The Costs of Hiring a Property Management Company

19 Aug

This is the 2nd installment of my Property Management Company series which details my selection process and hiring experience.

Now that I’ve explained the benefits of hiring a property management company, it is only fair that I lay out the costs too – in all its painful glory.

The actual numbers will vary by company, but I’ve included some ranges that I’ve personally encountered in my research. Property management companies make money at least a few different ways:

  1. Property Management Fee – 6%-10% of monthly rent
  2. Leasing Fee – 60%-100% of monthly rent
  3. Lease Renewal Fee – flat rate of $150-$250, or 20%-30% of monthly rent
  4. Late fees – keeps 50%-100% of late fees collected
  5. Interest – earned from holding security deposits in a trust account
  6. Evictions – the time to prepare and defend in court is included for some, but I’ve seen $25 an hour for others
  7. Other – the cost for mileage, copies, and other miscellaneous items is included for some, but passed along for others

For this hypothetical, I’m going to assume the most expensive company we’re considering for both of our properties. Your mileage may vary.

Property Management Fee (10%):

  • Property 1 – $1,745 rent/mo. = $174.50 fee/mo. = $2,095 fee/year
  • Property 2 – $1,905 rent/mo. = $190.50 fee/mo. = $2,286 fee/year
  • Total: $365 fee/mo. = $4,380 fee/year

Note: some companies don’t charge the property management fee when the unit is vacant, since a 6%-10% of monthly rent is $0.

Leasing Fee (60%):

  • Property 1 – $537 fee/vacancy
  • Property 2 – $597 fee/vacancy
  • Assuming 4 vacancies a year = $2,268 fee/year

The leasing fee is only applicable when there is a vacancy; this compensates the company for additional tasks like make ready work, MLS listings, photography, broker commission, showings, lease negotiations, and move-in coordination.

Lease Renewal Fee (30%):

  • Property 1 – $523 assuming 2 renewals/year
  • Property 2 – $571 assuming 2 renewals/year
  • Total (assuming 4 renewals) = $1,094 fee/year

The lease renewal fee is half the leasing fee. Needless to say, this will change the approach used when determining future rent increases. A renewal tenant has always been valuable, but is more so now.

Late Fees:

  • $50 initial fee + $10 for each additional day, paid by tenant

This isn’t much of an “expense” for me personally because we have yet to collect a penny in late fees. Most of our tenants pay automatically using eRentpayment.com.

Interest:

  • I hold $3,650 in security deposits when at full occupancy
  • At .75% interest I would have earned $27/year

The Bottom Line:

Looking at only the primary predictable costs: property management fee, leasing fee, and lease renewal fee – hiring a property management company for both properties will cost us between $5,475 – $6,649 a year depending on how vacancies and renewals shake out.  Ouch.

To put it into perspective against our most recent balance sheet –  that would subtract $456-$554 per month, leaving about $257-$355 in positive cash flow.


“Time is money says the proverb, but turn it around and you get a precious truth. Money is time.” -George Gissing

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