Amateur Landlord: The Benefits and Costs of a Property Management Company

• September 22, 2010
• 13 Comments

by Bryce Baschuk

A property management company can take a lot of the hassle out of renting out an apartment. In this week’s Amateur Landlord, we looked into what a management company actually does and how much it costs to outsource landlord responsibilities.

“The issue is really a question of time and resources,” Rick Gersten, founder of Urban Igloo, a residential rental brokerage firm, said in response to whether or not it makes sense to hire a management company. “Doing all your own management work can be very time consuming. Some people have the time and resources to do the accounting and the repairs that are necessary over the term of the lease. But a lot of people don’t.”

For amateur landlords that decide to go with a management company, it can be a huge load off.

In addition to advertising the unit and screening prospective tenants, the company will also coordinate the execution of the lease and collect rent. During the course of the lease term, the company will also coordinate maintenance and repair work, and most will document monthly cash flow statements and provide 24-hour emergency service.

In return for these services, management companies in the District typically charge fees of between three and ten percent of each monthly rental payment.

“Eight percent for full service property management has been the standard in DC for a long time,” Mary Kay Welch, president of Investors Management, a residential property management firm in Dupont Circle, told UrbanTurf. “But some firms now charge ten percent.” In addition to the monthly charges, the firms typically collect a leasing fee of one month’s rent. This makes the true, amortized monthly fee more like 16 percent total.

To put this in perspective, we calculated what the total annual management costs would be for a one, two and three-bedroom apartment at an eight percent monthly fee plus one month’s rent for the leasing.

• DC one-bedroom at $1,495/mo. — Annual prop. management cost = $2,930.
• DC two-bedroom at $2,400/mo. — Annual prop. management cost = $4,704.
• DC three-bedroom at $3,300/mo. — Annual prop. management cost = $6,468.

The calculations above show that a property owner would have to part with approximately two monthly rental payments a year to have a property management company take care of everything. This might seem like a lot of money, but to some landlords the cost-benefit analysis of such an arrangement can be more attractive than the headaches that come with managing a unit themselves. This is particularly true for landlords who live far away from their properties.

Not surprisingly, maintenance and repair requests and rent collection are the issues that prove to be where owners get the most bang for their buck from using a management company. For delinquent tenants, management companies can be a tremendous help when it comes to pursuing litigation or evicting tenants that do not pay. Since companies collect their fees from rental charges “you can bet that they are going to ensure that the rent is paid and that local laws are followed,” Urban Igloo’s Gersten said.

For landlords looking to find a good local management company, check out the National Association of Residential Property Managers website. The site is used to find NARPM-approved property managers in specific neighborhoods.

Amateur landlords, do you use a management company? What have been your experiences? Let us know in the comments.

This article originally published at http://dc.urbanturf.com/articles/blog/amateur_landlord_the_benefits_and_costs_of_a_property_management_company/2501

13 Comments

1. RFalk said at 2:54 pm on Wednesday September 22, 2010:

   I own three apartments that I rent out in the city and have used the same management company for the last five years. Without a management company, my hours after work would be filled with dealing with tenant issues. I have had great relationships with my renters, but I am happy to have someone else manage the day to day issues.

1. RT said at 3:12 pm on Wednesday September 22, 2010:

   So does anyone have any recommendations on good property management companies in the area?

1. John said at 3:20 pm on Wednesday September 22, 2010:

   “Management Companies get compensated on when they pay rent”

   Yes that’s true - but dont they also typically collect 100% of the late fees?  Those are not generally passed on to the tenant no?  Oddly they have a perverse incentive to NOT collect on-time.

1. ashley said at 3:56 pm on Wednesday September 22, 2010:

   I haven’t used them but friends that live in a building managed by Meener say they do a good job.

1. ashley said at 4:03 pm on Wednesday September 22, 2010:

   And by meener I meant Keener

1. Rob said at 4:16 pm on Wednesday September 22, 2010:

   Why do management companies always set the fee as a percentage of the rent, rather than a flat fee or an hourly rate?  A nice apartment in a good building rents for much more than a run-down apartment in a badly run building, so a fee that’s a percentage of rent would be a lot more dollars/year for the nicer apartment—but I bet the nicer apartment is actually a lot less work to manage (stuff breaks less often and tenants pay their rent more reliably).

   I own one apartment that I rent out, and it’s silly for me to do the management myself—I’m really busy, and I’m not as good at property management as a pro would be.  But I have a reliable tenant and an apartment where things rarely go wrong, so it seems crazy to pay thousands of dollars a year to have someone else manage it.  If I could find a property manager who charges by the hour (even at a relatively high rate), though, I’d jump on that.

1. DC Landlord said at 6:18 am on Thursday September 23, 2010:

   I’m in the same boat as Rob. I, too, own a property that I rent out - and am unable to justify paying thousands to have someone select tenants and sporadically manage the place. And like Rob, I’d consider hiring property managers who charge by the hour. Are there any out there?

   Also, my personal landlord experience is that once you get through the hassles of first few weeks of the lease , it becomes pretty easy.

1. rdhd said at 8:06 am on Thursday September 23, 2010:

   Has anyone ever worked with a company that specifically manages apartments for clients with special needs or disabilities of some sort?  My wife has a coworker with a daughter (blind?) who rents through a place like this.  The company goes out and finds the apt or house and acts as a mgmt company in dealing with the owner.  I’m probably not describing this very well, since I don’t totally understand how it all works.  Short story long, it seems like a way to get a long-term stable tenant (we live near AU and would rather not rent our place to college students).

