Last Updated: January 13, 2023 by Cameron Smith
If you’re a real estate investor, hiring a property manager could be an excellent decision. But you have to be prepared for property management fees, which can significantly affect your bottom line. Property management fees usually add up to 8%-12% of your monthly rental income.
Fixed Management Fees vs. Percentage-Based Management Fees
A fixed management fee stays the same no matter what.For example, if you collect $1500 in rent one month but $1200 in rent the next month due to a vacant property, you’ll still pay your property manager the same rate.
A fixed management fee structure can be advantageous in some circumstances, such as when you make more rental income than you do normally. However, fixed management fees may not incentivize management companies to collect rent from your properties as eagerly as otherwise.
Percentage-based management fees are much more common than fixed fees.They are anywhere between 8% and 12% of the total collected monthly rent in most cases.
As a result, you may pay a property management company more or less money each month depending on how much money you bring in. If you collect $1500 in rent for one month with a 10% property management fee, you’ll owe the property manager $150.
But if you collect $1200 in rent another month, you’ll only owe them $120. A percentage-based management fee structure can be advantageous, as you pay less money when you make less as well.
Management Fees – Rent Due vs. Rent Collected
Percentage-based management fees are calculated based on “rent due” or “rent collected.” Your contract should always state that the fee is calculated based on “rent collected.” Otherwise, you will have to pay the stated monthly percentage even if you don’t collect as much in rental income as you project.
But there’s never any guarantee your tenants will pay that money. What if, for example, the rent due for your property is $2,000 for two units, but one of your tenants moves out suddenly and does not pay $1,000? You’re $1,000 in the hole. But if your contract requires you to pay your property manager 10% based on rent due, you owe them $200 even though you did not collect half of your month’s rent.
If a property management company does not agree to charge you based on rent collected, do not hire them.Find and choose another property managerinstead.
Average Management Fees & How They Can Differ
Most property management companies charge around 10% of rent collectedfrom properties they oversee. But the exact monthly rent charged depends on the management company and the types of properties they oversee.
Property management companies that oversee properties with many units, such as 10 or more, may charge a lower percentage for their monthly rates.
The reverse is true for management companies that oversee a few single-family homes. Say that you own a property and charge $2,000 in monthly rent to the tenant. A 5% fee would only net the property management company $100. That’s hardly enough to cover the cost of doing business.
Instead, such a company might charge a 10% fee or $200, which is much more reasonable.
Some companies, particularly large ones with many clients, may offer “discounted” or “low-cost rates” for new property owners or those with few rental units to manage. Discounted or low-cost management fee packages may be cheaper than average (possibly even less than 10% per month). But they may lack some of the features you expect from a management company, such as:
- Property maintenance services
- Eviction services
- Tenant placement
On the other hand, some property management companies offer premium service packages for higher-than-average rates. If you choose a high-quality, high-cost property management service package, you may benefit from additional services such as:
- Tenant recycling services
- Maintenance of advanced tenant amenities or facilities (i.e., pools, gyms, etc.)
- Better or more aggressive marketing
- HOA standard checks and maintenance
These high-cost packages can be good if you have the income for itandyou think they’ll increase the value of your rental properties (thereby drawing more tenants to them and allowing you to make more money).
What Kinds of Fees Do Property Managers Charge?
Property managers charge one-time fees, monthly fees for regular tasks, and then as-needed fees to cover irregular activities (such as finding a new tenant).
One-Time Property Management Fees
Some property management fees are charged only once. One-time fees are usually charged at the beginning or end of your contract with a given company. They include contract setup or onboarding fees and contract termination fees.
Ongoing/Regular Property Management Fees
Most property management fees include ongoing or regular charges. Regular property management fees cover the expected labor and expenses that are required to oversee and maintain properties, as well as manage tenants or tenant-related duties.
Regular property management fees include:
- Late payment fees
- Repair or maintenance fees
- Reserve fund fees
- Property update fees
- Inspection fees
- Eviction fees
- Lease renewal fees
- Services provided fees
- Pet fees
Other Property Management Fees
While most property management fees are predictable, some are only occasionally needed. Rarer property management fees cover less frequent labor or expenses incurred by your property manager in the course of their duties as stipulated by your contract.
Less common property management fees include:
- Vacant property oversight fees
- Tenant-occupied unit fees
- Property leasing and/or advertising fees
- Eviction or collection fees
- Bill pay fees
- Unpaid invoice fees
- Property sale commissions
- Lease violation fees
- Returned check fees
- Extra duties fees
Contract Setup/Onboarding Fee
Contract setup or onboarding fees are common one-time fees that cover the cost of setting up a new account with a property management company.They are usually between $100 and $300.
But in reality, it’s an unnecessary fee. If a property management company looks good aside from a contract setup fee, try to negotiate this fee down to less than $300. Most paperwork filing for a new client doesn’t cost that much to handle.
Furthermore, make sure that the onboarding fee is not charged per rental tenant. If the clause states the onboarding fee is per tenant, look for a different management company, as that can become exorbitant if you have many units.
