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.
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.
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
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.
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
- Availability of the unit
- Other factors defined by the area
In my area we typically see on average a vacancy airbnb 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)
We will omit the remaining example property management services as typically they would not be provided by an owner anyway. Without including the advertising costs, when we add up these costs we have an expense of $155.00. If we use our vacancy ratio of 5% (or 6 weeks) and calculate our advertising costs we will need to add in $240.00.
The cost for an owner managed unit not using a property management company is then calculated as:
Rent * term = Gross Rent minus Vacancy Ratio = Income minus simple operating costs = Net Income or:
$700.00 * 12 = $8400.00 – $420.00 = $7980.00 – $395.00 = $7585.00 annually
Wow, a property owner who does the renting of a unit by themselves makes $403.00 more a year or $33.58 more a month then if they hired a qualified property management company!
However, I am not aware of too many property owners whose hourly employment rate is $10.00 per hour considering someone who makes $10.00 would find it difficult to obtain financing to purchase income property!
The question then becomes, how much is your time worth?
If your time, aggravation and effort to rent a property yourself are worth the added income of $403.00 per year or $33.58 a month, then by all means you should not hire a property management company! If on the other hand, less aggravation and effort and your time is worth more then $403.00 a year, you should consider using a property management company to take care of your income property.
A qualified property management company not only saves you time, effort and aggravation but also saves you money. What would happen if the unit would have been vacant longer then 6 weeks? The advertising costs would have eliminated all or part of that $403.00 a year you made!
Is it really worth it? I don’t think so.
If you own rental property, do yourself a favor and hire a reputable, qualified property management company.
Services such as:
- Tenant screening – Background and credit checking
- Application services
- Unit showing
- Online transaction processing with tenant and owner reporting
- Monthly account reporting
- Electronic funds transfer
Are all part of most property management companies standard services.
In addition, property management companies have professional full time staff to help you with all your needs: from creating the most efficient advertising campaigns to tenant screening and background checks to advice for repairs and staging to get the most income for your rental units.