Is a Property Management Company Too Expensive?

If there’s one inevitability when owning property, it’s that the expenses never stop. From repairs and improvements to taxes and insurance, the bills always come piling in. It doesn’t matter whether or not tenants have continued to pay or if you’ve managed to convert underperforming real estate into cold, hard cash: You’ll still have to part with funds. 

Such intractable costs make many owners ask themselves, “Are property managers worth it?” After all, property manager fees represent yet another expense, and many don’t feel as though they can afford it. In this post, we’ll explain what determines property management costs, average property management fees, and answer the question of what property managers do to earn their keep. 

What a Property Management Firm Does

While the services offered by property management companies may differ from firm to firm, you can expect them to offer a more-or-less uniform assortment of basic tasks. These include: 

• Determining market rental rates for the area surrounding your specific property or properties  
• Marketing the property to prospective tenants 
• Evaluating the creditworthiness of prospective tenants  
• Promptly collecting rent  
• Responding to tenant complaints when they arise 
• Evicting tenants who fail to pay rent or who have otherwise violated their leases  
• Inspecting the property  
• Providing basic maintenance, repairs, and remodeling services  
• Facilitating transitions between outgoing and incoming tenants 

Understand that the ways in which a property manager bills for these services won’t always look the same. Some will start with a small flat fee and then add on charges for each service provided. Others simply levy a flat charge that’s a percentage of rent collected. Still others will combine the two approaches. Let’s delve a little more into the factors that influence property management costs and how company structures can influence them. 

Factors That Influence Property Management Cost

Sometimes customers will ask us something like, “Are property management fees negotiable?” Naturally, just about everything is negotiable, but you’ll have greater success if you understand how property management fees get calculated and what factors may influence them.  

To start with, it helps to know that average property management fees typically run from 8 percent to 12 percent of rent collected, although this can vary greatly depending on your location and situation. It’s also how a percentage of rent collected management structure works, and according to Buildium, it’s how 72% of property managers structure their fees. (Note that you should only select a property management fee structure based on the amount of collected rent, not the amount of rent due.) Sixteen percent of property managers charge a simple flat fee that may or may not include add-on fees. Finally, 13 percent employ some other kind of billing structure. 

These billing methods are some of the biggest factors that will influence your property management costs, but others come into play, such as how many units you have, their required upkeep, any necessary renovations, and whether or not you have lease-violating tenants under your roof who need to be removed. Some of these fees are more-or-less baked into your management costs. Others, though, you may be able to negotiate down or eliminate all together. See the “Breakdown of Property Management Fees” section below. 

How Property Management Provides ROI

Every investor and commercial property owner wants to realize a healthy ROI on their real estate. After all, that’s the main point of the whole endeavor — and that’s something that a property management company can help with. 

How exactly does property management help boost your return? Consider the following. It: 

• Removes potentially problematic applicants before they become tenants. Non-paying and property-damaging tenants are some of the biggest drags on ROI. A good property manager will help make sure they never gain a foothold. 
• Provides appropriate marketing. Property managers know the ins and outs of a specific area and can market your property so that it quickly rents for the best price possible. 
• Minimizes tenant turnover. Promptly addressing tenant concerns helps keep them happy — and paying rent in your properties. 
• Minimizes legal costs. Incorrectly filing legal paperwork or following improper procedures during an eviction can prove fiscally painful. A property manager can help you avoid that. 
• Offers prudent tax counsel. Are you claiming all of the deductions that you can when tax season rolls around? A property manager can help trim your tax bill. 

Other Benefits of Using a Property Management Company

While many investors may cite increasing ROI as their main reason for hiring a property management company, it’s far from the only reason. Some of the other include: 

• Having lots of properties or properties with many units. At some point, property owners reach the limits of their professional capacity and find themselves unable to effectively manage their real estate. When this happens, they must either hire staff or third parties such as property managers to help. 
• Lacking contractor contacts to handle upkeep and renovations. If you don’t remain on top of the inevitable cosmetic and structural work your property requires, you may quickly find yourself in trouble. A property manager can put you in touch with qualified individuals. 
• Providing investment advice for future expansion. Widening a company’s scope can sink it just as surely as lean times. Let a property manager help ensure your success as you wisely expand. 
• Enjoying additional freedom and less stress. One of the best benefits of hiring a property manager is also one of the least tangible: You end up with more freedom in your schedule to do what you want to. 

Breakdown of Property Management Fees

Earlier, we discussed the different ways in which property management companies may levy their fees. However, understand that you will likely see additional line items no matter if your management company bills you based on a lump sum or an itemized statement. Some of these may include: 

• Setup fees/application fees 
• Tenant placement fees 
• Lease renewal fees 
• Inspection fees 
• Property vacancy processing fee  
• Maintenance fees 
• Property management consulting fees 
• Eviction fees 
• Convenience fees for online payments 

Some of these fees are more or less industry standard (e.g., setup fees, tenant placement fees). Others arise due to the fact that the management company will need to make a substantial outlay in order to fulfill its duties (e.g., eviction fees, maintenance fees). Still others seem to disincentivize a management companies from doing the fundamental work that property owners have hired them to do (e.g., vacancy fees, lease renewal fees, consulting fees). It’s in this last category where you stand the greatest likelihood of reaching a successful negotiation. 

What Exactly Do Property Management Fees Cover?

Property management fees’ names generally describe the services provided. For instance, eviction fees cover the costs associated with removing non-paying tenants, maintenance fees provide for routine repair services, and tenant placement fees allow a manager to conduct appropriate (and sometimes pricey) background checks. Others, though, primarily go toward a management company’s staff and bottom line. Some of these might include account setup fees and various kinds of convenience fees. 

Still trying to wrap your head around property management fees? Wondering whether or not a property manager would add value to your investment activities? Contact the Millennium Properties team today! Since 1996, we’ve worked with real estate owners and investors in Chicagoland and across the Midwest.