Becoming a property manager is not an easy task. It takes hundreds of hours of work and dedication just to get to the point of solidifying your professional career. It is especially hard when you are managing your very own property management company. One of the most important steps of this process is to figure out an effective and efficient fee structure.
What is a fee structure?
In general, a fee structure is what business charge their clients for their services. This also applies to the property management world, where property managers have a certain amount of money that they charge their clients for their services.
The fee structure that you choose to apply to your business must be closely analyzed to make sure that it is reasonable while maintaining profits. This price depends greatly on a large number of factors which will be discussed below.
If you are new to the property management scene, you may still be in need of establishing a concrete structure. If that is your case, this article will assist you in knowing more about how to structure your fees and what to charge your customers.
To begin with, we will be going over the different kinds of property management fees that you could be charging your clients, depending on your business.
What are the different types of fees?
When it comes to establishing a fee structure for your business, it is important to distinguish between the different kinds of fees that exist. Listed below are some of the most common property management fees that a property manager will charge.
An onboarding fee, or a setup fee, is a one-time fee that is charged to new clients that covers costs of setting up the account. This fee covers costs like paperwork, initial inspections, and introductory materials to be used by the tenant in the future.
Although this is a very common fee to charge your new clients, not all companies choose to do so. Some companies may choose to suspend this fee and charge for the services separately. Also, it is completely up to the property manager to decide what the onboarding or setup fee is going to cover. Most times, the higher the price of the fee, the more services that they are going to offer.
Property Management Fee
If you are a property manager, the most obvious fee that must be charged is the property management fee. These property management fees, also referred to as a leasing fee, are what the client will pay every month to ensure that their property is properly maintained and managed throughout the year. Also, these payments cover services like showcasing the property, tracking tenant payments, processing paperwork, and preparing properties.
This fee varies greatly based on many factors, including:
- What type of rental property
- The size of the property
- Condition of the property
- Where the rental property is located
- Services requested
To get the best amount for a property management fee, it is important to consider all of these factors and make sure that you are not charging too much for your services. However, you also have to make sure you are charging enough, as you do not want to lose time and money.
Furthermore, this monthly management fee can take on two different forms: a flat fee or a percentage of rent. Being the more popular choice, a percentage-based property management fee takes into account the total rent of a property and charges the owner a certain percentage of that amount, say 10%, to manage the property. The second common option is to charge a fixed, monthly fee to cover all of these services. This may or may not be in your favor, so it is important to analyze each situation separately to make sure you are making the right decision.
Another fee that some property management companies may choose to include in their structures is a lease renewal fee. A property manager may charge a lease renewal fee to cover the costs of renewing or modifying the lease for a tenant. While some property managers skip over this fee, some will typically charge their clients this annually, which is when the lease is meant to be renewed.
Similar to the property management fees, property managers may choose to charge a percentage of the rent or a flat fee. Again, this is up to the discretion of the property manager, and it is important to consider both options to choose the best one for you.
Property managers charge a general maintenance fee that is meant to cover the costs of any unprecedented maintenance that needs to be done on the rental property. Although this may form part of the leasing fee, some property management companies charge extra markups for services done on the rental property.
Many times, property management companies have their own maintenance teams and may include some basic maintenance in your normal fee structure. It is important to make it clear in any lease agreements how much maintenance would be done on the property at no extra cost. If a property management company charges a client extra for labor, this may cause a dispute between the client and the company. For this reason, it is important to always be clear about the limits on the services in your agreement.
Early Termination Fee
If a client decides to break off of a company's property management services, they may be charged an early termination fee. It is important to make this fee very clear in any agreement, as it may be ignored at first. Depending on the terms of the rental contract, this fee can be anywhere from a small flat fee to a whole month of management fees.
Unfortunately, in the real estate world, evictions occur quite often, and they are very expensive. If you want the property management company to take care of the process, you will have to pay a fee. Typically, this would be a flat fee, plus any extra court or legal fees that came with the process.
As a property management company, you will most likely be dealing with a large number of evictions, so it is important to know the process thoroughly. Apart from this, eviction laws also vary from state to state, so it is important to be well versed in your state's eviction laws.
Want to learn more about your state's eviction laws? Visit DoorLoop to learn everything you need to know about your state's eviction process and laws.
How are property management fees structured?
At this point, you should know enough about all of the different fees that a property management company could charge. Now, you must understand the section in the agreement between the client and the property manager that explains how the fees will be structured.
Some of the most common ways that fees are structured in real estate companies are by "rent due" or "rent collected." It is essential that the difference between these two styles is understood very well as it can have a drastic effect on how fees are paid.
When property managers charge their fees based on "rent due," they expect payment even the property is vacant. Even if it is because of a tenant who is late on rent or has not paid rent for a few months, property managers who charge on "rent due" still expect payment. This could be a risky way of paying for property management services as a vacant rental property can come out very expensive.
The other common way that a property manager may structure their management fees is based on "rent collected." This is a much more favorable option for clients as you are only paying the fees when you are also collecting rent.
Whether you're an aspiring property manager or someone looking for a property manager, it is important to know very well about all the different kinds of fees and payments that exist. When deciding how much to charge your clients, it is important that you analyze the services all factors mentioned above and decide on a profitable, fair price. If you are hiring a property manager, you must consider the factors above as well and determine what the maximum is that you will pay for property management services. There are a plethora of factors to consider in each case, so as long as you follow this guide, you should know everything you need about property management fee structures.