Don’t kid yourself. If you think management companies make money solely off management fees, you will be shocked to learn that for some management companies, management fees are only a fraction of their income.
Property management can be a very lucrative business; not because it is easy, far from it, but because there are multiple ways to make money from a single property.
Management fees are the most obvious form of income for any property management company. Some management companies charge a flat fee, while most charge a percentage of the collected rent — usually between 7-10% of the rent amount.
However, even this is not so cut and dry. Some management companies charge a management fee every month regardless as to whether the property is tenant occupied or not. Similarly, some management companies have set billing dates, usually the 1st of the month, and will collect a management fee even if the tenant has not paid rent yet.
1st Rate Rentals currently charges $99 per month for new landlords for the first year of service, after which the fee is 7% of the rent collected per month every year thereafter; moreover, 1st Rate Rentals billing is tied to rent collection, so we get paid only when you get paid.
Some management companies have a sign-up or start-up fee, while others, like 1st Rate Rentals, have lease fees.
The difference between the two is simple: Sign-up fees you pay up front and hope that the management company can find you a tenant before your contract expires. In these cases, the sign-up is meant to cover the costs associated with the marketing, showing and screening of prospective tenants, drafting the lease, and completing the move-in inspection.
Lease fees, on the other hand, cover the all the same stuff. The only difference being that the lease fee is collected AFTER a tenant has moved in. 1st Rate Rentals is a firm believer in lease fees over sign-up fees as management companies should have to work for their money.
Sign-up/Lease fees typically range from $199 to 50% of the first month’s rent. 1st Rate Rentals currently has a lease fee of $329.
Application fees can be a huge money maker for a property management company.
Many management companies charge a non-refundable application fee to even see a property, and we’ve seen these application fees range from $40 to $55 PER applicant!
Think about it this way: if a management company charges a $40 application fee and a home attracted 5 families (which is a very low number in today’s competitive marketplace), each with two primary applicants, then the property management company just made $400. In many cases, a property management company can make the equivalent to half or even a full years worth of management fees before a home is even rented. This is why some management companies are so eager to list properties regardless of property condition or price.
At 1st Rate Rentals, we have no application fees. We feel that adding a fee to view a property or to simply complete an application adds an unnecessary barrier that may slow the rental process. That is not to say that we have no fees, however. We charge a credit report fee that covers the cost of reporting and processing and nothing more. That fee is only collected after a tenant has seen a property and wants to move forward with the application process.
Read the fine print! Some management companies will charge you to collect late fees. No really, they will.
Many management companies will take a portion or all of the late fees collected. They argue that they had to follow up with the tenant and post notices, which is added work; therefore, they are entitled to more money.
We think this is crazy. They are already collecting a management fee. A m-a-n–a-g-e-m-e-n-t fee! You would think rent collection was part of that management — late or not.
Consider this: if your management company takes a portion of the late fee, what incentive do they have to place a quality tenant in your property? They make money when you get paid late.
1st Rate Rentals does not take nor charge a fee on late fees.
This one is tricky as these fees are often hidden.
Sure, a management company should handle tenant repair requests so landlords do not have to, but landlords should check to see if their management company is affiliated with or owns the maintenance company they use and/or if landlords are contractually required to use the management company’s contractors. In many cases, management companies that are affiliated with, own, or contractually require landlords to use certain contractors are making money from property repairs. They may promote this fact as a feature or benefit, but without getting second opinions, how does a landlord know they are being charged a fair price?
Even worse, in some instances, those types of management companies tend to be overzealous calling out more repairs than necessary and/or mandate repairs that are not required by law.
Ask your management company if you can use your own handymen/contractors for repairs. It is your home, shouldn’t you get to decide who works on it?
1st Rate Rentals only works with third-party handymen and contractors. For large repairs, we’ll get you multiple estimates to ensure you get a fair price. Moreover, you will always receive a copy of the invoice and the contractor’s information should you wish to speak to them directly. Even better, we always allow you to use your own repair people or even do the work yourself.
You would think that the monthly management fee would cover, you know, the complete management of a property, but that is not always the case.
Be sure to read your management contract thoroughly as some management companies will charge for notices or other things they consider outside the scope of merely collecting rent.
These service charges may include:
- 3-day notices
- 24-hour notices
- HOA violation notices
- Complaint notices
- Returned check fees (NSF)
- Uncashed check fees
- Debt collection fees (if completed by the management company)
- Vacant property service/maintenance fees
1st Rate Rentals has no additional service or notice fees.
As you can see, there are multiple ways property management companies can make money from a single property.
This is not to say that any company that makes money in the above-noted ways are bad, a company exists to make money and provide a service after all. However, many of the ways management companies generate income is obscure and hidden from landlords. Knowing how your management company operates and makes money will help you better understand how they see you, your property, and the tenants that ultimately reside in your property.
Always ask questions, ask for samples of contracts and addenda and read them thoroughly.
If you have any questions about our services, please feel free to contact us.
Please note: the above information is posted for informational purposes only and is not intended as legal advice. In fact, we cannot and will not answer questions about your particular management company (unless it is us!) and how they do or do not operate.