Being a rental property manager is not an easy job. There are countless hours of work involved with making a rental property succeed to its highest potential. This is especially difficult if you own a poverty management company. Being a business owner requires you to make a range of important decisions, including how to structure your pricing.
When you first start your property management company, it can be hard to figure out what your pricing structure should be. This is especially true if your goal is to always go above and beyond for your clients.
However, while this can be confusing, charging an appropriate amount for your services is crucial for both the financial health and the longevity of your property management company. In fact, this should be the first thing you consider when starting your business!
If your pricing structure is done properly, it can do wonders for streamlining the financial transactions between your company and your clients.
Figuring Out Your Pricing Structure
The first thing that you need to do when creating a pricing structure for your property management company is to take a good look at your competitors. Do some research to figure out what they charge for their services and find out what you can do better.
There are many factors that you should think about when building a pricing structure that helps your business grow and succeed while remaining competitive in today’s market. Your fees should account for many aspects of your property management company, including the following:
- The services you provide: A property manager’s responsibilities include collecting rent, finding tenants, keeping up with property maintenance and repairs, as well as handling any evictions. Because your work saves clients endless amounts of time and stress, the quality of your services should be taken into consideration.
- The occupancy/vacancy rate of the properties you manage: How effective are you at actually finding and placing tenants in the properties under your care?
- Your typical maintenance expenses.
- The type of property you are managing: Is it a multi-family home, a single-family home, an apartment complex or a commercial property? All these types of properties can have an effect on how much you are charging for your services.
- The location of the property: You may be able to charge more for your services if the property is in an area with a higher rent cost and lower fees, compared to areas with lower rent costs that generate less income.
- The estimated man-hours required to effectively manage the rental property.
With all this considered, you should also try to negotiate a good rate from your property owner. The more fair your rate is for managing properties, the more clients you’ll attract. This also increases the chances of you having a long-term relationship with your clients.
Just make sure that you never charge too little for your services, as that can end up resulting in your company losing money in the long run.
Breaking Down Common Property Management Pricing Structures
There are many factors that go into creating a property management company’s pricing structure. Usually, a pricing structure includes the following:
Generally, a good property management company will charge their clients a management fee that is equal to around 4% to 12% of the monthly cost of rent. Further, residential property management fees tend to be lower compared to commercial fees.
You can calculate your ideal management fee by taking the following factors into consideration:
- The location of the property and its overall condition.
- The number of individual units in the property.
- Any services that you provide to your clients.
- Local market rates (for example, property management rates in Phoenix will generally differ from rates in Los Angeles or New York).
When it comes to how you base your property management fees, you have some options. Here are three pricing structures that are quite popular in property management:
1. Flat Fee
This pricing structure may end up being a great deal for you and your property management company. This means that you will get paid regardless of whether or not you have tenants living in the units you manage. If you’re just starting out in property management, this payment structure would be our top recommendation.
2. Percentage of the Rent
This is the most common property management structure out there. Typically, property managers will charge around 8% to 10% of the monthly rental income.
Most companies will charge a lower percentage of around 4% to 7% for properties with 10 or more units. A higher percentage of 10% or more is usually charged for single-family homes or smaller residential properties.
With this option, you would charge your clients a monthly management fee, in addition to other services that you provide. This means that you will only be able to charge your clients extra if they require you to provide a specific service.
If you are a seasoned property manager with a wide range of skills under your belt, then this may be the pricing model for you.
When you are beginning to choose a pricing structure for your property management company, it is important to really analyze your individual business, the services you provide, and the number of clients you have. Doing this will help you choose the payment structure that will be the most beneficial to you in the long run.
Other Fees You Can Incorporate Into Your Pricing Structure
The average property management company won’t charge this fee. However, the ones that do will typically charge their clients roughly $50 every month that a property is vacant.
When you are writing up your contract that will be signed by your property management company and your clients, make sure that you fully understand any and all terms that are used. The most common ones will be “rent collected” or “collected rent”, and “rent due” or “scheduled rent.”
New Account Setup Fee
When you take on a new client and set up a new account, you should typically charge your clients a fee. This is a one-time fee that will usually cover the process of transferring all of the information you need from your client or their previous property management company, among other things like paperwork.
This setup fee should also cover your initial inspection of the rental property itself. A thorough inspection of the property is absolutely necessary in order to identify any repairs or improvements that the property may need before you search for a new tenant.
While there are many property management companies that charge this fee to new clients, not all choose to do so. Some companies may choose to charge for these specific services separately or waive the fee altogether.
This one will cover any time and effort that your property management company spends on finding a new tenant to occupy the home. This includes tenant screening, preparing the rental property for move-in, and writing up the lease agreement.
