Breaking Down the Cost of Hiring a CRE Property Management Company
A property management company can bring a lot of value to you as a commercial real estate property owner. Managing even a single property can be a full-time job. If you have multiple properties, that time and energy commitment only increases. Property management companies can help you maintain your buildings, fill them with quality tenants, collect rent on your behalf, and even execute evictions when necessary.
The cost for this type of work varies property by property. The exact amount you will pay per building depends on multiple factors, such as:
● Property location: If your building is in the heart of a thriving metropolis, you can expect rates to be higher than one in an off-the-beaten-path location.
● Building condition: Older buildings or buildings with a lot of maintenance issues will naturally require more upkeep. This translates into higher labor costs than a brand-new building with fewer maintenance issues.
● Building size: The larger the property, the higher the monthly cost to maintain it.
● Type of property: Different types of property have different needs, and therefore associated costs will vary. For example, the cost will be different for a single-family unit than for a multi-family unit.
● The extent of services rendered: The more you ask your property management company to do for you, the more costs you will incur. Remember that your property management company can help you increase profits, which in turn justifies the higher fee.
These variables determine how much a property management company will charge as a base rate for their services. There may also be additional fees charged by the property management company.
Let’s first take a look at the base management fee to better understand how much it costs to hire a CRE property management company.
Base Management Fee: A Percentage of Rent Collected
When property management companies take a percentage of your collected rent each month, they do so at a rate of approximately 4-12%. Your exact percentage will be agreed upon in your contract.
Notice that the heading says “percentage” instead of “flat rate” and “rent collected” instead of “rent owed.” These are two important distinctions in property management fee structures. Some property management companies may want to charge you a flat rate each month no matter how many tenants you have or how much rent you collect from them. This can be misleading so read your contract carefully to ensure that the property management company doesn’t have hidden fees associated with their “flat rate.”
Rent collected instead of rent owed is another potentially costly difference. If your contract states that the property management company will collect their percentage on all rent owed, you must pay your property management company their percentage on all the rent you’re meant to receive—even if you don’t receive it. This can be devastating for CRE owners with tenants who fall behind on their rent. To avoid this, see that your contract stipulates that you pay only on the money collected, not the money owed.
Other Property Management Fees
In addition to the base management fee, your property management company may want to charge any or all of the following monthly fees.
Initial Setup Fee
Your property management company may or may not charge this fee. If they do charge a setup fee, it is a one-time payment that covers things like property inspections, tenant notifications, and account setup. This payment is normally only a few hundred dollars.
Tenant Placement Fee
There are advertising, screening, and move-in costs associated with placing tenants. Because of this, property management companies may charge a flat fee or a percentage of the rent specifically to cover tenant placement costs.
Maintenance Fee
This fee may already be included in the monthly management fee. It covers regular repairs and maintenance and may also be used to create a repair fund. Property managers keep money in this fund to use when a larger repair is needed.
Eviction Fee
If your management company is going to handle tenant evictions on your behalf, they will almost always charge you a fee to do so. This may be a few hundred dollars per eviction in addition to any court costs accrued.
Early Termination Fee
This fee applies if you break your contract early with the property management company. Check your contract carefully to understand what the rules are around early termination between you and your property management company.
Lease Termination Fee
The lease termination fee comes into play if a tenant breaks their lease early. Early lease terminations can hurt your bottom line, as there is now a vacancy where a monthly rent-payer used to be. Not all property management companies charge this fee. Talk it over with your potential new management partner before you sign any contracts.
Lease Renewal Fee
Happier than a broken lease is a lease renewal. This means your tenant is going to sign on for at least another year, resulting in increased rent and a stronger tenant-owner relationship in most cases. Processing a lease isn’t particularly difficult, but it does take time and some resources. Expect a fee of $100-200 or so for your property management company to process a lease renewal.
Late Payment Fee
A late payment fee usually means the property management company wants to charge you a fee on top of the percentage they take from the late rent and the accrued late payment fees. It’s verging on double-dipping, and it’s the one fee on this list you should consider negotiating away if you encounter it.
Does Your Property Management Company Have Your Best Interest at Heart?
We do. Our goal at Maddox Companies is to ensure your properties are well-maintained profit centers you can count on. If you’re looking for a reliable company with a proven track record to manage your commercial real estate property, give us a call today.