How much do you charge?
That's the number one question we get asked when a property owner calls us because they are interested in renting out their home. There are dozens of property management companies in the Inland Empire and they all seem to have a different pricing structure.
Why is that? What's the difference?
Asking about price first is almost always a sign of an accidental landlord. Accidental landlords are homeowners that never intended for their home to become a rental property, but life circumstances are taking them out of the home for whatever reason and they would rather rent the house than sell.
These aren't intentional investors that bought the home strictly as an investment so they typically have a higher emotional attachment to the home and have little to no experience with dealing with tenants or property managers. They have a mortgage on their home and are worried about covering all of their expenses and hopefully having some profit left over.
This isn't a wrong question to ask, but it's probably a question that should be asked closer to the end of a conversation, not right off the bat. Chances are you can weed out several property management companies before ever getting to the questions of price by asking them the right questions and knowing how they should be answering to benefit you.
There are really five main questions that accidental landlords have when deciding how to go about renting out their home: should I hire a management company or rent it out myself? How much does a management company typically charge? Is the cost of a management company worth it? Can I actually make more money renting out through a property management company than I can on my own? How do I decide which company to go with?
Should I hire a management company or rent out my home myself?
This questions strictly depends on your circumstances. In the Inland Empire, approximately 70 - 80% of rental homes are managed directly by the owner with no property management company involved.
Why is that?
The truth is, property management companies don't have a great reputation with landlords. They are notorious for not returning phone calls or always seeming to be "on the tenants side." That is changing in recent years as more and more companies enter the industry, but reputations take a long time to change.
Historically, it has also been relatively easy to rent out your home yourself. There were few legal hurtles and the number of laws you needed to be compliant with were also less. Over time, more and more laws have been created directly regulating rental homes which means landlords need to be up to date and compliant with landlord-tenant law.
Even if you get a great tenant, rental homes take a up a lot of time. If you don't have responsibilities that keep you from the job of managing your home, you may be just fine renting it on your own.
If you don't want to show the home to prospects, manage repairs, collect rent every month, negotiate leases and rent prices, answer the phone at all hours of the day, serve notices, or visit your property several times throughout the year, finding a good property manager may be right for you.
The number one expense in rental property is vacancy. The longer your home sits vacant, the more money you lose. If you aren't readily available to help out your tenants, they are going to get frustrated and move out as soon as they get a chance. So even if you can take a few weeks off work to get your home rented, will you be able to maintain a level of service that makes great tenants want to stay for years and years?
How much does a management company typically charge?
In the Inland Empire, this number has a surprising range. Property management isn't a commodity like gas or milk that is generally priced the same based on region and quality. Property management is a service that if done correctly should provide you with ultimate peace of mind that ultimately justifies the amount you pay.
There are a multitude of different services that property managers can charge for, but the main one everyone talks about is the monthly management fee. It's really easy to compare companies side by side and determine which one charges less per month. That doesn't necessarily make them the cheapest company though.
Some management companies will charge a really low monthly fee but then charge a lot of extra fees to make up for it. Their monthly fee sounds really low, but in reality they are getting a lot more out of you every month with other fees like admin fees or maintenance markups.
They also may have a special fee structure for the first year and then drastically raise their rates the second year. Make sure when comparing companies, you ask about all of their fees, not just their monthly management fee.
But, since the management fee is what most people want to know about, let's dive in and see what companies charge.
There are really two ways that property managers will price their services:
- Flat fee based.
- Percentage based.
Flat fee companies will generally have a monthly fee that doesn't vary based on rent amount. The will rent out your $1k/month studio or your $4,500/month mansion for the same fee.
The good in the flat fee instead of percentage model
It's great to know exactly how much you you are paying each month. As rents go up over time, you never pay more for a management fee. Typically, flat fee companies will charge less than percentage based companies, but may be making up for it in their other service fees.
Flat fee companies run off of the thought that higher rent doesn't mean more difficult to manage, so they just charge a flat fee for all types of properties. This comes across as very transparent, and many property owners like this.
The bad in the flat fee instead of percentage model
The old saying, "you get what you pay for" certainly rings true here. If one company seems drastically lower than other companies, there's probably a good reason for that.