1. prh said at 11:39 am on Thursday September 23, 2010:

   I live in a small four unit building where I became the condo president after the guy that sold us the units ran off with our condo fees.  Long story, short a friend referred a property manager to me and for the last 2 plus years, she has been a tremendous help.  The company is call Property Management Solutions (.(JavaScript must be enabled to view this email address))

1. roots said at 1:01 pm on Thursday September 23, 2010:

   Wow, so based on the numbers provided, management companies take about 16% of what you make in rent per year to “manage” your ONE unit.

   I’m in the wrong field if you can make that much money sitting around and dealing with a “crisis” every couple of months. Amazing.

1. Steve Baker said at 10:48 am on Friday September 24, 2010:

   The benefits of having a property management company handle all the issues for your property far outweigh the costs.  You need to ask yourself when you first purchased your property “Do I want to deal with screening new tenants? What if I need to evict a tenant? Am I getting a call to repair a plumbing problem?”
   The list is endless.  However, if you enjoy the challenges of managing your own property, by all means go for it.

1. Theo said at 10:57 pm on Saturday September 25, 2010:

   First of all the way the fee is presented is misleading. The 16% is a bundled fee for two separate activities. Not all property managers do leasing and not all leasing agents do property management. The leasing fee is a one time “finder’s” fee and the other is a monthly management fee.

   Most importantly, few property managers require that they lease the property for you as a condition of managing it.

   So, even though it is explained in the article that there are two different fees involved, presenting them combined is very misleading to people, as witnessed by the comments.

   Secondly, I should disclose that I am a broker who does not manage properties, other than my own, and also help out a few friends with their properties.

   I will agree with some of the comments that sometime, managing property can be uneventful. For 6 years I have managed 3 properties I own in the area (one sold since) and also hired a property management company manage a property I owned in Florida.

   Here is my experience, both personally and professionally:

   a) The business of property management has huge liability. I don’t even know where to beging. Just to make the point, “rdhd” who commented above has already violated Fair Housing laws. If rdhd made this comments to a licensed agent or prospective tenant he would be facing a very expensive lawsuit and perhaps even jail time (not sure what the penalties are but they are not light). A property manager can protect you from liability.

   b) To address the comments by “John” & “roots”, a property manager does not have an incentive “not to collect on time”. Property management as a business has very low margins and the way to improve them is to run it efficiently. If a PM needs to spend extra time chasing late rents, the extra $30 or $50 in late fees don’t make up for the additional admin and other work needed to collect.

   c) In managing my own properties I have had very few issues. However this is a result of being in the real estate business and knowing the laws, rules and regulations, and what needs to be done and how. I am very strict and do not let anything fall between the cracks.

   d) In a few occasions there have been unexpected situations. For example, a friend’s condo flooded because a pipe burst in the unit above his. He happened to be out of town, but even if he was in town the situation was a nightmare to deal with for two weeks. Luckily the tenants happened to be cooperative, otherwise it would have been a disaster. I have also had a couple of minor issues while I was out of town for extended periods of time, and the only reason I managed them without a PM was because my real estate partner helped out.

   e) For the property I had in Florida, I didn’t even blink about hiring a PM company. I also didn’t think twice about hiring a buyer’s agent when I bought it, even though I knew the area. Being in the business, I have the privilege and misfortune of seeing things that most consumers don’t know, so one thing I have learned to recognize is the value of a good professional, no matter the industry (but that’s a different discussion).

   Unfortunately, I was pressed for time and the PM company I hired for my property in Florida did a pretty bad job. Hiring the right company makes a big difference.

   f) @Rob & @DC Landlord - I keep challenging myself to find alternative compensation models that make sense for both the consumer and the professional. I keep hitting a wall. Here is an experience I had, which, although not directly relevant, illustrates a point I’d like to make:

   I once did an extensive renovation ($100k+) in my own property. Doing it for the first time there were things I didn’t know. When the time came to finish the bathroom, the crew I had hired told me that I needed to build a concrete shower base, and I should higher a tile guy who had done it before. I also had to find the tile guy in one day’s notice. I found a good one who came and did it immediately, but also charged me $500 (his daily fee) for two hours worth of work. My point is, that if you expect someone to jump when you say jump, then you’ll pay for it dearly.

   The other reason a PM gets paid through monthly commission vs hourly-as-needed is because he is basically on call. It is like insurance. You might not need it, but when you do need it, it’s there and it is not costing you an arm and a leg. Perhaps you don’t need a PM but a handyman that’s accessible.

   I am not married to the existing compensation models in real estate, but I can see the value of monthly fee over hourly/as needed.

   Sorry for the long post. Hope this provides another view.

1. BJ McKellar said at 11:45 pm on Saturday April 9, 2011:

   Better late than never.  We do management in Dc, and charge a lot less than the other companies.  Most companies do charge the 8% , and 100% of 1st months rent, that is charged every 12 months.  We offer 8% management, and charge 40% for the initial lease up, but if the tenant stays for multiple years, we do not charge the marketing/lease up fee.  This fee is only charge, when placing a tenant.  This will save an owner thousands of dollars over the life of a lease.  Or we offer a 10% mgmt fee with only a $450.00 leasing fee. 
   There are lots of good reasons to hire a manager.  Send emails to .(JavaScript must be enabled to view this email address)

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