When an individual is in the process of forming their own property management company, there are many things to be concerned with. One of the main things, however, is how the company will make money.
This topic could be tricky, as it may not be clear how a property management company can make money. Some believe that these companies make money solely based on fees, while some believe they make it from rent.
To clear the confusion, we will we going over the various ways in which a property management company makes money.
To begin, we will go over what a property management company actually is and what they typically consist of.
What is a Property Management Company?
In simple terms, a property management company is a company that is hired, typically by landlords, to cover the various tasks of managing properties. The hiring of this kind of company allows landlords to not have to worry about as many tasks as they usually do.
The services offered by property management companies differ from company to company. Most of these services, however, revolve around the following:
- Tenant Screening and Background Checks
- Maintenance Requests
- Marketing and Advertising
- Rent Collection
The best companies offer most, if not all, of these services at once. These tasks should sound like things that you, as a property owner, do almost every day.
Now that you are clear about what a property management company is, and what it does, let's discuss the different ways that this kind of company can make money.
How Property Management Companies Make Money
Once you have your company set, it is important to think about how you are going to begin making money. One of the main ways that you will be making money is by charging fees. As a property manager, there are many things that you can charge a fee for, and it is important to have this structure clearly laid out.
Also called your fee structure, the way that your company charges their clients is vital to making money for it. Property managers must have this aspect of their business very secure before entering the market for other clients.
Below, we will discuss the various kinds of fees that property managers charge in order to make money.
What are Property Management Fees
A property management fee is any kind of fee that is charged by a property manager to provide any kind of service on the rental property. In the real estate world, there are a plethora of fees that management companies charge to service rental properties.
Since there are so many different kinds of fees that can be charged to property owners, we will be going over the most commonly found ones here in this guide.
We will be starting off the list with the most common fees that most, if not all, property management companies charge their clients in order to make a profit.
Property Management Fees
Of all the fees that exist in the management industry, property management fees are one of the most common. This should be one of the most obvious fees, as this is what the company is all about, management. These fees are what clients pay every month to ensure that the property is properly maintained and managed throughout the year.
These management fees can cover different services depending on the company, but many times the fees cover things like:
- Collecting and processing rent
- Coordinating maintenance
- Property inspections
- Tenant communication
Different companies can charge for these separately, or they can include them all under one management fee. Typically, they will all be included under the management fee to make things faster and easier.
Although these fees sound simple, there are many factors that can affect how they are charged. Some examples of factors that affect the cost of property management fees include the following:
- Type of rental property
- Size of the property
- Condition of the property
- Location of the property
- Management services
It is very important that all of these factors be taken into consideration when deciding how much your management fee is going to be. Once all of these factors are taken into account, property managers can come up with a management fee that will both generate business and profit.
How it is charged
One of the options for this fee is to use a flat fee every month. This means that no matter the rent, the property owner or landlord will pay the same management fee every month. This is usually the least popular option. The more favorable option that many property management companies tend to use is the percentage-based fee. This means that every month, a certain percentage of the rent (typically 8%-12%) is collected to cover the management fee.
The latter option could also get tricky due to the language used in the contract. The two choices when it comes to charging a percentage are based on either rental value or rent due. When the contract states rental value, this means that the management fee will be a percentage of the expected rent. So if there is no rent being paid, the fee still needs to be accounted for. If the agreement states rent due, the management fee is only paid when there is rent collected.
Even though it sounds like a headache, this fee is what will usually generate the most revenue from the managed properties. However, there are still many fees that you can charge as a property manager that will also make the property management company money.
Next on the list is the leasing fee. This fee covers the costs of leasing or re-leasing a rental property when it becomes vacant. It essentially covers all of the work that is involved in finding a new tenant to rent the property.
Some of the services that are typically covered by the leasing fee include:
- Property showings
- Applicant screenings
- Initial inspections
In most cases, it is in the property manager's best interest to do a good job during this process. This is because most property management companies offer a refund if the tenant moves out of the investment property less than a year after.
For this fee, it is typically charged similar to the management fee. Some companies charge a flat fee while some charge a month's rent. Instead of charging a whole month's rent, however, they may only charge a percentage of it.
An onboarding fee, also called a setup fee, is a fee that is charged when new clients are hiring the company's management services. This fee is typically a flat fee that is charged per the number of units that the new client needs to be managed.
Some of the things that this onboarding fee covers include:
- Creation of account
- Inspection of property
- Property evaluation
- Introductory materials
Although this fee is normal, a property manager may choose not to include this fee. They may opt to charge for the services separately. This is completely up to the property manager. The property manager also decides what services the onboarding fee covers and which ones must be paid for separately.
Another fee that property management companies typically use to make money is the lease-renewal fee. This fee usually covers all of the costs of renewing or modifying a lease for a tenant. If the property manager chooses to charge this fee, it should be yearly, which is when leases expire and need to be renewed. Although it is common, some property managers will choose not to charge this and include it in the general management fees.
Like the property management fee, this fee could either be a flat fee or based on a percentage of the rent. Whether it be one or the other, this fee usually comes out to around $200 or less. Again, this is up to the discretion of the property manager, as it is their choice whether to include it or not.
Another fee, or group of fees, that are typical of property management companies are maintenance fees. These are fees that are charged to the property owner or landlord that cover the costs of any services done on the property.
Although this fee may be included in the general fee, there may often be markups on the fee due to the price of the services done. For example, if a landscaping job exceeds the budget set by the maintenance fee, the property owner will be charged the difference.
Sometimes it can be difficult to make money off of these fees because some property owners are careful with how much they pay in maintenance fees. The property management company should theoretically only charge for the price that it cost for the repair or replacement. Charging anything over this amount could cause a dispute with the landlord, so caution is recommended.
Also, some companies opt to charge a flat maintenance fee and have a dedicated repair crew. This way, they know for sure whether or not they will be making money off of maintenance based on the fee and the price of the team.
Early Termination Fee
Sometimes, an early termination fee may also be included in a company's agreement. This fee is charged to the client if they decide to terminate their contract earlier than the agreement states. This is usually a flat fee anywhere between $250 and $500 or even more.
It is especially important to make this fee clear to the property owner as it may come as a surprise. If it is not known to the property owner, it may cause a dispute at the time of ending the agreement.
As a property management company, there are various things that you can do to make money. More importantly than charging fees, you should have every other aspect of your company secure, like your infrastructure and marketing strategy.
Once you have everything secure, charging fees is the easy part. This is where you get the chance to determine how much your company will make and may make or break your business. But when you get it right, you'll surely be on your way to success.