How Should You Structure Your Property Management Company's Fees and Rates? We'll Show Common Fees and What They Cover
Want to grow your property management company?
So you would like to start a property management company? Before starting, you should understand what thriving property managers do and how their fees are structured.
Property managers have an interesting job in that they oversee both people (for example, landlords and tenants) and real estate properties (such as, townhouses and condominiums).
Additionally, property managers should have an understanding of landlord-tenant laws in order to establish effective protocols in alignment to each specific property. To name a few, here are some of a property manager’s responsibilities are:
maintaining the property’s financial record
If you’re comfortable executing these types of tasks, setting up a property management company may be right for you. However, there are a lot of things you need to consider when starting your company, such as, what are my competitors doing? Do I need to obtain a property management license? Where should I set up my office? Do I need a website for my company? But possibly one of the most critical aspects of opening a property management company (particularly during the initial stages) would be to set up your property management fee structure.
Determining this would provide clients with transparency, so that clients would know what to expect from you. It should be noted that your fee structure should be given careful consideration to ensure that the prices charged do not negatively affect the quality of work performed. Additionally, as with any industry, providing a high caliber of work is very important to the reputation of your company.
Standard Management Fee
Management fees are the necessary services performed to keep your property operating effectively. This figure is calculated based on several factors, such as:
the number of units at each property
the location and condition of those properties that services were performed
number of man-hours required to execute specific tasks.
These factors should be discussed with the property owner in order for there to be a mutual understanding. However, some property owners prefer a more laid back approach with regards to understanding the maintenance of their properties.
Typically, management fees are approximately 4-12% of monthly rent. Operational duties that are expected to be covered by management fees include inspecting properties and ensuring tenants pay rent. Obviously, with a more competitive fee structure, you will sign up more property owner leads.
Commercial property management fees are usually higher than residential properties because of the different types of responsibilities that are involved (for example, preparing financial statements and processing payrolls).
Additionally, management fees could also be dependent on other pricing structures, such as, flat fee, percentage of rent collected and hybrid.
This fee is one of the more popular and modern pricing structures. It is not based on the amount of rental income received. The flat fee is one set figure that is paid to the property manager monthly. Some landlords prefer this option because it allows them to easily budget for it (example, the property manager is to be paid $300 monthly. However, this also means that no matter how much (or little) profit is obtained by the landlord, he or she still owes the property manager a fixed monthly figure.
Percentage of Rent Collected
This is another popular pricing structure based on a proportion of the gross collected rent. Ideally, a property manager should state a fee for the ‘percentage of rent collected’ and not the ‘percentage of rent due’. Reason being, ‘percentage of rent due’ is unfavourable for the client, as the landlord would have to pay the property manager even if the property is vacant. A percentage of rent collected is more beneficial to both parties (landlords and property managers). If the landlord does not collect rent, the property manager does not receive an income either.
This pricing structure is a combination of the flat monthly management fee and a low percentage of rent collected (for example, $100 management fee plus 4% of rent collected monthly). This option is preferable to landlords as they would try to get the highest rent as possible from tenants in order to offset their costs. A hybrid pricing structure can also mean a flat monthly fee plus fees for additional services, such as an advertising fee or a lease-up fee.
This is one of the value-added services that some landlords may be interested in having their property manager handle. The figure is calculated based on the type of property advertised and the marketing methods used, such as, frequency of advertisements and advertising media (for example, whether online or through the local newspaper).
Some landlords choose to advertise along with the property manager. In this case, the property manager may partially charge the landlord an advertising fee or include the cost of advertising into the management fee.
Lease-Up Fee (AKA Tenant Placement)
Also known as placement fee, this fee is calculated based on the amount of man-hours exerted by the property manager into helping the landlord find a tenant. Additionally, it depends on the status of the rental market – the demand for housing and location of the property. However, from the landlord’s perspective, the goal is to obtain a long-term tenant in order to avoid paying these fees frequently. This fee can be expensive. It is not uncommon for a property manager to charge either the first month’s rent in full, or a significant proportion of it (for example, 50% of the first month’s rent).
Sometimes, tenants are unable to pay their rent for different reasons like job loss and unexpected expenses. In addition, there are tenants who simply choose not to pay their rent or decide not to follow the rules and may even partake in disorderly behavior at the property. That being said, a property manager can charge anywhere between $20 to as much as $500 for evicting a tenant and other associated court costs.
New Account Fee (Setup Fee)
When a landlord opens a new account at a property management company, he/she is typically charged a new account fee or "Setup Fee". This fee covers transferring all prior information from the landlord’s previous property management company. It also includes a property inspection to determine if the property needs any repairs done. It can cost anywhere from $200 to $500, according to the amount of work required.
Lease Renewal Fee
Some property managers charge this fee for when an existing tenant has to renew his/ her lease. It's basically like the "lease-up fee" happening again. The property manager discusses the terms of the agreement (as decided by the landlord) with said tenant. Once agreed upon, the tenant signs the lease for the following term and it is returned to the landlord. For the lease renewal fee, property managers typically charge approximately 25-50% of the first month’s rent.
Late Payment Fee
Property managers may charge a late fee (in accordance with the lease agreement terms) for fees paid after the due date. Before setting a late fee, check your local and state laws as there is a limit to the amount one can charge for late fees. The maximum that courts permit landlords to charge is 10% of a month’s rent. Additionally, if you are uncertain about how much to charge, you can discuss late fees with a solicitor whose expertise is in rental law in order to ensure you are charging a fair price.
Communication between the landlord and tenant or property manager and tenant is critical. Once the landlord or property manager realizes that a tenant has been paying rent after the due date on a continuous basis, a discussion should be had with said tenant. There is a possibility that the tenant gets paid from his or her employer after the rental due date. It is also possible that the tenant may simply be irresponsible. Explain to the tenant the importance of paying on time. A discussion will allow both parties to better understand each other and come to a mutual arrangement.
It should be noted however, it is against the law for a landlord or property manager to collect late fees if there was nothing stated in the signed lease agreement about charging tenants who paid past the due date.
Property managers are high in demand and the industry can be lucrative. However, there are certain things one should be cognizant of when starting their own property management company that will assist in your success:
Regarding the fees listed above, there is one important thing that is necessary in order to execute the associated tasks – communication. Whether it is communication between the landlord, the tenant and others (for example, handymen). Property managers also have to be good communicators because they often have to relay information from tenants to landlords. Additionally, it is important for property managers to have the ability to properly explain to landlords the duties and fees involved.
Take Pride in Your Reputation
As with any industry, if one provides quality service and behaves in an ethical manner, your clients will take notice. They are likely to recommend you to others. It is therefore vital, that you ensure that you only make promises that you can keep. Do not overcommit. If you overcommit and are unable to fulfil those duties, this will lead to dissatisfied clients which can ultimately lead to a loss in profits.
Do Your Research
There are a lot of things to take into consideration when starting your property management company. Find out who your competitors are and what they are currently doing. Determine your skill sets and how you can use them to differentiate from your competitors. What is the market like in your area? How much do property managers charge locally?
For example, it may be cheaper to source a plumber in Toledo, Ohio than in Miami, Florida. Compare prices. Talk to landlords in your area. Find out what they need and what is currently lacking in the industry. By doing this, you will prepare yourself to effectively manage properties and achieve success in the property management field.