Property Management - Operations & Fee
The typical activities in managing a property include the collection of rent and assessing penalties in the event of late payment. It also includes the accounting services including the creation of monthly financial statements and administration of the lease including enforcement, tenant qualification and collection of security deposits.
In addition it includes day to day activities like repair and maintenance as well as the provision of twenty four hour emergency services. Finally it also includes monitoring and managing vacancies and marketing of vacant units to potential tenants.
Most management companies combine their collections from all the different properties they manage into one single account. As a property owner you should not hire a management company that functions from a common account as this can lead to lot of confusion and financial mix ups. You should also look into the way the management company structures its process including the collections system. Ideally you management company create separate checking accounts for each property. The checking account is usually used to deposit all the rent collections. All the properties' expenses are taken care of from that single account. Once all the bills are paid, if there is any balance left it belongs to the property and its owner(s). Another important point to consider is whether the owner would have authority to sign all the checks and approve all the expenses.
An equally important aspect of the management company’s operation is its fee structure which should be clearly mentioned in the contract. Management fee is usually determined as percentage of effective gross income (after accounting for vacancy and credit loss). Generally, management fee is between four to six percent for smaller properties and between two to four percent for larger properties. As a rule, residential properties have higher fees than commercial properties because they entail relatively more work.
In addition to the above, management companies are also responsible for the supervision of construction work and capital improvements made to the property. The management company is responsible for reviewing plans and proposals, negotiating bids with various contractors and vendors and for supervising the construction and capital improvement process. Generally, the fee for this kind of work ranges between five to ten percent for jobs under $20,000, and from three to five percent for jobs above $20,000.
Property management companies also make money by getting leasing commission. They are responsible for either renewing old leases or getting new leases.
Property owners on the other hand are responsible to reimburse some expenses to the property management company. These expenses include but are not limited to mailing expense, bank service charges, travel expenses etc.