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What are Property management fees?

What are Property management fees

Property management fee are the service charges to be paid to a property manager or real estate investment advisor.  Property management companies render services in operation, rental and leasing of real estate. As compensation, investment property owners pay management fees to property management companies, either in the form of flat fees per unit managed, or, a percentage of gross incomes, depending on the arrangement between the owner and the management company.

How do Property management fees work?

To ensure the smooth maintenance of property and maintaining a strong return on investment optimization, property managers are often a necessary expense, which is worth more to the owner than its cost.

A property management company offers the property management services and charges the landlords for that accordingly. These companies ensure upkeep and  timely repairs and maintenance of properties, as well as deal with tenant issues, which can be frustrating for landlords. 

An additional very valuable service provided by a Property Management company is, intimate and very precise knowledge of what rents for any given property should be. Even if you are an owner that owns multiple properties- Property management companies often manage 50, 100, 500, sometimes over 1000 units, in a given area. There is nobody – and I mean nobody – who can tell you what your property should rent for, and how to maximize your rents in any given area- more than an experienced property manager in that area.

Generally, the following services are offered by property managers:

  • Regular inspections of property
  • Maintenance and repairs
  • Rental property marketing
  • Booking new tenants
  • Management of labor-force in case of renovation
  • Monthly rent collection
  • Lease agreement between tenant and landlord
  • Handling of evictions
  • Setting up rental rate depending upon rental property area

Property management fee depends upon several factors which will be discussed shortly.

What is included in a property management fee?

Following is the brief breakdown of the property management fee:

  • Monthly property Management Fee
  • Initial Property Management Fee
  • Maintenance Fee
  • Additional Services Fee
 

Monthly Property Management Fee

Monthly property management fee is charged by the property managers as a compensation to their property management services. Monthly property management fee is generally classified into two classes: percentage fee and flat fee.

Percentage Fee

Percentage fee refers to A monthly property management fee charged as some percentage of monthly rent of rental property. Percentage fee depends upon the type of property. In case of residential property i.e. single-family home or small multi family home, property management companies may charge a higher percentage of rental income. However, in the case of industrial or commercial properties, or higher income residential rentals, where rents are much higher, the percentage may decrease. 

The fee usually depends upon the monthly rent– if the monthly rent is not high, then a lower % management fee may not cover business expenses of the management company. For example, monthly rent of property is $2900 and 4% of monthly rent is to be charged. This means that landlord has to pay $116 every month as property management fee. The management company would not manage a property for this cheap, so they might double the fee to 8%. 

However, if monthly rent is $45000 then percentage fee comes out to be $1800. A management company might manage a property for this amount per month. Higher income properties can get lower management fees (by percentage of gross revenue).

Flat Fee

Flat fee means fixed amount charged by the property manager to property owner every month. Flat fee is calculated by taking the area and size of the property into consideration. Services acquired by the landlord also plays a role in flat fee calculation. Erin Eberlin, the author of ‘A Breakdown of Property Management Fees’, has quoted that the flat rate for single-family homes can be $100. Flat fees may be more common in higher rent properties.

Initial Property Management Fee

Initial property management fee, also referred as initial setup fee (one-time, is charged by the property management company after signing the agreement with rental property owner. Some companies don’t charge initial property management fee. Generally, this fee covers the initial on-site inspection (initial property inspection) by the property management team.

Maintenance Fees

Maintenance fee may also be charged by property managers as monthly management fee. It may include regular inspection, appliance maintenance painting, plumbing work, waste management, repairs, cleaning, landscaping etc. 

Repairs

 Rental property managers take the responsibility of repairs of rental property. These repair works include renovation, plumbing work, furniture repairs etc.

Cleaning

It is important to clean the rental property deeply before advertising it. Detailed cleaning includes typical services like carpet wash, floor cleaning and wash, dusting of the property, polishing furniture, water tank cleaning, washroom detailed wash etc. 

Appliance Maintenance

Property managers may also provide appliance maintenance services as needed.Appliances, including electric heaters, microwave ovens, electric stove, refrigerator, Air-conditioning system etc., need seasonal and regular maintenance. For example, in winters, Air-conditioners’ filter may need to be changed. Similarly, in summers, it is important to maintain the water pipes for air-conditions which can be damaged due to severe heat waves. 

Plumbing Work

Plumbing work may include fixing water pressure issues, running toilets, water pipes leakage, blocked drainages etc. Rental property managers usually also offer plumbing services , or have the required contacts to get those services done. 

Regular Inspection

Regular inspection involves detailed regular inspection of a rental property. In an inspection, Property managers look for repair needs, safety hazards, code violations etc. and will make maintenance requests if needed.

