Why You Should Not Hire a Property Management Company

During my daily activities driving around town looking at properties, I see many For Rent By Owner signs on lawns of vacant rental property. As I see these signs, I find it interesting that the owners have not asked themselves, is it really worth it?

I wonder to myself if the property owners have actually asked themselves some key questions:

Am I actually saving money doing it myself?

Am I prepared for the responsibility?

Do I have all the tools I need such as Applications, credit and background checks, leases, eviction forms, notices, repair and cleaning resources?

Will the cost of doing it myself actually save me money or will it cost more?

As a full time professional property manager, I know from experience how difficult and costly it is to manage rental property. 

How do I know this? 

Because I do it for a living, I have unique insight into the activities and costs associated with managing income properties. My time is valuable!  Why would you as an income property owner want to invest the aggravation, effort and time it takes to make a few extra dollars a year renting a property yourself, when you can hire a reputable company to do it!

It's a no brainer to me.  Isn't your time worth more then $10.00 per hour or $33.58 per month or $403.00 a year for one property! What am I talking about?  Let's take a look at how I arrive at these figures... Before we begin to look at the costs associated with property management, let's set a few ground rules and identify and define some terms.

Fees

Property management companies charge anywhere from 5-35% for their services based on:

The rental term - Short, mid or long term

Services offered - Concierge, housekeeping etc

Repair services - On staff or hired as needed

Local market - Some areas receive higher management fees then others.  Example: Los Angeles California may charge 20-30% fees for long term rentals where my market area charges much less.

Other factors

Property Management services in my area for mid and long term rentals run approximately 10% of each month's rent.  Sometimes, an additional first month's rent fee is charged to cover initial setup costs.

Lease Terms

I classify lease terms as:

Short term rentals - Less then 1 month

Mid term rentals - 1 to 6 months

Long term rentals - 7 months to 1 year

Variables for renting in my market area depend on several factors:

The season - Being a primarily tourist oriented area; we go through several tourist oriented seasons where our residency swells.

Transfer in and out of Military personnel and families

Construction increases

The Seasons

Let's break down the type of renters by season so we can estimate and gauge the types of renters we will typically have in a given season:

Winter - During this season we get several types of renters which include "snowbirds".  "Snowbirds" tend towards mid term rentals.  They come to our area during the winter months and their primary residences are often the northern United States and Canada.

Spring - The spring season brings short term renters in the form of "spring breakers" as well as families taking advantage of breaks during the school year.  An interesting aspect to spring is the semi annual transfer of military families to one or more of our local military bases.

Summer - This season consists primarily of short term renters and midterm renters.  Visitors from all over the world travel to our area during summer and stay anywhere from 2-3 days to 1-2 months.  While visitors from the United States tend towards short term, European visitors lean more towards 2 weeks or more.

Fall - This is an interesting season and often the time of year local residents change residences.  It is also part of the semi annual transfer of military families to one or more of our local military bases. 

Vacancy ratio

An important factor to consider in estimating the costs to run an income property is the Vacancy Ratio.  Vacancy ratio is defined as the amount of time a rental property is vacant compared to the amount of time it is not.

Vacancy ratio is governed by not only the seasons as mentioned above, but also:

The price of the unit

Amenities - Pool, spa, allow pets, etc.

The local economy

Marketing

Availability of the unit

Other factors defined by the area

In my area we typically see on average a vacancy ratio of 2-4% for small multi-family long term rentals (duplexes and triplexes).  However, during difficult economic times we could expect to see ratios as high as 6-7%!  I've recently seen vacancy ratios as high 10-12% for several areas.

For ease of calculation, we will use a 5% vacancy ratio since it is in the middle of the vacancy ratios we expect to see in my market area.  These may or may not reflect the ratios other areas experience.  It is advisable to seek the assistance of a qualified property management company in the local area for accurate data.

Let's get to it...

Now that we have a few guidelines to work with, we can make some educated estimates:

Vacancy ratio

Expected rental terms

Property Management Costs

Using these guidelines, let's look at the average costs to use a Property Management company. In our example we will use a 2 bedroom 1 ½ bath apartment which typically rents for $700.00 per month utilities not included and no pets allowed.

The property management fee of 10% will provide the following services:

Marketing and advertising - general (lawn sign, website, print, etc.)

Tenant screening/Application services - Background and credit checking

Unlimited unit showing - Using an average of 5 pre-qualified tenant showings per Unit before is rented.

Online transaction processing for tenant and owner

Monthly accounting report

Monthly Unit inspections for the first 3 months

Tenant notifications - Failure to conform to Lease, 3 day rental notices and late payment notices, etc.

Tenant evictions - NOTE: Only the beginning of this process is included.  Expenses for full tenant evictions are typically paid by the owner.

Our formula for calculating rental income will be:

Rent * term = Gross Rent minus Vacancy Ratio = Net Income:

$700.00 * 12 = $8400.00 - $420.00 = $7980.00 annually

We expand on this formula and include a property management fee of 10%

Rent * term = Gross Rent minus Vacancy Ratio = Income - Property Management Fee = Net Income:

$700.00 * 12 = $8400.00 - $420.00 = $7980.00 - $798.00 = $7182.00 annually

Note: This article is not intended to be an investment strategy article.  The intention of the article is to identify whether it is worth the cost to use a property management company for a rental unit.  Therefore, our example uses a simple calculation of net income and not Net Operating Income which is much more complex and used for investment strategies.

In our example calculation we see that without any negative impacts affecting a rental unit, the property management company made a whopping $798.00 per year on 1 unit. Let's now put a price tag on just some of the services we've identified being offered by the property management company using average pricing:

Application services - Application forms will cost approximately $5.00 for 5 forms

Marketing and advertising - Lawn sign - $15.00, Website - $40.00 per month, Newspaper advertising - $40.00 per week

Tenant screening - Background check - $15.00, Credit check - $15.00

Unit showing - $10.00 per hour, 5 showings (1 showing per hour) = $50.00 (This is an extremely low rate and used simply to provide a guide.  I'm sure your time is worth much more then $10.00 per hour).

Tenant notifications - Notification forms will cost approximately $5.00 for 5 forms, Hourly cost for 1 notification - $10.00 (includes travel time)