A Breakdown of Property Management Fees
Written by: Lana Williams, Property Management Specialist - Updated: Aug 18, 2022
People who own investment properties often hire property management services to take care of maintenance, tenant relations, and all the other tasks that are required to turn a profit on their real estate assets. Although these services certainly provide a lot of value (the best property management companies will help you increase ROI and give you more time to grow your business), paying for them can get quite complicated.
From setup and tenant placement to late payment services and vacancy fees, this guide will take you through all the fees that are most commonly included in property management contracts.
Flat Fee vs. Percentage of Rent
Before we get into the specific fees that property managers charge, it’s important to note that these fees tend to be structured in one of two ways: flat fee or percentage of rent.
With a flat fee, property managers charge the same amount each month for a particular service. When a fee is calculated as a percentage of rent, the amount you pay is proportional to the number of tenants who are currently using your properties.
Generally, fees that are calculated as a percentage of rent are preferable for property owners, as this gives property managers a strong incentive to quickly fill up vacant units and generate more rental income.
The 11 Most Common Property Management Fees
It’s also important to note that every property management provider is different. Some may only charge a single management fee for their service, whereas others charge fees that aren’t covered in this guide. That said, you’ll find that most property management contracts include some combination of the following fees:
1. Setup fee
Property management companies will sometimes charge a one-time fee (typically a few hundred dollars) to set up your account. This fee can be used by property managers to cover the cost of initial inspections as well as the time it takes to inform tenants that they will be the new contact for maintenance requests and any other property management needs. The setup fee can also cover welcome and introductory materials that help tenants learn more about the property management company.
2. Management fee
This monthly fee is the cornerstone of most property management contracts. It’s usually calculated as a percentage of rent (typically between 8% and 12%), though some providers do charge a flat fee for general management.
The management fee can be misleading. Some property management firms will take many of the fees described below and bundle them into one management fee, whereas others will charge separately for each service they provide. So, a low management fee might not mean that you’re getting a good deal — you’ll need to look into the full scope of potential fees before you can judge the true cost of using any particular provider.
3. Security deposit account management fee
Certain states, such as Connecticut, require security deposits to be kept in separate interest-earning accounts, and then the interest must be paid to the tenant. Other states like Delaware require the landlord to disclose the deposit account location. To compensate for the time it takes to comply with these regulations, property management companies often charge security deposit account management fees.
4. Tenant placement fee
The property manager charges this fee, which is also known as a leasing fee, whenever they find a new tenant for a vacant unit. It helps property managers cover the cost of advertising available units, screening tenants, and preparing lease agreements. A single tenant placement fee is typically equivalent to somewhere between half and one month’s rent.
5. Lease renewal fee
In addition to charging the owner every time they find new tenants, property managers may also charge the owner when an existing tenant renews their lease for another term. This fee compensates property managers for analyzing the rental market, determining whether the rent should be changed, and making any necessary adjustments in the lease agreement. Some property management companies only charge lease renewal fees on a case-by-case basis.
6. Vacancy fee
Vacant units can be especially time-consuming to manage. There won’t be any tenants in the unit who can alert the property manager about leaks or broken appliances, so the manager must regularly inspect vacant units for such damage themselves. They’ll need to check for break-ins and squatters as well. This is why some property managers charge for vacancies — ideally, your contract will not include this fee, as you’ll want your property manager to have as much incentive as possible to fill vacant units.
7. Maintenance fee
Property managers will need to put together a network of trusted vendors for complicated jobs like plumbing and electrical repairs — the best companies have established working relationships with vendors in the community that they can rely on in any emergency. For more basic tasks, such as trash collection and leaf removal, larger property management firms tend to use in-house maintenance crews rather than contracting out the work.
A separate reserve fund is often set up to help cover the cost of repairs. You could require the property manager to notify you every time they use this account, or you can be more hands-off if you prefer. Generally, the amount of money that is kept in these funds is equal to around one to one-and-a-half month’s rent for each unit.
8. Routine inspection fee
Properties should be inspected every three to six months in order to find and fix any maintenance issues before they develop into bigger problems. If a property is vacant or being shown to prospective tenants, inspecting it once a week is necessary to ensure it’s up to showing standards. This fee is usually included in the general management fee, but some providers charge separately for it.
9. Late payment service fee
Late fees are typically charged to the tenant whenever they don’t pay their rent on time. It can be a hassle for the property manager to chase down these late payments, so they may take a percentage of the late fee for themselves as compensation.
10. Eviction fee
Most property managers will need to hire a law firm whenever evictions are necessary, though some larger organizations have lawyers on their own staff who can handle evictions. Either way, you can expect that they will pass on these legal fees to the owner (the low-end cost of eviction legal fees is usually around $500).
11. Early termination fee
As with most contracts, you’ll likely need to pay a penalty if you terminate your agreement with a property management firm before it expires. Expect to pay at least one month of additional management fees if you decide to leave early.
Factors That Affect the Cost of Property Management
There are many factors that determine exactly how much all these fees add up to. In addition to the number of units that the property manager is overseeing, you can expect location, size, and condition to have a significant impact on the cost of property management:
- Location: There’s nothing more important in the real estate market than location, so it shouldn’t be a surprise that property managers account for this factor in their fees. Generally, the more expensive the area, the more you’ll need to pay for property management.
- Size: There’s a positive correlation between the size of a property and the size of property management fees. This makes sense, of course, as larger properties usually take more time and effort to manage. There are some exceptions to this rule, though. For example, it would likely cost less to hire a property management firm to oversee a large warehouse compared with a small apartment building, owing to the amount of effort involved.
- Condition: After the general management fee, maintenance fees tend to be the most expensive part of a property management contract. Investing in new buildings and buildings that have recently been renovated allows you to cut down on the cost of maintenance — older buildings may require less upfront cost, but they also carry the risk of potentially frequent or extensive maintenance needs.
At this point, you should have a good idea of how much property management will cost you. Of course, if you pick the right company, you’ll be able to save far more in prevented repairs, legal fees, and vacancies than whatever these fees add up to — before you move on to the next step of actually hiring a property manager, be sure to check out our guide on what to look for in a property management company and warning signs to watch out for.