Most property management companies do not perform such inspections, but it is recommended by us here at BTRE, that a PM company perform at least a once a year inspection of a property, just to ensure the tenant is not trashing it.  Nothing takes the fun out of property ownership more than, walking into your house after a long term tenant leaves, and being aghast and appalled at how they kept the place- and thinking to yourself “Geez I wish I knew what was going on in here I would have put the kibosh on that a long time ago.” Regular inspections of the property by a property manager solve this problem.

Additional Services Fees

Landlords may also acquire the additional services rendered by property management companies and pay additional charges accordingly. 

Tenant Placement Fee

Placing a potential tenant in rental property can be very challenging. Property managers may also charge additional fee for advertising the rental property (including advertising costs) along with placing a new tenant. This process may involve advertising rental property, finding the potential tenants, showing the property, screening the tenants, and preparing the lease agreement for landlord and tenant. Usually this fee is a commission equal to one month of rent. IN some higher rent properties, the fee may be less- perhaps half a month of rent.

Eviction Fee

Property managers may also provide assistance in the eviction process of existing tenants in case of non payment of rent. Landlords try not to indulge themselves in disputes so, property management companies charge eviction fee to handle tenant eviction process. 

 

How to calculate management fees?

Management fee depends upon the services acquired by the landlords from property management company. As a rule of thumb, as the number of services acquired by landlord increases, the management fee increases. 

How much do property managers charge in Los Angeles?

According to Janil LAPMG, the author of ‘How Much Do Property Managers Charge in Los Angeles?’, the residential property management firms in LA can charge from 8% to 12% of monthly rent. These fees are typically negotiate – the more properties you put with the property management company, the lower their fees will usually be.

What is a monthly management fee?

Monthly property management fee are the charges to be paid by the landlords to property managers as a compensation to their property management services. Monthly property management fee is divided into two classes i.e. percentage fee and flat fee.

Flat fee refers to fixed charges to be paid by landlord every month. On the other hand, percentage fee is some percentage of monthly rent to be paid by landlord every month.

What does a management fee cover in real estate?

Management fee is charged by the property managers as a compensation to their services including on-site visits, inspections, maintenance and repairs, eviction, lease agreement, account management, finance management, rental assessment, finding new tenant etc. 

What is the typical property management fees percentage?

As per facts quoted by Eva Hatzenbihler, the author of ‘How Much Do Property Management Companies Charge?’, the typical property management fees percentage is 8 percent to 12 percent of the monthly rent.

How can I calculate property management fees?

You can calculate property management fee by following two standard fee structures i.e. percentage and flat rate. However, property management fees may increase by adding additional services. Typically, property management fee varies from 8 percent to 12 percent as mentioned above. When underwriting potential deals, a good rule of thumb is to assume it will be 10%.

Are property management fees negotiable?

Yes, property management fee varies from manager to manager and firm to firm. Depending upon the services acquired by the landlord, property management fee can be negotiated. 

Are property management fees worth it?

It depends on the property owner, as it might not be a right choice for every landlord. For example, if a person owns a single-family home and acquires number of services by property management firms. Then, he might not get much profit due to deduction of property management fee from considerably little monthly rent.  Big Town Real Estate recommends that most investors who are just “part timers” with small portfolios and smaller properties, especially those who live in the same area as their properties- simply manage their own properties.** [CAUTION: See below for legal liabilities associated with self-management] A 10% rake off out of profits is a pretty steep loss in the rental property game, especially nowadays, when the margins are the thinnest they have maybe ever been.

However, the following situations most likely call for property managers:

* Larger properties (10-12, or more units);

* Properties which are out of driving distance of landlords location;

* Properties which are short term rental homes, unless landlord dedicates a large portion 

Of their work-life to managing the properties, and landlord has many automations 

And systems in place.

 

What are the pros and cons of property management fees vs self-managing?

To summarize the discussion, let’s discuss some pros and cons of self-management and property management fees:

Table 1: Pros and Cons of Self-Management

Pros

Cons

Cost Saving/ Money Saving

Takes time

Direct control of property

Lack of experience can cost even more time/money

Social relationship with tenants

Must be available for any issue 24/7 sometimes

Learning how to manage properties and people

Potential legal liability for issues ith the property**

Ultimately, whether to hire property management is a decision that must be carefully thought out and all factors weighed. A good general rule is that, smaller real estate investors are often better off managing their own properties, while larger investors are better off hiring PM’s.

 

 **: One of the biggest “cons” of self management is that, if something goes wrong on the property, someone gets injured due to an alleged bad dangerous condition, or as a result of something which was not in good repair- landlord can be held directly responsible EVEN IF PROPERTY IS IN LLCs/TRUSTS, etc – because landlord was the manager and should have been keeping the property safe.

If landlord hands off management to a licensed property management company, then it is much harder for anyone to blame landlord for anything that goes wrong at the property. Most high net worth individuals will not manage their own properties, in order to limit legal exposure.

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