There are certainly some situations where self-management of your rental properties makes sense. But for the majority of real estate investors, especially inexperienced ones, hiring a professional property management company is the smartest way to go.
However, property management isn't free. While the cost can certainly be a worthwhile expense, here's a rundown of what you should expect to pay for a property manager and what services they'll provide in return.
How much should you expect to pay a property manager?
The short answer is that you should expect to pay about 10% of the property's rent in the form of a property management fee, but there's more to the story. In fact, there are several different fees that you can expect to pay your property manager.
Property management fee
As I mentioned, a 10% property management fee is the industry standard, and is based on the collected rent. So, if you own an apartment that rents for $1,000 per month, you can expect the ongoing property management fee to be about $100 while the property is occupied. The fee varies depending on the company, scope of services provided, and geographic location, and some property managers also give a discount to landlords with larger portfolios of rental properties. Generally speaking, you should expect to find management fees in the 8% to 12% range.
Many property managers charge a one-time setup or startup fee for bringing your property into their business and setting up your accounts, etc. Some have a flat fee while others charge a setup fee per rental unit.
For an example of what to expect, my property manager charges a $100 setup fee for each housing unit they manage. This fee not only covers setting up your account with the property manager but may also cover the time it takes to get other property-related bills switched to the management company. For example, I own a triplex, and water service is included in my tenants' rent. But the bill goes to my property manager, not to me.
Some property management companies charge a leasing fee when they initially rent a property, and half of the first month's rent is a typical amount. This covers the costs of marketing the property, showing it to prospective tenants, and other expenses and time spent leasing the property. Some also charge a lease renewal fee (usually lower) when an existing tenant renews their lease. In my experience, most property managers charge either a setup fee or a leasing charge, but it isn't usual to have to pay both.
This isn't an exhaustive list, and there are several other fees you might have to pay. If your property manager has to evict a tenant, for example, you can expect that they'll charge you a fee for handling the process. And while it isn't necessarily a fee paid directly to your management company, they might bill you for maintenance and repairs they've arranged on your behalf. Another common charge is a late payment fee; property managers often take a percentage of it as their fee for collecting it.
Vacation rental management is more expensive
It's important to mention that the fee structure discussed here (specifically, the ongoing property management fee) is referring to long-term rental properties. If you hire a property management company to handle the day-to-day operations of a vacation rental property, you should expect to pay more -- a lot more.
The average vacation rental property management fee is in the 25% to 30% range, but it can be as high as 50% in some cases. This is much more expensive than property management for long-term rental properties, but there's considerably more work involved with managing a vacation rental. The property manager needs to find renters on a weekly or even daily basis and arrange cleanings between vacationers, and they have more work to do when it comes to accounting and payment processing.
What does a property manager do?
Property management might seem like a large expense. If you own a triplex that rents for a total of $3,000 per month and your property manager charges 10% of collected monthly rent, you'll pay $3,600 per year in property management fees in addition to any leasing, startup, or other fees.
However, a property manager's job isn't easy. Consider what a good property management service can bring to the table and what they can handle for you:
- Market knowledge: An experienced property manager likely knows your local rental market better than you do and can use that knowledge to set your rental rates appropriately. In one case, my property manager determined that a house I had been renting for $1,000 could easily get monthly rent $1,200 upon lease renewal. That alone can pay for the cost of property management in situations like this.
- Marketing: A property manager will list and market your property for you, so you don't have to play any active role in finding tenants.
- Tenant placement: A property manager will show your property to a prospective tenant, perform credit and background checks, and facilitate the move-in process.
- Rent collection: Property managers collect monthly rent and other payments (like security deposits) from tenants and can also pay certain bills on your behalf. In multi-unit properties, it's common for the landlord to cover water and sewer charges, for example, so these bills can be sent directly to the landlord.
- Evictions: If you're a landlord for long enough, you're eventually going to have a "problem tenant." This could be someone who simply doesn't pay rent, or it could be a tenant who is a constant nuisance to your other renters. The eviction process can be lengthy and complex, and a property manager will deal with it on your behalf (often for a fee, but well worth it).
- Maintenance and repairs: If your property needs something fixed, your property manager can arrange it. In fact, most property managers have either an in-house handyman or a trusted network of contractors who often charge preferential rates compared to what you could get on your own.
- Tenant issues: Do you really want your phone to ring every time a tenant's toilet isn't working? A property manager will deal with your tenants so you don't have to. In fact, most tenants have absolutely no idea who the owner of their property is if there's a property manager. Mine certainly don't.
Is it worth it?
Obviously, the biggest drawback to using a property manager to manage your real estate investments is the cost involved. Property management isn't cheap, and it can certainly cut into your cash flow. If you do decide to hire a property manager, it's important to shop around to compare not only fee structures but also the scope of services each company provides.
On the other hand, a good property manager will find tenants and handle the day-to-day operations of your rental property so you don't have to. You'll still have to make occasional decisions, particularly when it comes to making costly repairs, but for the most part, hiring a property manager turns a rather time-consuming and active investment activity into a passive one.
If you're prepared to treat your investment properties like a job and want to maximize your profitability, being a property owner who also acts as a property manager could be the right move for you. But if you'd like the day-to-day operations of your property handled and don't want to deal with tenant issues yourself, a property manager could be worth every penny you pay them.