Rather than charging this fee as a separate service, most property management companies factor it into the main management fee. This fee largely exists as an incentive for property managers to find long-term, quality tenants for the rental home.
Lease Renewal Fee
Whenever a tenant’s lease has to be renewed, some property managers will charge a lease renewal fee. This covers the task of writing up a renewed lease agreement, in addition to modifying it if necessary.
While some property managers may choose to waive this fee, some charge their clients this fee annually, whenever the lease is meant to be renewed. The cost of this service is usually up to $200.
When a property owner is looking for a new manager to care for their rental home, they will often ask questions about the company’s fees, such as:
- How much does your property management company charge for leasing? Generally, this cost usually falls between 25% to 100% of the first month’s rent. Some companies choose to charge a flat fee for everything.
- Do you strictly require lease renewals from tenants who are looking to stay at the property after their initial contract? Or, will you allow tenants to stay on a month-to-month leasing system after their initial lease term has ended?
- What happens if it takes an unreasonably long time for your company to find a new tenant for a rental property? Will you decrease or waive the leasing fee?
- Do you provide any incentives to only choose high-quality tenants for each rental property? Tell new clients about your tenant screening process that ensures you’ll only choose reliable tenants that the owner can trust to abide by the lease terms.
- Are there any leasing agents involved with your company? If so, once they find and secure a reliable tenant, what is their fee?
Some property managers will charge their clients advertising/marketing fees in part or in full. This ultimately depends on what the advertisement requirements are for the rental home. Luckily, there are currently more ways than ever before to attract new tenants and market a rental property.
For example, when you are advertising a rental property, you can use rental listing websites such as Zillow, Craigslist, or Facebook Marketplace. Generally, you should charge your clients between $100 and $200 for this process.
When it comes to advertising fees, a rental property owner may be skeptical. You may receive the following questions:
- What are the advertising fees and who pays for them while you market the property?
- Is the process of advertising a rental property the sole responsibility of your property management company? Or can the property owner choose to do it as well? If the owner takes on this responsibility, will they still need to pay the advertising fee?
- Does your property management company charge an advertising fee in addition to the leasing fee?
- Which tools and strategies does your property management company use in order to effectively advertise a rental property?
Maintenance fees are usually included in the general property management fee, but in some cases you can add it as a separate cost. This fee can cover services such as keeping the common areas of a property clean, handling garbage disposal, and snow or leaf removal.
It’s important to be clear with your clients on which basic maintenance services are included in their normal property management fee and which ones are at an extra cost. Failing to do this can cause disputes between you and your clients, creating unnecessary tension.
If there is a specific repair to be made, such as a broken furnace or plumbing that is not working properly, the cost of the repair will often be covered by the property owner. Many property management companies have their own in-house maintenance teams.
There are many benefits to having your own crew on board for making repairs to a property. By having your own maintenance team, you will be able to provide reliable repairs to the property in a timely manner without as much stress.
So, if you’re planning to build your own maintenance and repair team, make sure that you negotiate the fees with an agreement between you, your team, and your clients. Generally, your agreement with your client should limit how much your company charges for maintenance work on the property.
If you are planning on charging this fee to your clients, be prepared to answer the following questions:
- Does your company have its own in-house maintenance and repair crew? If so, what is the billing rate for their services?
- What services are included in this fee? Will they be available 24 hours a day, every day of the year in case a tenant has an emergency? Do you have a trip charge?
- Is the maintenance fee able to be negotiated?
While you may be able to reduce the chances of dealing with a problem tenant by investing in thorough and effective tenant screening, you will, unfortunately, have to deal with them once in a while.
Regardless of the reason you’re removing a tenant, evictions are never an ideal situation to have to deal with. The process can be long and frustrating, not to mention expensive. Depending on the state that you’re located in, there can also be lots of legal hoops to jump through.
Usually, property management companies will charge around $200 to $500 per eviction. This fee is excluding any court costs associated with the process. Evictions can be lengthy and expensive, so it is always important to be familiar with the process thoroughly.
Do your research on your state’s eviction laws and costs so that you can be prepared for when you inevitably have to handle this frustrating and long process. Being unprepared for this situation could result in unfortunate consequences.
In order to minimize these evictions as much as possible, make sure to implement an effective tenant screening process that you can apply to each and every prospective tenant before writing up a lease agreement. Ask your applicants the right questions, run credit checks, verify their employment, and conduct a thorough background check.
Your goal when choosing a tenant for any property under your care should be to find the highest quality resident possible, and then you should do everything you can to keep the best tenants for as long as possible. This will greatly reduce the number of evictions that you will have to handle as a property manager.
