Property Management Fees and What to Expect
When investing out-of-state and especially buying rental properties out-of-state, your property management company is your boots on the ground. They’re the most important person on your team. They do everything from collecting rents, to managing work orders, to filling vacancies, etc., and they help you manage the property entirely.
Therefore, you want their interest to be aligned with yours. You want them to be paid when you get paid. You want them to make money when you make money. That’s why the fees are very important, and they should be aligned with you generating revenue.
There are some normal property management fees that we pay all of our property management companies that we use out-of-state. So if you’re talking to a property management company, you want to make sure that the fees are normal and you’re not being over charged.
10% of Gross Collected Rents
The first fee that property management companies normally charge is 10% of gross collected rents. Most property management companies out-of-state for the single-family home space will charge this. Once you’ve developed some portfolio of five, or ten, single-family homes, you can negotiate with the property management company to get this fee down to maybe 8%, 7%, or 9%.
Now, of course I’ve heard that other property management companies out there charge only 6% to 8% right from the start. I would definitely do your due diligence on those companies. Maybe they’re just starting out and they manage 20 to 30 properties and that’s why they’re charging such a low fee just for them to get started and get some numbers. You just want to know why they are charging a lower fee compared to the normal fee.
When property management companies go and fill vacancies they are paid a fee which is normally the amount of the first month’s rent. The way that it works is that if a property is vacant, the property management company will fill that property.
Let’s say the rental amount is $800, the property management company will get the first month’s rent or $800. After that the property management company is just paid $80 a month. Hopefully your property management company is putting the tenants in on one-year leases, and even better if they’re putting them in on two-year leases.
Lease Renewal Fee
The other fee that property management companies charge is what is called a lease renewal fee, and it’s normally a flat fee, it shouldn’t be more than a couple hundred bucks or half of first month’s rent. For an $800 rent, it should not be more than $400 for them to sign a lease renewal.
In addition, for every lease renewal, your property management company should recommend you to increase the rent a little bit. Even a little bit of money each month is going to keep more cash going to you. And if you can increase your property rent by just $25 every lease renewal, that’s money going right into your pocket. When you scale your properties up and you do $25 rental increases per property, and you have 10 properties, that’s an extra $250 a month right into your pocket.
The Right Company Size
In terms of the size of property management companies, I tend to like property management companies which manage a thousand properties or less. I like these managers because they’re a little bit more hands-on. The larger property management companies which manage 2000 to 3000 properties, I feel like their clients, the landlords, just get lost in the shuffle. They just become numbers on a spreadsheet and are not well taken care of.
That has just been my personal experience with those larger property management companies, and that’s why all the property management companies I use manage less than a thousand rental properties. I have a real interaction with the property managers and the people who go and walk on the property if there are any work orders, etc.
If you’re interested in seeing the properties that we currently have available view our current inventory. If you would like to talk to us and ask us more questions, feel free to schedule a call with us.