Becoming a landlord is stressful enough without getting nickeled and dimed by property managers.
When you hire a property manager, you delegate the labor of advertising vacant rentals, screening tenants, signing lease agreements, and collecting rent to them. For the cost of property management fees.
Are typical property management fees worth it? It depends on your priorities — and the average property management fees you can negotiate.
Typical Property Management Fees
While property management companies can make your life easier, they charge accordingly. Keep an eye out for these typical property management fees as you evaluate prospective managers.
Some property managers charge an onboarding fee, also known as a setup fee. This is a one-time fee, usually around $300, that covers the cost of paperwork, initial inspections, and reviewing your portfolio’s books.
Like everything else in real estate investing, it’s negotiable. Aim to eliminate this fee entirely.
All property managers charge a leasing fee, to advertise and fill a vacant unit with a new tenant. Property managers typically charge between half a month and one month’s rent to sign a new lease agreement with a renter. It should include the cost of screening tenants.
Rental unit turnovers are where 90% of the work of managing rentals lie. So, filling a vacant rental unit makes for a reasonable fee for property managers to charge.
Some property management companies also charge a fee simply to renew an existing lease agreement. As renewing an existing rental agreement requires virtually no work on the part of the property manager, you should negotiate to eliminate this fee.
Monthly Management Fees
Monthly management fees, sometimes referred to as rent collection fees, come as a percentage of rent collected. The average property management fee ranges from 7-10% of collected rent.
This fee covers activities such as communication with existing tenants, housing inspections, collecting rent and late rent fees, and emergency maintenance and repairs.
Some property managers also charge whenever they have to oversee maintenance of your property such as property inspections, repairs, cleaning, and so forth.
In other words, they try to charge for something that’s already part of their job. Don’t allow it.
Also, watch out for contractor kickback fees to property managers. Unscrupulous property managers sometimes take kickbacks from contractors when they send them out to work on your rentals — and you know the contractors aren’t coming out of their own pockets for those fees. They’re passing them on to you in the form of higher invoices.
Insist that your property manager collect at least three quotes for every significant repair, and build your own network of contractors to have them sent out to your rental units. Consider negotiating prices with contractors yourself for the best possible deal.
No landlord or property manager wants to file an eviction. It’s expensive, time-consuming, and leads to a tenant turnover, not to mention the stress and risks of managing resentful tenants.
Some property management companies charge eviction fees if they have to manage the eviction process for you. Note they charge these on top of any court filing fees.
Factors that Impact Property Management Costs
Several factors can impact property management fees for rentals. Some examples include:
- Type of Property: It’s more efficient to manage 20 units in a single building than 20 single-family homes spread out over an entire city. Landlords can often negotiate lower average property management fees for multifamily properties than a portfolio of individual houses, each of which requires separate maintenance.
- Size of Property: Similarly, a 20-unit apartment building is more efficient than a 4-unit building.
- Location of Property: While it may seem counterintuitive, many property managers charge higher average property management fees for lower-end neighborhoods and Section 8 rental properties. They tend to come with far more work, with higher rent default rates, eviction rates, maintenance, and other property management headaches.
- Condition of Property: Expect property managers to charge more to manage a crumbling or outdated rental property than a pristine unit. It will inevitably require more work on their part to manage and maintain, and it will attract lower-quality renters (perhaps even professional tenants).
That said, you can and should attempt to negotiate lower monthly management fees before signing a property management contract.
How to Negotiate Lower Property Management Fees
How much do property management fees cost?
Whatever you negotiate.
Shop around and talk to many different property management companies before hiring one. Ask landlords in your market who they use (try our 35,000+ member landlord Facebook group). Ask your real estate agent who they like in your market.
Aim to negotiate the typical property management fees down to just two types of fees: a new leasing fee and the monthly management fee. Don’t agree to any other fee types.
Not every landlord enters the negotiation with the same bargaining power. Expect better luck lowering prices if you have one or more of the following to back your position.
- Multiple Properties: Larger portfolios mean larger revenues for the property manager. It creates an economy of scale, where larger landlords can negotiate lower average property management fees.
- High-Rent Properties: Higher rents mean the property manager earns a higher payout per unit. Plus, higher-end units tend to attract lower-maintenance tenants.
- Multifamily Units: The more units under one roof, the more efficient each is to manage.
Another way to save when hiring a property manager is by taking care of some of the maintenance on your own! Some landlords like the DIY approach of handling their own maintenance projects.
Now, if you are like me and don’t trust yourself with power tools, there are other options as well. Consider hiring a maintenance concierge service like Latchel to field all maintenance requests and send out reputable contractors to fix them immediately.
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Are Property Management Fees Tax Deductible?
The IRS considers landlords to be like any other business, whether you own one investment property or ten. Therefore, you must pay taxes on all profits.
However, property-related costs, including property management fees, are indeed tax deductible. In fact, the only rental-related expenses that landlords can’t deduct immediately are capital improvements — these must be depreciated. Capital improvements include any property updates that extend the usable lifespan of the property, such as new roofs, new flooring, new plumbing, and so forth.
You can depreciate these property expenses over the next 27.5 years. Use our free depreciation calculator to get a better sense of how rental property depreciation works.
Bottom Line: Are Property Management Companies Worth it?
A property management company takes care of all the headaches associated with being a landlord.
If this is a part-time job, do you have time to stay in constant communication with your tenants? Hire the plumber they need when the toilet isn’t flushing? If not, a property management company might be necessary in order to keep your tenants happy.
Ultimately, you want happy tenants who renew their lease agreements repeatedly. But new landlords should consider managing their own properties for the first few, as it will make them better landlords and real estate investors. Once you have five or ten units under your belt, consider outsourcing work to a property manager if you don’t enjoy managing your rentals.
Or you could simply retire young with real estate and manage the units yourself to keep you busy in retirement.♦
What are the average property management fees you’ve paid? How do you negotiate lower typical property management fees?
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About the Author
Emma Dudley is a data marketer by day and financial writer by night, early on her journey to financial independence. She lives in Baltimore but loves international travel, and enjoys the challenge of cutting-edge fashion on a cut-down budget.