Property Leasing/Tenant Placement Fees
Property leasing fees or tenant placement fees are charged when the property management company fills vacant rental units.Leasing fees can be flat fees of $300-$500 or between 25% and 75% of the first month’s rent for the unit.
Property leasing fees cover associated costs to market or advertise vacant units, as well as:
- Screen tenants
- Show prospective tenants the unit
- Make lease paperwork for future tenants
- Performing move-in inspections
Property leasing fees are only charged when the property manager has to fill a new unit. These fees are acceptable, but be careful they’re not exorbitant or your property manager will be incentivized to rotate through tenants..
To avoid being taken advantage of, you should negotiate your property leasing fee to be:
- The same no matter how long it takes to fill a vacant rental unit.
- Only chargeable if the property management company finds a new tenant – if you find a new tenant, you don’t need to pay the fee.
Lastly, have your attorney consider the possibility of incentive clauses. For example, you might include a clause in the management contract that gives you a full refund for the property lease fee if thenew tenant breaks the leaseor is evicted within one year of moving in.
Standalone vs. Ongoing Placement Costs
As you seek to fill your rental properties, you may discover some property management companies that offer standalone tenant placement services. These companies don’t provide the ancillary services/duties of traditional management companies. Instead, they fill your empty rental units for one-time fees.
Other management companies only fill empty units with tenants if you contract for an ongoing business relationship with them.
Note that costs between both types of services are often different. Generally, standalone tenant placement fees from management companies are higher ($500 and up). In comparison, tenant placement fees for management companies whose services you contract continually are typically lower (closer to $300).
Repair & Maintenance Fees/Reserve Funds
Most property management companies have you maintain a reserve bank or escrow account with a pool of money they can dip into when needed to cover the cost of repairs or maintenance tasks.This repair reserve is usually around $1,000-$3,000, and it’s an acceptable fee type for almost all investors.
The majority of property management companies have a network of trusted contractors, such as plumbers, pest inspectors, carpenters, and more. They employ these contractors to fix damaged items in the properties they oversee, take care of pests like rodents or cockroaches, and more.
But property management companies do not pay for these contractors out-of-pocket. Instead, they pass most of the costs of maintenance or repairs on to you, the property owner. Such an arrangement is fair and acceptable, provided that the repair and maintenance reserve fund is actually used for those duties.
How Are Repair Fees Calculated or Decided?
Many property managers will markup the repair or maintenance costs they incur to turn a profit. This is typically at a rate of 10%-20% depending on the company and type of repair job. For example, if you have a repair job that costs $100, the company takes $110-$120 from the repair reserve. Markups more than this are unacceptable.
Your property management contract may outline the repair and maintenance fees form in different ways:
- You authorize every repair deduction from a shared account between you and the property manager. If you trust your property management company, this is not necessary.
- You are only notified for account withdrawals or repairs if they are over a certain cost, such as $1,000.
- You authorize the property manager to use the repair cash account as they please. This is obviously only acceptable if you trust the property manager explicitly.
Your contract might specify that a certain amount of money has to remain in the account at all times. Or it may not require an account at all. In the latter case, your property manager will simply bill you for the extra charges for necessary repairs that month at the end of each billing cycle.
Contract Termination Fee
A contract termination fee is charged when you end your business relationship with a property management company.Termination fees can range anywhere from $50-$1,000 or more.
Termination fees are usually only charged when you end the contract earlier than specified. In that case, a termination fee can be called for—just be sure that it isn’t exorbitant. If you want to end a relationship at the end of your contract, a termination fee is unreasonable.
It all boils down to reading the contract and knowing what you’re getting into.
Vacant Property Oversight Fees
Vacant property oversight fees, also called vacancy fees, are ongoing charges that cover the cost of maintaining and protecting vacant units.Vacancy fees may cost anywhere from $100 per month of vacancy per unit to much more.Vacancy fees are more common if the property management company charges you based on a percentage of monthly collected rent.
Some property managers claim that keeping vacant properties in good condition is hard work. In many cases, they are right. Vacant properties can attract rodents or squatters and generally need to be maintained regardless.
But that extra work should be covered by property leasing fees (see more below). If a property management company insists on a vacancy fee, make sure you know how that money will be used. A minor vacancy feecanbe acceptable if:
- That money will be provably used to protect the vacant unit (i.e., by installing special locks or hiring pest inspectors).
- That money will be used to upgrade the vacant units.
- That money will only be used to repair damage from delinquent tenants in the past, so it will be collected and saved for that occasion.
That said, many property management companies don’t charge any money if a unit is vacant. This is the most desirable arrangement for you as an investor. After all, one of yourproperty management company’s responsibilitiesis to fill the vacant units as quickly as possible, especially if the company relies on rent collected to earn money itself.
Eviction or Collection Fees
Eviction or collection fees are charged per eviction that cover the cost of all labor and charges associated with removing a tenant from an occupied unit.Eviction fees are typically between $200 and $500 per eviction. But the cost of eviction fees can vary depending on expertise, sheriff’s fees, and more.
