Not all property management companies charge the same fees. How they calculate their fees is based on several factors. The fees that you’ll be potentially charged reveal the company’s character and should be used to inform your ultimate decision.
Sometimes you have to work with fees that aren’t ideal because your options are limited by available companies. A bad fee shouldn’t be a deal-breaker, but don’t excuse bad charges just because you need to make a deal.
Property Management Fee Considerations
When your property management company begins its negotiations, these are the factors that it will consider:
- Size: The bigger the space, the more work it requires, which translates into a larger fee.
- Type: Property managers manage all sorts of properties, from residential to commercial and even vacant ones.
- Condition: Newer properties or freshly renovated older properties have fewer maintenance issues than older ones.
- Location: If an area has higher rents, then a property manager may use that to justify higher fees. Conversely, a property manager may charge fewer fees in an area with lower rents.
- Services: The services your property management company gives you will influence how much they charge. A property manager who only maintains tenant relationships will cost less than one who does it all.
What are Common Property Management Fees?
These are the different fees that you may be charged. Some of these are expected, while others are deal breakers because they create a conflict of interest.
1. Setup fees
The first fee you’re most likely to pay is for setup or onboarding. The cost is usually $300 or less. It’s meant to pay for setting up your account with the property management company. It may also go toward an inspection that documents the condition of your property, or toward any welcome/introductory materials.
Ensure you know whether or not the onboarding fee is charged on a per-unit or per portfolio basis. Additionally, suppose your units are already occupied. In that case, you should try to get the property management company to lower the fee because it should take much less time and effort to set up an account for an already rented unit.
Lastly, be wary of companies that charge higher setup fees because they’re trying to make up for charging lower monthly fees.
2. Management fees
This is how much you pay each month to cover the day-to-day management of your property. This includes everything related to rent, tenants, inspections, repairs, and emergency calls. Expect to pay a percentage of your gross monthly collected rent, although some companies charge a monthly flat fee. Although the fee changes from market to market, expect to pay roughly 8 to 12% of monthly rent for single-family homes.
When studying your property management agreement, make sure that you’ll be paying based on rent collected and not rent that’s due, scheduled, or the rental value. These differences are essential because rent collected means you’ll only be paying if rent is collected, whereas the others entail paying irrespective of rent being collected. You don’t want to pay if there’s a vacancy. By making payment contingent upon rent collected, you ensure the property management company and your interests align.
When choosing your management company, make sure you’re getting the services you want. Some companies require paying a single fee that covers a host of services, while other companies require you to select which services you want manually. Make sure you’re paying for what you want.
3. Leasing fee
Expect to pay your property manager between 25 – 100% of one month’s rent any time they place a new tenant or have a tenant move out (although some companies charge a flat fee instead). This fee pays for advertising, showing the property, screening applicants, preparing the lease, and the move-in inspection.
To incentivize a thorough and rigorous tenant screening, some property management firms provide a full or prorated refund if a tenant is evicted or breaks their lease. You can also add a provision that stipulates that if you find the tenant yourself, you don’t have to pay the leasing fee, which will further incentivize the property management company to find a good tenant.
4. Lease-renewal fee
Not every company takes the same approach to lease-renewal fees—some charge a flat rate, some cost a percentage of the rent, and some charge nothing.
When charged, the fee is meant to cover the time and effort it takes to adjust the lease, including any comparative market analysis that informs any rent changes. It also includes getting the tenant’s signature. If there is a fee, expect it to be roughly $200 or less.
5. Maintenance fees
Depending on the home’s age, you should budget at least 1.5 times the monthly rent for maintenance. If rent is $1,000 per month, you have set aside $1,500 just for repairs during that one year lease. You should also figure out what routine maintenance is necessary given the age and state of the home. You can keep your maintenance fund full by putting 10% of your monthly rent into it every month.
In some cases, you can request a threshold past which you will need to authorize a repair. Any repair that costs less than the predetermined amount won’t require your involvement. When receiving information on an issue with your property, you’ll get photos, an itemized estimate for the repair cost, and an itemized statement after the repairs are made.
If it costs more than your predetermined threshold, you’ll have to sign off before the work begins. Because a property management company is arranging the project, you may end up saving money on labor and materials because they have more leverage to negotiate.
Keep in mind that maintenance isn’t supposed to be a source of profit for property managers. Don’t work with property managers who charge a fee higher than 20% for maintenance. Unless it’s a significant repair that your property manager is overseeing, you should only pay for the cost and labor of the renovation.
You’ll also need to have money set aside to take care of any damage or upgrades between renters, including cleaning, painting, repairs, etc.
6. Retainer fees
Also known as a maintenance fee (but different from the cost you pay for maintenance services), this fee is sometimes paid if your property management company has a contractor or crew on retainer in the event of an emergency.
This is more of an uncommon fee since most management companies can deal with emergencies without additional charge. However, this fee shouldn’t preclude you from working with an otherwise good company.
7. Sales Commission
Some companies stipulate that they are given the right to sell the property and take a corresponding commission on the property’s sale while under contract. This is an important thing to know because if you sell with a different broker, the property management company may still take a commission.
If your company wants the commission, let them take care of the sale and stipulate the contract’s timeline. That way, past a certain point, you can list the property with whoever you want.
Make sure that the breakdown for the commission is in the contract, which should be no more than 6%. If your property manager works with another realtor, both the realtor and the property manager should get no more than 3%.
8. Eviction fees
Property managers may charge for serving eviction notices, time spent in court, attorneys, or anything else that takes up their time. The fee may be hourly and range between $25 and $50, or it may be a flat fee.
9. Late fees
If you don’t pay your property management fee on time, you may be charged a small penalty of around 1.5% for every day your past due. You may also incur a fee that ranges from 25 to 50% for any service you don’t pay for on time.
10. Bill Payment fee
Some property management companies can pay any of your home expenses for a fee, from your monthly mortgage to your home insurance.
11. Returned Check fee
A bounced check from you or your tenant may lead to a charge of around $35. This fee should only be used to cover the cost of the bounced check.
12. Early Termination fee
If you break the contract with your property management service, you will likely have to pay an early termination fee. The terms of the agreement will dictate the fees, ranging from an additional month of management fees to a lawsuit for breach of contract.
13. Late Tenant Payment fee
You shouldn’t work with a company that takes a cut of a tenant’s late payment fee. The fee is supposed to deter late payments by the tenant. If the management company earns a percentage of the fee for late tenant payments, it creates a reason for them to collect the payments late.
Walk away from this fee requirement.
14. Lease Violation fee
Another deal-breaker, lease violation fees are meant to encourage your tenant to follow the lease guidelines. If the lease guidelines are broken, you stand to lose money and are entitled to those fees.
However, your property management company shouldn’t be rewarded for their failure to manage a tenant or find a tenant who wouldn’t violate the lease. Things happen, and even tenants who look good on paper and are good tenants for years can one day violate their lease agreement, but those fees should go in your pocket and not the property management company’s.
Remember, the company is getting paid for managing your real estate investment; if your investment is mismanaged, they shouldn’t be rewarded for it.
When looking at the various fees that you’ll be paying, keep in mind that a lower cost isn’t always best.
Low-cost upfront may translate into shoddy work or more fees on the back-end or higher expenses. You should also go through all of the different fees your potential property management company charges and see where you can negotiate.
Once you’re well informed, you can make the best decision given all the specifics of your property and your available options for property management companies.