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How Much Does Hiring A Property Management Company Cost?
If you are a down to earth landlord, you would probably know that the costs of hiring property management company varies.
You don’t even need to have experience crossing swords with them. A business person should instinctively feel that this is the type of service where service providers attempt to squeeze as much as possible out of their customers.
Well… that point of view could be true or flawed. It really depends. Typically between 6% to 12% of rental income. Tax deductible.
And if a management company is really sucking your cash dry… it’s most probably because you allowed them to do so. Don’t accuse them of taking advantage of you when you have presented yourself as someone primed to be taken advantage of.
So what are the variables that determines how much to pay for their services?
1) Number of units
The concept of economies of scale holds true here.
If you own a multifamily property, you are going to pay much less per unit than if you own a single family property.
It’s sort of like paying retail price when you buy an item but offered a bulk discount when you buy the item by the bucket loads.
Let’s just use a simple example to illustrate this point. A handyman might charge a $10 transport fee just to get to the property to take a look at a problem in a house. But it would still be the same $10 for him to arrive at a multi-unit property to work on a few apartments.
In most occasions, the total price you pay would be higher for multifamily properties. But the price per unit would be much lower.
2) Condition of property
It goes without saying that the worse the condition of a house, the more effort has to be done to maintain it. This translates to higher costs.
This is also why sometimes, it’s better to get something totally fixed and bare the one-off costs rather than wait till a problem absolutely cannot be ignored anymore.
3) Finding new tenants
A considerable number of management companies charge a one-time fee for each tenant on top of the monthly fee.
Of course being the superstar we often think we are, surely we can take on the task of finding new tenants ourselves?
This really depends on the terms of the hiring contract.
Service providers are aware that landlords might prefer to find their own tenants. So to grab this piece of the pie they are often willing to negotiate the monthly leasing in order to convince landlords to agree to charges on new tenants.
For example, if a property management company quotes you 12% of rental income. They might be willing to go down to 10% if you agree to their prospecting services too. This would be worthwhile financially if the tenants secured stay on for the long term.
Yes. Management companies might secretly wish that tenant turnover is as high as possible in order to exploit these charges. It’s just a risk you have to take.
4) Administrative fees for ad-hoc repairs
One of the tasks of property managers is to hire third parties to attend to maintenance and repair works. And many operate like a bank in charging for administrative and processing fees.
This can give them an incentive to call for any type of help whenever and wherever.
This is one of those expense items that often escape your attention during outsourcing. So inquire about his beforehand.
Other than that, also question them about charges for the purchase of supplies from vendors.
I kid you not.
This is a grey area where unscrupulous service providers fill their own pockets with cash. YOUR CASH!
For example a specific wall is so worn off that it has to be repainted. Yet the manager purchases enough paint to paint a whole house. And he bought it at a premium price from a “friendly” supplier.
The costs of supplies is then tagged to you. Outrageous!
So remember to sort this out before signing any agreement with management companies.
5) Fees for vacancies
This is no joke. There are service providers who charges you even for vacant properties.
You’d think that management companies are incentivized to maximize profits. That is not always the case.
Slap that rookie out of you!
In order to maintain their operating income, some companies charge a minimum fee as soon as you engage their services. This means that they will continue to invoice you even though a unit is vacant.
Although this might make no sense to you. It makes perfect sense to them.
You probably don’t need to be enlightened about what are the potential problems when property managers are not solely incentivized by tenant-occupied units.
6) Management fees due even when tenants don’t pay rent
By logic, the rent collected from tenants is used to pay the management company what is due to them. Yet there are practices where they demand payment even when rents are not paid.
This has a negative impact on the motivation to collect rent – the life blood of your real estate business.
Don’t agree to such payment arrangements.
On a side note, if your property is in a condominium or a townhouse that has a homeowner’s association undertaking a lot of tasks, do a cross-reference of whether their activities clashes with that of the management company. There’s little point in paying them to do something that is already done by the association.
Overall, if you only own a couple of properties, it might not be worthwhile to hire a property management company unless there are extraordinary reason that require you to hire one. But if you are managing quite a mini empire, they could actually be your best friends very fast.