Property Management 101

When you purchase an investment property to rent out to tenants, you have a choice to make — hire a property manager or manage the property yourself. Property managers aren’t cheap, so at first, this might seem like an easy choice, especially to inexperienced real estate investors. However, it’s important to know just how much value a property manager can bring to the table before deciding which way to go.

How much does an investment property management company cost?

Just like other service-based businesses, the fees charged by property managers vary tremendously.

Having said that, 10% of collected rent seems to be the industry standard for long-term rental properties, and the vast majority of property managers I’ve ever talked to charge between 8% and 12%. Some also take a bigger cut of the tenant’s first month rent to help offset the time and expense of putting a tenant in place, while others don’t. For example, a property manager may charge half of the first month’s rent plus 10% of rent on an ongoing basis. You may also be able to get a better deal if you have several rental properties, or a multi-unit property.

If your property is rented on a short-term basis (such as a vacation rental), it’s important to expect property management fees to be significantly higher (think 25%-40% of collected rent). This may sound astronomically high, but consider the extra work that goes into managing a short-term rental. For example, if you rent a beach condo on a weekly basis, your property manager needs to get as many as 52 different “tenants” per year, while a manager of a long-term rental home likely needs to find just one new tenant a year, if at all.

Whatever your situation, it’s important to shop around for a property manager. Not only do the costs vary, but so do the services that are included with those costs. I suggest getting information from a minimum of two to three reputable property managers in your local market so you can compare.

Consider the value a property manager can add:

The major downside to hiring a property manager is the cost. However, if the value you receive from your property manager exceeds its cost, it can be well worth it.

  • Marketing know-how: A property manager will advertise and market your property to prospective tenants. My property manager has a large advertisement that runs in the local newspaper and features all of their listings — a much better attention-getter than a simple classified ad you run yourself.
  • Rental market knowledge: Here’s one area where a property manager can really create value. A good property manager will know how much they can get for a property without overpricing it. For example, I had assumed $800 in monthly rent from one of my rental units, but my property manager told me I could get $895 without too much trouble — and they were right. This alone justified the 10% property management fee in this case.
  • Showings: Your property manager will physically show the property to prospective tenants. Not having to do this can be a major time-saver.
  • Collecting rent: Do you really want to track down your tenants to collect rent each month? A property manager will collect rent on your behalf and deposit it into your bank account.
  • Screening tenants: Property managers have the systems in place to properly screen tenants, such as by conducting credit checks and verifying references.
  • Dealing with tenant complaints: Property managers also have systems in place to handle tenant concerns and complaints efficiently and professionally.
  • Evictions and late rent: Unless you’re an experienced real estate professional, it can be extremely difficult to navigate the eviction process or even to strictly enforce rent due dates. A property manager can be an extremely valuable asset if you find yourself needing to deal with non-paying or otherwise troublemaking tenants.
  • Maintenance and repair help: Property managers typically have repair professionals on call that do work for reasonable prices, and also have contractors who they can use if your property needs major work. And, because these professionals are getting repeat business from your property manager, they tend to do work more quickly and cost-effectively than the professionals you could find.
  • Bill payments: Property managers can handle bill payments on your behalf, including things like property taxes, insurance, and utilities. For example, I don’t ever see the water bills from my investment properties they are sent directly to my property manager.

As a personal example, one of my investment properties is a triplex that brings in approximately $2,500 in monthly rent. My property manager charges 10% of collected rent, so if the property is fully occupied, they’re making $250 per month. To me, this is well worth the price. In fact, the money I saved by getting repairs done quickly and more cost-effectively than I could have done on my own probably justified a year’s worth of management fees all by itself.

Related Posts