What Determines Property Management Fees for Rental Properties

Some of the things that dissuade people from investing in residential or commercial real estate are management hassles and difficulties. Repairing damage left by a disgruntled tenant, having to market a recently vacated unit, and collecting rent in a prompt manner aren’t tasks for the faint of heart. That’s why many investors end up turning to real estate management companies to deal with both their occupied units and vacant units.

Many potential clients, though, find themselves stymied by the not-so-simple matter of property management fees. Some simply don’t know how to evaluate whether or not a particular rate is fair. Others balk at any sort of fee, considering it an extra expense that eats into their cash flow.

This post will describe the typical services covered by a property management fee, various additional costs, types of fee structures, and a rough general rate that you can expect to pay.

What Is Included in a Property Management Fee?

Like many things in real estate, the exact services provided as part of a property management fee can vary from management company to management company. For instance, companies may choose to charge you based on a percentage of your rent (more on that below) or via flat fees. A few may adopt an à la carte structure, having a very low upfront fee while maintaining a long list of add-ons for which they charge. Many will offer a hybrid approach that combines one of these general approaches with elements of the others.

With all that being said, you can expect a management company to include a number of basic services in its fees. And while of these services may incur separate, individualized charges, they are generally considered to be part of a standard service structure. They include:

• Determining going rental rates for a specific property: Your property management company ought to know the rates in a general area and what a property in your condition can expect to command. The company should also discuss with you how certain rental policies (e.g., allowing pets) will affect your rent.
  • For example, if comparable properties in the area rent for $2,000 per month, your management company might suggest $1,900 to attract tenants quickly or $2,100 if the property has premium features.
• Marketing the property: This would involve taking reasonable marketing steps such as talking with realtors or leasing agents, posting fliers or ads, and showing the property.
  • For example, if a vacancy costs you $2,000 per month in lost rent, effective marketing that fills the unit in one month versus three months could save you $4,000.
• Evaluating tenants: Determining potential applicants’ financial stability, employment history, and criminal record helps guarantee a successful tenancy, as does finalizing all leases and agreements.
• Collecting rent in a timely manner: A property management company ought to ensure that you get your rent when it’s due and no later.
• Evicting tenants who have violated their leases: If there’s one aspect of property management that causes real-estate owners to seek outside help, it’s this one, and property management companies regularly handle the removal of nonpaying tenants.
• Inspecting the property when necessary: No property manager should simply assume that your real remains in good condition. Periodic inspections to determine that nothing is amiss are part and parcel of the package.
• Providing basic maintenance, repairs, and remodeling: From dealing with common tasks such as removing leaves and snow to overseeing larger renovation projects, property management companies helm the ordinary (and extraordinary) work that your building requires.
• Facilitating tenant transitions: When tenants inevitably leave for one reason or another, managers ascertain the state of the unit or facility, return any security deposit minus costs for damages, return the property to working order with cleaning and repairs, and restart the whole rental process.

Standard Fees Associated with Property Management

When hiring a property management company, understanding the standard fees involved is essential. These fees typically cover core services but can vary depending on the level of management needed. 

• Management Fee: This is the core charge for day-to-day operations like tenant communication, rent collection, and general oversight. It’s often charged as a percentage of monthly rent collected. 
  • For example, a typical 10% management fee on a $2,500 monthly rent would amount to $250 per month. For a property with five units at the same rent, the fee would total $1,250. 
• Leasing Fee: This fee covers the marketing, tenant screening, and lease negotiation process when filling a vacant unit. 
• Maintenance Fee: While routine maintenance is typically included, larger or specialized repairs may incur additional charges. 
• Eviction Fee: If evictions are necessary, these are often billed separately due to legal and logistical complexities. 
• Early Termination Fee: Some companies may charge this fee if the property owner cancels the management agreement before its term ends. 

Understanding these standard fees can help property owners budget effectively and compare management options. 

Fee Structures: Percent vs. Fixed Fees

Understanding how property management fees are structured can help property owners make informed decisions when choosing a management company. While percent-based and fixed-fee models are the most common, some companies also offer hybrid arrangements tailored to specific property needs. Below is a closer look at these fee structures and their potential impact on your bottom line. 

