We often get asked the question, “Why do some companies have very low monthly management fees, and others higher? Is it just a case of one company costing me less?” A simple cliché comes to mind, “You get what you pay for.” In this case it is even worse. You think you are paying less, when in reality, the cheaper company is charging you more. In general, it probably costs a good management company 7-8% of your monthly rent to properly manage your property. That means they have enough staff to show the property personally (make sure they do that and that they don’t give strangers lockbox codes to your house!), run full credit checks, have dedicated personnel coordinating maintenance, rent collection, legal coordination and so forth. That leaves 2-3% of your rental income to their bottom line.

So how or why would someone advertise 5% or $50 a month for a $1000 a month rental? There are really three possible reasons: 1) They will not be in business very long and you should not trust them with your investment, or 2) They simply do not have enough staff to manage your property or 3) They will make that money back from you (and more) in other places. Item number three is by far the most common. The most common method is by a LEASE UP FEE. Do not decide on a management company or compare management companies by the monthly management fee alone, because there are some unscrupulous companies that will advertise a low amount and get you elsewhere. A lease up fee is normally a percent of the lease that amounts to one half to one full months rent. So for a $1000 a month rental, you might pay a well staffed company around 10% monthly management fee or $1200 for the year. This is generally a good deal, because it is most likely not worth your time to manage it at that rate (more on that in a future article). But another company advertises only $50 a month (plus a lease up fee in small print).  If the lease up fee were say 8%, it would be nearly a full months rent (at $960) and when you add that to your monthly management fee, you have just paid $1560 for the year! That is 30% more than the company with a straightforward 10% a month leasing fee.

The sneakier companies these days don’t charge leasing fees either. They have mandatory 3 month marketing fees (even if it rents in a month), large annual account fees (say $150), Lease Renewal Fees, Freshen Up Fees (where they supposedly put air freshener in your property every two weeks while vacant), and, oh yea, once a tenant moves out, they continue to charge management fees even when it is vacant!

So how do you compare property management companies? We have found is that it is best to calculate an Effective Management Fee when comparing companies. The Effective Management Fee is the actual percentage you pay of your rental income each month to the management company once you factor in all the reoccurring fees you are charged for the year. Unfortunately, unlike the mortgage industry, Property
Management Companies are not required to provide a “Truth-In-Lending” type of statement about their fees (whether mortgage companies have any scruples either is fodder for another time). You are encouraged to use this formula when evaluating property management companies.

How to calculate Effective Management Fee?
Assume your property will be leased for a year.
Add up all the annual fees that are in the fine print of the management agreement.
Add up all the management fees collected for the year.
Sum those two numbers, and divide by all the rents collected on your behalf for the year.

For example, a company advertises 6%, has a $450 marketing fee, $20 twice a month freshen up fees (when vacant), $150 annual fee and 4% lease up fee. You believe your property will rent for $1000.

Management Fees = 12 months x 6% management fees = $720
Marketing Fee = $450
Annual Fee = $150
Lease up Fee = 4% of 12 months rent or 12,000 x 4% = $480

So the sum of all fees for the lease year is = $720 + $450 + $150 + $480 = $1800
Divide that by the $12,000 annual rent collected = 1800 / 12,000 = 15% EFFECTIVE MANAGEMENT FEE !!!!!

Compare that to a company that only charges 10% on rent actually collected (that other company probably charges you even when the house is vacant or the tenant does not pay), and you would pay $1200 or actually be paying what is advertised, 10%. Not only are you paying more to the first company, but if they are being deceptive in their advertising about what you pay, what else are they deceiving you about?

If a company, like the one above, charges some type of fee during vacancies (like the dreaded and bogus FRESHEN UP FEE), re-compare them as above, but assume one month is vacant. In this example the total annual amount of fees would be reduced a little (as with your rent) but would further show the disparity between the two companies. Make sure to add that 12 month management fee if they company you are evaluating charges you while vacant! That pushes it up towards 20% management fee if they do.

At Real Property Management North Valley, we always hope you will choose us to be your property management company, but even if you don’t, please always take care during your selection process, and utilize tools like calculating the EFFECTIVE MANAGEMENT FEE to make your decision a good one!