Flat fee companies that are priced much lower than their percentage based competitors will have a multitude of problems down the road. Low prices tend to attract cheap owners. Cheap owners tend to own low value, low rent properties that aren't in very good condition. These properties usually house difficult tenants.
This means that low priced company is constantly dealing with conflict between tenants and owners alike. No one is happy in that office. Staff burns out quickly and probably turns over rapidly. The company isn't making enough money to adequately compensate their employees and doesn't have room to grow and provide more services to their clients. This results in poor service to you and your tenants and a frustrating experience all around.
But hey, at least you're saving a couple bucks a month in management fees, right?
This isn't to say that all flat fee companies are cheap. Some have a very high flat fee that negates the problems addressed above.
We've seen flat fees range from $89 - $250/month in the Inland Empire. It's a safe bet that the $89/month companies have a lot of other fees, or they're trying to break into the market. The $250 company may be all inclusive and have absolutely no other fees.
Why percentage based?
Percentage based is how most companies in the Inland Empire price their services. They take a percentage of monthly rent collected that typically ranges from 5 - 10%.
This means the higher they price your home, the more they are making in management fees. This can help you rest assured that when their rental analysis comes in several hundred dollars less than what you thought it would rent for, they really are trying to get the most out of your home because ultimately that means more money in their pocket. If you think their analysis is too low, it could be that yours is too high.
Every year when the lease comes up for renewal, they are also going to be a lot more motivated to see if an increase is in order. They make more per month if they successfully negotiate a higher rent with the tenant, and so do you. Flat fee guys get paid the same with or without rent increases and guess what? Rent increases can be difficult so they may advise you not to raise the rent at all so they don't have to deal with it.
Is the cost of a management company worth it?
Now that you understand the costs of property management, you have to decide if it's worth it for you. As mentioned earlier, what you are really paying for is peace of mind. Your property manager is your fiduciary agent. If they take this seriously, that means that everything they do is supposed to be in your best interest.
For a lot of people, establishing trust with their property manager and then being able to stop worrying about their property is well worth the cost. There's no better feeling than knowing you can trust an expert to manage your asset and put the most money in your pocket while minimizing your risk as much as possible.
If you don't trust your property manager, maybe it's time to find another one. Or maybe the relationship is just too new. It will take time and experience with a property manager to build trust and be able to gain that peace of mind.
Can I actually make more money by renting out through a management company than I could on my own?
Yes! Even after the costs associated with professional management, how much you make from your property over several years can actually be more than if you had tried to do it all yourself.
Several owners that hire property managers after managing themselves after many years find that they are way under market on their rent because they haven't been doing correct rent increases over time or they didn't understand the rental market when they originally rented it out.
Just like we talked about before, the number one expense is vacancy so if your home is sitting vacant for weeks or months out of the year, chances are you are making significantly less than you could be if you had a professional manager minimizing that vacancy as much as possible for you. After all, you probably aren't available 7 days a week for most of the day like your property manager can be to show the home to potential tenants.
How do I decide which company to go with?
So with so many companies out there, which do you choose? The cheapest? The most expensive? The ones with the best online reviews?
All of these are factors, but when you interview different manages, you should have several questions ready to ask them. Also pay attention to how long it takes them to call you back, how punctual they are when they meet with you and whether or not they ask you questions.
If they take forever to call you back when you reach out inquiring about their services, chances are, they will do exactly that when managing your home. And if they aren't asking you questions, chances are they sign up every owner that walks through the door, which means they are desperate for business and aren't selective with who they work with.
If they aren't getting to know you or taking the time to understand your needs and situation up front, they probably aren't going to manage your property well. You may notice this to be the case with the cheapest companies out there.
Just remember, you get what you pay for!
As a last thought, make sure you have an easy out in case your property manager turns out to not live up to all of their promises. Most contracts are for one year, but can easily have a 30 day cancellation clause added. Be very wary of a company that wants to lock you in for at least a year so you can't jump ship if they aren't doing their job.
If after all this you still aren't sure if property management is right for you, check out our self-managing landlords guide. You will find a ton of information that will be very helpful in managing your own rental home.