Basics of Property Management
Many buy and hold real estate investors decide early if managing their own rental properties is worth the time and effort. While there are pros and cons to self management, ultimately it comes down to preference, free time and personal BS capacity. Some owners have told me they really enjoy the challenges, headaches and hassles of remaining hands on and saving a few dollars per month. Increasingly, others gladly pay a small percentage of the rental income to let a professional manage the property and potential problems. This is especially true for investors that own property outside of their immediate geographic area.
For owners that opt to outsource the management to a property management company, knowing what questions to ask is a vital part of making a solid hiring decision. In almost any market, you’ll find numerous property managers of all shapes, sizes and colors. For those less familiar with how property management companies work, here is a basic checklist to help you get started.
Leasing fees and tenant placement/selection:
How much does the property management company charge (including advertising, showings, background checks, lease preparation etc.) to place a new tenant in the property? I’ve found that half to one full months rent is fairly standard. Be sure to find out how the property manager advertises for potential tenants. A property manager with low leasing fees may not spend as much on advertising or may rely on potential tenants to “show” themselves the property via a lock-box system. Saving a few dollars on leasing fees may actually cost you more in vacancy time if it takes longer to find a tenant or if damage occurs due to an unsecured property. It’s also important to understand how the property manager screens applicants. At a minimum your property manager should verify income and have a stated income approach, obtain a credit report, including a criminal background check and finally verify references to understand rental history.
Management fee: All property managers charge a certain monthly price (percentage or flat) for managing the property. This is typically between 8%-12% of the gross rent. It’s important to find out if the fee is automatic, regardless of vacancy or if the fee is charged only when rent is collected. It’s also important to understand what services are included with the management fee.
Some of the services below may actually be included as part of the management fee OR may be charged independently, make sure you ask before proceeding.
Renewal fees: Charged to handle the paperwork associated with renewing the lease for another year (or more). Renewal fees can range anywhere from $149 to $199. While this may seem like an unnecessary fee, as an owner you will save thousands of dollars in vacancy and turn over expenses by keeping existing tenants for multiple years while not interrupting your cash flow.
Maintenance reserve: Most property managers require owners to fund a reserve account for future maintenance expenses, typically ranging between $250-$1000.
While different markets are going to have different nuances associated with how property management is performed, understanding the basics (above) is important in selecting the correct property management company for your needs.
Serving the Greater Kansas City area, Real Property Management Greater Kansas City offers a full range of Property Management services including Tenant Screening, Marketing, Leasing, Maintenance, Accounting and Evictions.
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Thanks for pointing out that the income of the tenants must be checked as well. I think that is important to ensure that the tenant will be able to pay the monthly fees. I will definitely hire professionals to help us get tenants for the apartment that we just bought last year. It hasn’t been rented yet because we took some time to decorate it.