Bills Payment Fee
This fee is added when your property management company allows the property owner to pay any homeowner-related bills through your business to help streamline their finances.
This can include a variety of property owner payments such as homeowners’ association (HOA) fees, insurance payments, and anything else related to owning a rental property.
Many property management companies don’t charge a separate fee for this and choose instead to just include it in the general management fee. Others don’t even offer it to clients at all, but it can be a good way to earn a little extra income for your company.
Unpaid Invoice Fee
If your company’s invoices have gone unpaid, you should be charging your clients a late fee. This will usually hover around 1.5% of the total amount owed. This is a small charge that is added each month to any unpaid invoices that are past their due date.
Late Payment Fee
In a similar fashion, property management companies may charge clients and tenants a fee if their payments are delayed. On average, the cost of this fee can range from 25% to 50% of the original payment that was due.
When you are just starting out in property management, you may need to charge lower late fees. However, as your company grows and you gain more and more clients and responsibilities, you will be able to charge more for late payments.
Sales Commission Fee When the Rental Property is Sold
There are some cases where a property management company can receive a commission if their client decides to sell the rental property that is under their care. This happens when the property is sold through your management company’s firm.
However, when brokering an owner’s rental property, it is important that you draft an exclusive arrangement in writing. If you don’t do this, then the owner could re-list their rental property for sale with another firm if yours fails to sell it in a timely manner.
Ultimately, the sooner you are able to sell the property, the better. Further, it’s important that you negotiate a good sales commission if you choose to go this route.
Reserve Fund Fee
If your company is managing a single-family rental property, a reserve between $200 to $500 is standard. This fee will help to ensure that the day-to-day operating costs that your company will incur are adequately covered. It will also make sure that bills are paid in a timely manner and services are rendered on time.
Early Termination Fee
For a variety of reasons, there can be times when a property owner wants to end their contract with your property management company. If your client chooses to end your contract early, you should charge them a termination fee. Depending on the terms of your specific contract with your client, the cost of the fee can vary.
It is always important to make the terms of this fee clear in your contract, as this may be ignored at first. The cost of this fee can range anywhere from a small flat fee to an entire month’s worth of property management costs. In any case, this fee is necessary in order to help you protect yourself and your company from unexpected losses in the future.
Looking for more ways to generate some extra money for your property management company? Let’s go over some more ideas that you can implement.
Other fees that you can add to your pricing structure include:
- Payments from washers, dryers, and vending machines.
- Interest on security deposit payments (Make sure to check the laws in your state to ensure that this option is possible for your property management company).
- Fees for when a tenant violates the terms of the lease agreement: This can help you to protect your clients, your business, and the property itself from problem tenants. These violations can include causing damage to the property, making late or insufficient rent payments, or having an unauthorized pet in the home.
- Pet deposits or pet rent: While you may not want to initially, allowing tenants to have their pets in a rental property can have many benefits, and it may even end up earning you more money in the long run. Many property management companies collect a monthly pet rent in addition to the normal cost of rent.
When you are building a pricing structure for your property management company, it’s important to always pay close attention to what exactly is covered in the contract. This way, all of your financial transactions can go as smoothly as possible, and misunderstandings can be minimized between you, your clients, and your tenants.
What Should I Watch Out For?
When you decide to implement these fees for your property management company, it’s important to make sure that you are always clear with your clients on the terms of your contract.
For example, does your property management contract say that you will be charging your client “rent due”, “rent collected” or “rental value”? These are very important distinctions and it’s crucial to understand all of the terms of your contract.
Most property owners will prefer to pay property management companies a percentage of the rent income. That is due to the fact that a property management company will usually keep them on their good side if they choose this method of payment.
For a “rent-based” contract, you should expect your company to be paid even when the property does not have a tenant occupying the space and making rent payments. This is when your client will pay your firm a fee that is at a flat rate, regardless of where their vacancy level is sitting.
Bottom Line: Property Management Costs
When you choose to start your own property management company, it is important to find a good balance between the high-quality services that you offer to your clients and the fees that you charge them. Over committing without charging enough for your services can be a big mistake that many new property managers make.
Although showing a strong commitment to your clients will most likely help you attract new property owners to your company, it may result in lower profits overall, which is the opposite of what you want. Sometimes, this approach can even lead to losses for your property management company.
So, even if it means that you may have to charge your clients more for your services, strive to provide services that are only the highest quality. Charging high fees may seem risky, but in the end, these charges can help to ensure that you are always able to provide top-notch property management services to each and every one of your clients.