Eviction can be a messy and complicated process. Furthermore, all evictions have to go through local courts. If you and your property manager decide one tenant needs to be kicked out, the property manager will likelyhandle the eviction process.
This involves speaking to the tenant, providing them with several warnings, contacting the sheriff’s department, and filing paperwork with the court. The eviction or collection fee covers the cost of all this work, plus the court fees your property manager may face getting the job done.
Eviction fees are fine and necessary in most cases. Property managers have to work hard and act quickly so that you (and they) can continue receiving rental income.
Eviction Insurance
Your management company might build an “eviction insurance” fee into their monthly rates. This is usually a small fee (typically between $50 and $100 per month) that’s intended to cover the larger costs of evicting a tenant later. In theory, this averages the cost of an eviction out over time instead of giving you an invoice with the full amount all at once.
In general, this is a better idea if you have many tenants and an eviction is likely to happen at some point. With a single tenant, the odds of an eviction are much lower and the only result of this fee is the property management company holding onto your money.
Inspection Fees
Inspection fees cover the cost of inspectors to look over your unit(s). Some property management companies will include this at no cost, and perform them every six months or so. Otherwise, it may be up to you to pay for inspections, but in exchange for a lower monthly management bill.
These inspections are often conducted every 3-6 months, but can vary based on local real estate laws.
Lease Renewal Fees
Lease renewal fees are cyclical charges that kick in whenever your property manager has to review existing tenant leases and possibly make changes to those leases (i.e., updating the year, the rental amount, etc.).Lease renewal fees are usually $200 or less per year.They are acceptable fees if your landlord does enough work to justify them.
However, some property managers don’t charge lease renewal fees whatsoever. Other property managers charge a percentage of monthly rent for each lease renewal. You should avoid it or negotiate your way out of it at all costs.
Theoretically, a lease renewal fee pays for the paperwork labor needed to update existing leases, send that information to existing tenants, etc. This does take a bit of time, but not much. In general, lease renewal fees should be low and flat, if present at all. Aim for a lease renewal fee of less than $200 if you must pay it.
Bill Pay Fees
Bill pay fees are repeating fees that cover the cost of paying various bills for your property. These tasks include making payments toward your property’s mortgage, paying your homeowner’s insurance, and paying homeowner’s association dues (if applicable). Bill pay fees are only acceptable if you don’t pay your own property bills.Bill pay fees are usually $50-$300 per month.
Bill pay fees are by no means required. If you, the property owner, take care of the above tasks, you should obviously not sign a contract with one of these fees. For example, if you only own one single-family home to rent, it shouldn’t be too difficult for you to pay the mortgage for that property (plus any other associated fees) in addition to your own home.
Bill pay fees become more common and necessary as you add properties to your portfolio. Read your contract carefully and ask the property manager whether you can strike this clause from the contract if you don’t need it.
Lease Violation Fees
Tenants incur occasional lease violation fees whenever they violate or disobey a clause/provision on their leases.Lease violation fees can be anywhere from $25 to several hundred dollars, depending on the nature and severity of the lease violation. Your property manager should never receive any money from a lease violation fee. If they insist on a lease violation fee, walk away from the deal.
It doesn’t make any sense for a property manager to receive lease violation fees (or a commission of those fees) for the same reason it doesn’t make sense for them to make money from late payment fees: it actively incentivizes bad property management.
If a property manager gets money each time a tenant violates their lease, they are incentivized to:
- Make leases with confusing languages or clauses, making it more likely tenants will accidentally violate their leases
- Not manage property tenants properly, leading to more lease violations and more money for them
While you can charge a lease violation fee, you should receive the money, not your property manager. You cannot trust the work ethic or lease-writing abilities of a property manager that insists on including lease violation commissions or monetary penalties.
Returned Check Fees
Return check fees are occasional fees charged when a tenant’s check bounces, and the property manager has to do work to find the tenant and get a good check. They’re acceptable only if they do this work, not you.Returned check fees are usually between $25 and $50.
Be wary of property managers with contracts that demand you pay them a fee each time a check bounces. Technically, there’s little reason for a property manager to make any money from a bounced check – they aren’t losing any money since you pay them, not tenants directly.
Extra Duties Fee
Some property management contracts list miscellaneous or “extra duties” fees, which cover any extra labor not explicitly listed in the contract.Extra duties fees can range from as little as $50 per month to several hundred dollars per month.They are acceptable if they are not too high but are not necessary.
It’s a good idea to make sure that any services not explicitly listed in a contract are still listed as “extra duties.” This clarity of understanding prevents property management companies from feeling obligated to do things they did not agree to and prevents you from being taken advantage of.
Given the subjective and unclear nature of this fee type, it may be wise to have your attorney look over and determine whether it is a fair fee. If a property management company tries to charge several hundred dollars with little justification aside from what it “might” need to do, don’t sign with them.