Building a rental property portfolio has become synonymous with today’s greatest retirement and wealth-building strategies. A properly performing collection of rental properties is entirely capable of helping savvy investors realize financial freedom passively, now and in the future.
However, in order for a curated portfolio of rental properties to operate passively, it needs a qualified rental property manager. For a fee, a truly great property manager will allow investors to continue adding to their portfolio for years without adding more work, which begs the question: How much does property management cost? How much do property management companies charge for the peace of mind they award investors? Better yet, is the cost of property management worth it?
The average property management cost is between 6.0% and 12.0% of the rent they collect. That said, rental property owners don’t necessarily need to know the exact cost of property management, but rather where their money is going. If for nothing else, a good property manager is well worth their cost. Let’s take a look at the fees investors may expect to see over the course of a contract with a property manager.
Property managers have developed a reputation for serving as passive income investors’ greatest assets (outside of the properties themselves, of course). Few services, for that matter, are more valuable to rental property investors than dependable property managers who take care of everything. From running the property to collecting rent, property managers make it possible for investors to own multiple assets without being bogged down by daily operations. As a result, it’s quite common for today’s property management companies to offer a complete complement of services and fees:
Early Cancelation Fee
Reserve Funds Fee
Automatic Payment Fee
Lease Renewal Fee
Late Payment Fee
Tenant Late Payment Fee
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Commonly referred to as an on boarding fee, a setup fee is exactly what it sounds like: a price homeowners must pay in order to do business with a third-party property manager. More specifically, however, a setup fee will represent the cost homeowners are responsible for in order to set up an account with a respective manager. Setup fees aren’t typically included in monthly collections, and are instead an upfront fee that can range anywhere from $0-300. As the name would lead you to believe, it’s typically a one-time charge, but some managers may require a setup fee for each additional property added to the portfolio.
As perhaps one of the most common property management company fees, a leasing fee is the price homeowners must pay to fill a vacancy. Otherwise known as a placement fee, a leasing fee is the cost levied on homeowners by managers to fill empty homes. Due, in large part, to the leasing fee’s direct correlation to market demand, it can vary significantly; when demand is high it may cost less, but markets lacking sufficient demand may result in a higher leasing fee. That said, one thing is for certain: leasing fees constitute a large portion of the cost of working with a manager; they are perhaps the single most common reason rental property owners align their services with a manager in the first place.
More often than not, most contracts with property management companies will include an early cancelation clause. Not unlike how tenants may be charged extra for terminating a lease early, homeowners may be penalized for ending their contract with a manager early. While not every manager will incorporate an early cancelation fee into their contract, it is very common. Therefore, if you notice your contract has an early cancelation fee, don’t fret; it’s by no means a deal breaker. Simply mind due diligence and be sure to hire the right manager for the right situation.
Depending on the property manager, this fee may already be included in the leasing fee. After all, advertising is one of the biggest expenses in securing tenants for any property. The property manager will use this money to pay for filling vacancies. It is important to make sure the contract states exactly how much money will be dedicated to advertising, as advertising costs can vary dramatically. Likewise, not all marketing comes with a price; there are free avenues the manager should be exploring, too. Nonetheless, this fee will go a long way in increasing your home’s exposure on just about every platform.
Most maintenance fees are the result of the relationships property managers already have with contractors and other maintenance service providers. The fee is used to pay for keeping their services on retainer, meaning the property manager will have access to their skills when necessary. It is important to note, however, that this fee is technically used to pay to retain the services of said workers, and not for the work itself. Any additional work will need to be paid for by the homeowner. Not surprisingly, maintenance workers will need to be compensated for materials and time spent on each individual job, which can vary dramatically from project to project.
Average property management fees are included in contracts to give managers a cut of the money homeowners are making. However, property managers stand to make no money if the property sits vacant. As a result, some managers include a vacancy fee. As its name suggests, the vacancy fee will charge homeowners for properties that sit vacant; that way, they aren’t at risk of losing money. Having said that, it’s the manager’s job to keep the home rented, so many would argue that this fee is the most unfair. As a homeowner, this fee should raise some red flags.
