The Clear Costs of Property Management Companies

Professional property management has typically been an industry that does not disclose its prices and fees on easy-to-find information pages on websites. It has been an industry that treated relationships more like business-to-business, requiring proposals to be requested and a “tailored offer” made to you.

This has changed, and while not every company is transparent in its pricing, enough companies are that you, as a landlord, can find the stated costs companies will bill. These include both traditional and modern fees.

Traditional fees that have been industry standard for decades include:

• Monthly management fee
• Leasing fee

The monthly management fee is the recurring and standard expense a landlord will have every month. This will either be a percentage of the monthly rent or a flat fee that stays the same each month.

In Orange County, California, the typical management fee for a residential property varies depending on whether you have a single-family home or a multi-unit property, as more units will reduce the fee. The standard cost will be between 5% and 8% of the rent, or $125 to $200 in management fees. Some companies may bill as low as $100 a month or as high as $300 a month, and you’ll have to determine whether the value is there for the price.

Leasing fees, however, are only billed when a property is vacant and a new resident needs to be found, vetted, and placed in the property. This fee can also be a percentage or a flat fee, with most companies billing:

• 40% to 50% of one month’s rent
• 5% to 6% of one year’s rent
• $1,000 to $1,500 as a flat fee

These are the traditional fees that have been in place for decades, but in recent years more costs are being routinely billed by management companies, such as:

• Year-end documentation fee of $50 to $100 for providing tax documents
• Inspection fees of $100 to $200 to conduct a property walkthrough and inspection
• Luxury marketing fees of $250 to $500 for premium marketing photos or advertising
• Renewal fees of $200 to $300 for renewing the current resident’s lease
• Technology fees of $10 to $25 per month for providing client access to management software

These are the main fees disclosed by management companies, either as part of a one-size-fits-all management proposal or through a tiered model in which the higher-priced services are “included” or “free” at the higher price point.

The Hidden Costs of Property Management Companies

Beyond the upfront and stated fees you may find on a management company’s website, or even hear disclosed by a salesperson from that company, there are likely additional expenses that you, as a landlord, need to be cautious of.

Hidden fees are part of your total cost when you hire a management company and need to be understood. Consider this example: you have two management companies you are reviewing that have similarly good reviews. The first company charges 6% of the monthly rent, which, at $3,000 a month, is $180. The second company bills a $100 flat fee each month. The latter looks cheaper until you account for hidden fees billed monthly or annually that actually cost you an extra $100 per month on average.

It is important to note that any fee has to be disclosed to clients in the management contract or it cannot be billed, but these expenses can be hard to notice in a multi-page document filled with legal and industry jargon. Every management company is different, and many may not charge these hidden costs, but what types of fees should you expect and look for?

• Preventative fees
• For-profit fees
• Hourly work

Preventative fees are expenses that a management company charges to discourage behavior it does not want occurring. This primarily applies to tenants, such as late fees to encourage on-time payment and lease-break fees to encourage residents to remain for the lease term. Some also apply to landlords, including:

• Termination costs for ending management service
• Home-warranty coordination fees for working with a home-warranty company instead of the management company’s preferred maintenance vendor

For-profit fees are additional costs that a management company bills primarily to generate additional revenue without incurring much additional work. They are billed for the management company to make more money, which is in its best interest, even when the fee does not provide meaningful value to you as a client. Such fees can include:

• Client onboarding fees, in which the company charges you to add you and your property information as a customer before billing you for monthly services
• Vacancy management fees, in which the company bills you for managing the property even when it is empty and no rent is being collected
• Maintenance markups, in which the company receives compensation from a contractor who performs work on your property or bills extra for coordinating and organizing the maintenance work

The final hidden fee is not truly hidden, but merely not billed on a routine cycle. This is hourly work and means additional work a property manager has to perform outside the scope of standard property management. Typically, this is billed at two to three times the property manager’s hourly wage and can include:

• Being onsite for a permit inspection
• Going to small claims court for a client
• Collecting mail or packages delivered to the rental property instead of the client’s home

How Much Property Management Companies Actually Make

In an effort to pull back the curtain on the property management industry, we want to take a final moment to discuss what a professional property management company actually makes.

After all, the reason a company has hidden fees needs to be understood: is it greed or necessity?

The truth is somewhere in the middle and varies from company to company.

Across the residential property management industry, the average profit margin is reportedly 15.2%. This profit is the money the business can pay its owner after all expenses, such as rent, payroll, software costs, insurance, supplies, and many other operating costs.

This 15.2% profit margin is not perfectly reliable, however. The number accounts for companies that self-reported, so selection bias may exist if lower-profit companies did not disclose their results or if higher-profit companies were more likely to report, skewing the average.

Additionally, this does not account for large multi-unit management companies, which are often owned and operated by the owner of the apartment building they manage. It is cheaper to use your own time at cost than to pay for a professional service at a markup.

A 15.2% margin is respectable, but it is nothing extraordinary. Without hidden costs that do not incur a corresponding direct expense, those fees could be the sole reason some companies make a profit.

After all, California, and Orange County in particular, are high-cost-of-living areas that demand higher commercial rent, salaried employees earning $80,000 or more, and rising business costs. Those costs can be nearly impossible to offset by charging $120 to manage a property in a market where the majority of owners self-manage, creating a smaller marketplace in which to attract clients.