By Paul Branton, Director of Investor Services for Home Rental Services
When you go to the grocery store and apples are on your list, do you also look at oranges? Of course not! If you want oranges, you look at the oranges. If you want apples, you look at the apples. Unfortunately, too often when talking to folks looking for a property manager, they don’t realize that they are comparing apples to oranges.
While the monthly management fee, tenant placement fee and other recurring costs are important to consider, those may not be the expenses that will matter the most at the end of the year. When you call around and simply ask property management companies what they charge, there’s a good chance you aren’t getting the whole picture.
In addition to fruit, I also compare property management to insurance premiums and coverage. If one provider is less expensive, is it because they offer the same service or coverage for less? I doubt it. It’s more likely that they are cheaper because the deductible is higher and/or the coverage is weaker.
What questions should you be asking?
In addition to the commonly asked management fee and tenant placement questions, here are a few more important questions to ask when interviewing a property manager:
- How long has your company been doing property management?
- How many properties do you manage?
- If you charge a flat fee, what extras might get charged each month?
- What is your average vacancy between tenants?
- Do you market and show the home while it’s occupied?
- What is your tenant renewal rate?
- What is your annual eviction rate?
- What is the average amount charged to the tenants Security Deposit?
- Do you “up charge” vendor invoices? If so, by how much?
These questions are important because, when the year comes to an end, all of the above will impact your bottom line.
You should ask how long the company has been in the property management business to determine if they have a track record of success. If they’ve been in business less than five years, they’re probably still “learning the ropes.”
You want to know how many properties they manage (and types of property) to determine how well your portfolio will fit into their business model. If the majority of their management is multi-family and you have a single family portfolio, that is likely not the best fit.
You need to know the average vacancy between tenants, renewal rate and eviction rate as all of those will impact your cash flow. Avoiding turnover, vacancy and make-ready expenses is critical to the success of owning rental investments.
Finally, you should know if vendor invoices are being “up-charged” by the property manager. This one could cost you, and it’s not uncommon. For instance, let’s say you need a new hot water tank and the vendor bill is $900 but the PM gets a 10% “referral fee.” You are now paying $990. This up charge can easily add a 1-2% difference in the annual cost of management.
Just as you should not buy an orange when shopping for apples; you should not hire a property management company based solely on management and tenant placement fees. Be sure to ask more questions and get the whole picture.