Percent of Rent Collected

This fee structure charges a percentage of the total rent collected from tenants. It’s a popular choice because it aligns the property manager’s success with the property owner’s, incentivizing timely rent collection and efficient occupancy management. Typical rates range between 8-12%, but these percentages may vary depending on factors like the property’s size, location, and the complexity of services provided. For example, properties in high-demand areas may have lower percentages due to ease of leasing, while more challenging properties could command higher fees. This model benefits owners who want a performance-driven agreement, as it motivates property managers to minimize vacancies and ensure maximum revenue generation. 

Fixed Fees 

A fixed-fee structure involves a set monthly charge for managing a property, regardless of the rent collected. This model is straightforward and can be ideal for property owners with smaller portfolios or properties with consistent rental income. However, fixed fees can become less cost-effective for larger properties or portfolios, as the costs may not scale proportionately with the services provided. Fixed fees often appeal to owners who prefer predictable expenses, offering them greater clarity when budgeting. However, it’s essential to ensure that the fixed fee covers all required services to avoid surprise add-ons. 

Hybrid Models

Many property management companies adopt hybrid fee structures, combining elements of both percent-based and fixed-fee models. For instance, a company might charge a fixed base fee to cover administrative tasks and basic oversight, with an additional percentage of rent collected for services like tenant placement, marketing, or maintenance. Hybrid models can provide flexibility and balance, especially for owners with diverse needs or larger properties that require a mix of routine and specialized management. These arrangements also offer transparency by allowing property owners to see where their money is allocated while providing the property manager with incentives to maintain high performance. 

By evaluating these fee structures and understanding how they align with your property’s unique needs, you can select a management agreement that optimizes cost-efficiency and ensures effective oversight. Always clarify what is included in any fee arrangement to avoid unexpected expenses down the road. 

What a Property Manager Typically Charges

Property managers will generally charge you anywhere from 8 to 12 percent of the monthly rental value of your property. However, let us be quick to say that this range is only a rough guideline. We’ve seen examples of fees that drop as low as 5 percent and rise to 15 percent. When selecting from among property managers, make sure that you’re comparing apples to apples. Sometimes seemingly pricey fees make a lot more sense when you understand what you’re getting.

Factors that Affect Property Management Costs

Property management fees can be influenced by several factors, each factoring into the overall cost of services. Understanding these variables can help property owners make informed decisions. 

• Property Location: Properties in high-demand urban areas or upscale neighborhoods often require more specialized management, resulting in higher fees. 
• Property Size and Complexity: Larger properties or multi-unit buildings require more resources for management, inspections, and maintenance, driving up costs. 
• Vacancy Rates: Properties with frequent tenant turnover may incur higher fees for marketing, tenant screening, and leasing services. 
• Level of Service Required: Comprehensive management, including full maintenance, compliance checks, and tenant transition services, will cost more than basic rent collection and communication. 
• Condition of the Property: Older properties or those needing regular repairs and upkeep may require additional fees for maintenance and compliance. 
• Regulatory Environment: Properties in regions with stringent regulatory requirements may incur higher costs for ensuring compliance. 

By understanding these factors, property owners can better anticipate costs and select the right property management plan. 

What to Look for (and Look out for) in Fees

Not every fee that you may encounter is on the up and up. In fact, some serve as downright warning signs that your manager may not be leveling with you. These include:

• Leasing fees: Companies can assess leasing fees as part of the screening procedure for new tenants, but this service should be considered basic instead of an add on. What’s more, the presence of leasing fees may encourage a property manager to increase tenant turnover, which is never good for your property.
• Vacancy fees: If you need to pay a vacantly fee when any of your units aren’t rented, think twice. Such an arrangement is little better than a percentage of rent due agreement.
• Setup fees: Providing a small sum to solemnize a property-management contract makes some sense, but often these fees do nothing more than line a manager’s pockets.
• Tenant late payment fees: Believe it or not, some property managers try to charge you when tenants fail to pay in a timely manner — and collecting rent in a timely manner is no small part of why they were hired in the first place. Avoid like the proverbial plague.

Reasons Why Property Management is Worth it

Finding the right property manager may seem like a complicated task. In the end, though, having a competent professional care for your tenants and your properties will increase your income, maintain the value of your real estate, and (most importantly) free up time so you can do bigger and better things. Millennium Properties wants to be that manager. We’ve helped countless clients sell, lease and manage properties throughout the Chicagoland and the Midwest since 1996. 

Take the hassle out of property management—contact us today to get a custom management plan!