The reserve fund fee is more like a bank account that doesn’t incur any interest. In fact, while it’s called a fee, the reserve fund is essentially a pool of money to contribute to each month that the manager may draw from in the event the property needs attention. Instead of bothering the homeowner, and perhaps wasting an exorbitant amount of time, the manager may use this pool of money to address any issues that may require expenses. More often than not, homeowners end up tapping into this reserve fund, so it’s not like the money is going to waste. Likewise, this fee is often refundable.
Transactions that aren’t in cash cost money to complete. As a result, most property management fees include an automatic payment fee in the respective contract. That way, the homeowner will cover the transaction fee. Including this fee not only ensures the homeowner will pay their bill each month, but also reduces overhead for the third party property manager.
Rental guidelines and leases are constantly changing due to the fluidity of the economy and current market environment. At the very least, it is common for rental rates to change at the end of a lease in order to adapt to the new standards. As a result, new leases are required after each contract expires. Consequently, new contracts and leases must be drafted following the expiration of their predecessors, which costs money. This fee, therefore, is to account for the need of a new lease when new tenants move in.
Late payment fees are common additions to any property management contract. They state that the homeowner is required to pay a fee for any late or missed payments. The idea, of course, is to prevent any late payments from occurring. However, the good news is that this particular fee is entirely avoidable with proper budgeting.
Some property management companies will charge a fee to their homeowners when their tenants don’t pay on time, which is highly questionable. In fact, many would argue that this fee should be negotiated out of a specific contract. If for nothing else, it’s the property manager’s job to collect the rent, so there may be a conflict of interest, or at least a lack of motivation to collect on time. At the very least, there is a lot of room for ambiguity in this particular fee, and homeowners should do their best to avoid signing any contracts with tenant late payment fees.
Eviction fees can add up quickly, but they are certainly well worth the cost of admission. Evictions are timely, costly, and full of headaches—all things investors would rather avoid. Therefore, paying an eviction fee to the property manager to take care of everything makes a lot of sense.
The average property management cost may appear to detract from the bottom line of investors, but it is important to view the expense as an investment. Of course, enlisting the services of a property manager will cost money, but it’s entirely possible for the initial cost to be recouped through the number of services provided. In fact, the right property manager can very easily return more in the way of profits than their upfront costs.
It is worth noting, however, that there is one specific advantage property managers award investors that trumps everything else: time. In hiring a property manager, rental property owners free up a great deal of their time; time that can be spent doing any other number of money producing activities. Perhaps even more importantly, the help of a property manager may allow investors to continue to add more properties to their portfolios without adding any more work to their schedules. That means investors are free to simultaneously add homes to their portfolios without increasing their workload; the potential then becomes limitless.
Self management, on the other hand, sentences homeowners to trading their time for money. Self managing a rental property will require a landlord’s utmost attention. That means every phone call and maintenance frequenter must go through them, which is both timely and costly. Not only that, but the idea of servicing more than a single rental property becomes a significant challenge, and creating an entire portfolio becomes impossible without the help of a manager.
To be perfectly clear, it’s entirely possible to self manage a single rental property—maybe even two or three. However, the moment an investor decides to self manage their own rental properties, they must resign to the fact that nearly 100 percent of their time will be accounted for. Managing even a single rental property is time consuming. That said, the small cost of property management can go a long way in freeing up a lot of time, which is invaluable.
According to Zillow, the median rent price in the United States is $1,715. Therefore, the cost of doing business with a property management company that charges 10 percent will run the average investor about $171.50 a month. On the surface, the average property management cost may seem steep for unsuspecting investors. However, the cost of rental management isn’t as much of an expense as it is an investment. Hiring a property manager is just that: an investment. Their services are entirely capable of returning more profits and time than the initial upfront cost. Of particular importance, however, is the ability to add more properties to a single portfolio without adding more work to one’s schedule.