What Determines Property Management Fees for Rental Properties

Some of the things that dissuade people from investing in residential or commercial real estate are management hassles and difficulties. Repairing damage left by a disgruntled tenant, having to market a recently vacated unit, and collecting rent in a prompt manner aren’t tasks for the faint of heart. That’s why many investors end up turning to real estate management companies to deal with both their occupied units and vacant units.

Many potential clients, though, find themselves stymied by the not-so-simple matter of property management fees. Some simply don’t know how to evaluate whether or not a particular rate is fair. Others balk at any sort of fee, considering it an extra expense that eats into their cash flow.

This post will describe the typical services covered by a property management fee, various additional costs, types of fee structures, and a rough general rate that you can expect to pay.

What Is Included in a Property Management Fee?

Like many things in real estate, the exact services provided as part of a property management fee can vary from management company to management company. For instance, companies may choose to charge you based on a percentage of your rent (more on that below) or via flat fees. A few may adopt an à la carte structure, having a very low upfront fee while maintaining a long list of add-ons for which they charge. Many will offer a hybrid approach that combines one of these general approaches with elements of the others.

With all that being said, you can expect a management company to include a number of basic services in its fees. And while of these services may incur separate, individualized charges, they are generally considered to be part of a standard service structure. They include:

• Determining going rental rates for a specific property. Your property management company ought to know the rates in a general area and what a property in your condition can expect to command. The company should also discuss with you how certain rental policies (e.g., allowing pets) will affect your rent.
• Marketing the property. This would involve taking reasonable marketing steps such as talking with realtors or leasing agents, posting fliers or ads, and showing the property.
• Evaluating tenants. Determining potential applicants’ financial stability, employment history, and criminal record helps guarantee a successful tenancy, as does finalizing all leases and agreements.
• Collecting rent in a timely manner. A property management company ought to ensure that you get your rent when it’s due and no later.
• Evicting tenants who have violated their leases. If there’s one aspect of property management that causes real-estate owners to seek outside help, it’s this one, and property management companies regularly handle the removal of nonpaying tenants.
• Inspecting the property when necessary. No property manager should simply assume that your real remains in good condition. Periodic inspections to determine that nothing is amiss are part and parcel of the package.
• Providing basic maintenance, repairs, and remodeling. From dealing with common tasks such as removing leaves and snow to overseeing larger renovation projects, property management companies helm the ordinary (and extraordinary) work that your building requires.
• Facilitating tenant transitions. When tenants inevitably leave for one reason or another, managers ascertain the state of the unit or facility, return any security deposit minus costs for damages, return the property to working order with cleaning and repairs, and restart the whole rental process.

Other Fees Associated with Property Management Costs

While the above services (which may be assessed individually or as part of a flat rate) are considered the basics that a property management company should provide, there are other services with their own fees that you should know about. Additionally, some of the tasks mentioned in the previous section might carry an additional cost if they cross a certain threshold. These fees might encompass:

• Early cancellation fees. Some companies may include an early termination fee if you cancel your contract early. Take note of the presence of this fee if you’re considering working with an untried property management company with minimal experience.
• Eviction fees. Though evictions are a normal part of property management, they can become pricey, and property management companies may pass some eviction costs on to you as a fee.
• Maintenance fees. Just like eviction fees, larger maintenance issues may appear on your expense statement as a fee.

Types of Fee Structures and Factors Impacting Costs

So far, we haven’t gone into a lot of detail about just how management companies will levy maintenance fees and marketing fees and the like. There’s a good reason for that: Property management companies employ a number of different billing structures, and they can look very different in practice even when they’re providing roughly the same kinds of service.

Billing structures typically break down into three broad categories. The first, a flat fee, is the easiest to understand. A property owner pays a simple per-unit sum. This kind of arrangement usually makes sense for owners with only a few units, but it can quickly become cost prohibitive when dealing with large, multi-unit structures.

Many consider percentage of rent collected arrangements to be the best arrangement for both owners and property managers. Managers get paid a percentage of all the rent they take in, which incentivizes them to make efficient collections, and owners don’t need to pay for units that remain empty.

A percentage of rent due agreement means that property managers receive a fee even if tenants haven’t paid and units sit unleased. It’s generally considered a bad deal for property owners. (Continue on to learn more about warnings signs you should watch out for when considering a management company.)

What a Property Manager Typically Charges

Property managers will generally charge you anywhere from 8 to 12 percent of the monthly rental value of your property. However, let us be quick to say that this range is only a rough guideline. We’ve seen examples of fees that drop as low as 5 percent and rise to 15 percent. When selecting from among property managers, make sure that you’re comparing apples to apples. Sometimes seemingly pricey fees make a lot more sense when you understand what you’re getting.

What to Look for (and Look out for) in Fees

Not every fee that you may encounter is on the up and up. In fact, some serve as downright warning signs that your manager may not be leveling with you. These include:

• Leasing fees. Companies can assess leasing fees as part of the screening procedure for new tenants, but this service should be considered basic instead of an add on. What’s more, the presence of leasing fees may encourage a property manager to increase tenant turnover, which is never good for your property.
• Vacancy fees. If you need to pay a vacantly fee when any of your units aren’t rented, think twice. Such an arrangement is little better than a percentage of rent due agreement.
• Setup fees. Providing a small sum to solemnize a property-management contract makes some sense, but often these fees do nothing more than line a manager’s pockets.
• Tenant late payment fees. Believe it or not, some property managers try to charge you when tenants fail to pay in a timely manner — and collecting rent in a timely manner is no small part of why they were hired in the first place. Avoid like the proverbial plague.

Reasons Why Property Management is Worth it

Finding the right property manager may seem like a complicated task. In the end, though, having a competent professional care for your tenants and your properties will increase your income, maintain the value of your real estate, and (most importantly) free up time so you can do bigger and better things. Millennium Properties wants to be that manager. We’ve helped countless clients sell, lease and manage properties throughout the Chicagoland and the Midwest since 1996. Contact us today!