carte to an all-in-one inclusive package. Along with that comes an array of fees for each. There is no set in stone fee structure we can provide you. But we can educate you on what common fees to expect and what each is commonly for. In the end it will be up to you to compare company fee structures and choose the best one that fits within your budget. Below are some of the most common fees and what service they provide.

Commission

This is an ongoing monthly fee charged to the owner to compensate the property manager for the responsibilities of overseeing the management of their property. This fee can vary from as little as 3% to over 15% of the monthly gross rent. In place of a percentage some managers may charge a flat monthly amount which again can vary from $50 to over $200 per month. All property management companies generally charge this fee.

Lease-Up or Setup Fee

This fee is charged to the owner to compensate the property manager for their initial time invested and resources used in setting up an owner’s account; showing property and/or other activities resulting in tenant placement. I guess you could look at it as a “finder’s fee” for placing a tenant in your property. Once a tenant has been placed and first rent income comes in, the property manager will deduct this fee from the rent proceeds. Some property managers have been known to require this fee upfront prior to tenant procurement. Usually this fee is non-refundable once the property manager has started the process of tenant procurement or any legwork has been initiated with the property. This fee can vary from none to as much as the first months rent, and usually is a one-time fee per tenant.

Lease Renewal Fee

This fee is charged to the owner when a property manager renews a current tenant’s lease and covers the costs of initiating paperwork or communication involved in implementing the new lease document. A property manager may also justify this fee if they perform a year end inspection of property. This fee can vary from none to $200 or higher, and may be charged every time a lease renewal is implemented.

Advertising Costs

Depending upon the property management company’s contract, either they will pay the advertising costs or the owner or they could split the costs. If the manager is willing to cover this cost, most likely they will charge the lease-up or setup fee as outline above. If the management company covers this cost make sure to find out what type advertising or marketing of your property is included. If it’s placing your listing on their own web site and other free online classified sites you may not be getting your monies worth. They are many good rental or tenant resource online web sites that bring in qualified tenants for a reasonable fee and you will want to consider these. And don’t forget about print media, yard signs, listing on the MLS or even an open house. Nothing is worst than having your property vacant, bringing in no money only because you or your property manager skimped on advertising.

Maintenance Mark-up Charges

This is one of those costs you may never really of known about or had it disclosed to you. A “Mark-up” is a charge over and beyond the final bill on maintenance and/or repair work done to your property initiated by your property management company when using their vendors or in-house maintenance staff. This should be disclosed in your Manager/Owner contract which usually will state the markup as a percentage above the final invoice from vendor. For example, your manager had to call a plumber to replace the dishwasher in your rental property. Total charges for completing the job: $400. If your property manager contract states you will incur a 10% markup on all maintenance work the actual cost to you will be $440. Just one of those things to be aware of as these all eat into your profits.

Early Cancellation Fee

The dreaded “3 months and no tenant”. Your property manager insist he or she’s doing everything they can to find you a tenant. But here it is 3 months and still no tenant; what do you do. Well, look at your Manager/Owner contract and that might be your deciding factor. I am not a fan of this fee, and believe it to be an unnecessary fee and for you manager out there this could be the deal breaker. I’ll tell you why; if a property manager is doing their due diligence and keeping the owners in the loop as far as decision making, market conditions and communication lines open an owner will not be second guessing his property managers abilities. The odds of this scenario happening is unlikely but you must be prepared for it. A cancellation fee can range from none to over $500. To be fair, some managers legitimately deserve this fee especially if they have pocketed advertising costs, incurred lots of legwork and time invested in your property.

“You’ve Got To Be Kidding Me” Fees

These are one’s I have personally had the pleasure of running into.

* Your property is vacant, but we still will charge our monthly commission or a small flat fee.

* “A For-Rent Yard Sign Fee”. I believe this was $25/mo.

* “Preventive Maintenance Fee”. This was to cover the “just in case” and changing out A/C filters. If “just in case” never happens they still pocket the money. I believe this was $20/mo and I still was charged for filters.

In Summary

Read your Manager/Owner contract, understand what you are signing, ask lots of questions and know what the fees will buy you in services. A good real estate lawyer can help in negotiating the terms in a contract that suit both parties. These contracts are not set in stone. If your property manager will not negotiate, there are other property management companies that are eager to earn your business.

Steve Gillman asked:


You just bought a small apartment building. Do you hire a good property management company or do you try to manage your rental property yourself? The best answer to that depends on what your goals are and what your skills are.

Your Goals

Do you want to be a landlord or an investor? Of course, the choice isn’t that black and white, and you can be both to some extent. However, before you start spending all your time dealing with rent-collecting and fixing broken toilets, consider how that will affect your ability to go out and find more good investment properties. Certainly much of the time spent at your apartment building could be spent on finding more buildings – if you had a manager.

It’s worth noting that wealthy investors often spend more time finding the deals than doing the day-to-day things necessary to operate their rental properties. They hire good property management companies, and not just because it frees up their time for more valuable things. It also has to do with the question of skills.

Property Management Skills

It may be tempting to do everything yourself. In fact, this may not be a bad way to start out investing in rental real estate. There is no question that if you do it right, you can reduce your expenses and so generate more cash flow by not hiring a property manager.

In fact, you may need to do the managing yourself in order to have any cash flow. In this case, you may have paid too much or financed the property wrong. Even if you plan to manage a property yourself, you should always buy in a way that the income covers all costs – including management fees if you decide to pay them. Any other way is too risky.

If you are thinking you’ll do your own managing, can you do what is necessary? This is an important question. Do you have what it takes to collect from tenants who are late with their rent? Do you know who to call and how to negotiate for cleaning and maintenance? Of course you can learn whatever you need to know, but if you’re not willing to learn, you are better off hiring a manager.

Consider too, whether property management will really be as expensive as you think.Sometimes a good property manager will save you money. A company with experience, for example, may have tenants calling all the time looking for apartments. This means they can fill your units quickly, and without the expense of advertising that you would have had if you were on your own.

When there is a vacancy, a good property management company will (hopefully) have a carpet cleaner and housekeeping crew in there within days to get the unit ready to rent. If they get the place re-rented two weeks faster than you would have, that’s two week’s extra income. Good property management can pay for itself in time and money savings.