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Another week, and it’s time yet again for CPI Capital’s weekly news briefing. This contains a mixture of updates, commentary and informative articles about the lucrative world of passive real estate investment.
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For many passive investors who scrutinise the key investment terms of a multi-family or BTR-SFR project, property management fees and some of the other fees involved with the investment can seem a little confusing at first.
So, this week we decided to review property management fees, what they cover and what services the supplier is providing.
What are Property Management Fees?
Once a property has been acquired or is nearing completion in the event of a new project, it needs to be managed, that is someone needs to take care of, amongst other things:
- cleaning, repair and maintenance of common areas;
- security and other staffing issues;
- finding and dealing with tenants (including collection of rents and arrears if any);
- any legal or administrative requirements involved with the property operation (licences, permits etc).
The general partner (“GP”) may choose to self-manage the syndicated multi-family or BTR-SFR property, directly recruiting its own staff and contractors. Or, more likely, hire a professional property management company.
Naturally, a third party management company will require fees to provide the necessary services, although It is intended to self-manage, the GP can still require a property management fee. However, some lenders require that an experienced third-party property management company be engaged, at least on the general partner’s first project or two.
Some of the key advantages of hiring a property management company include the fact that such a company should have extensive knowledge of the local rental market (ie vacancy rates, rental structures and source of tenants) and may be able to enhance investment returns. They are also usually better equipped than the GP to handle day-to-day operations of the property (ie handling operational problems or tenant’s repairs, plus collecting rentals of the units).
What are some of the key components of Property Management Fees?
Typically, property management fees are usually in the range of 4-10% for smaller properties up to about 100 units, with a lower range of 3-5% for larger projects, and are charged on all collected monthly income.
Some of the key components of property management fees include:
1. Setting-up fees
Sometimes called an “onboarding fee”, this one-time fee varies between $250-$500 per unit to be taken under management. This is a charge for the property management company (“PMC”) to do all of the preparatory work to set up the management of the property, such as a physical review of the property, determination of staffing numbers, setting up systems and including the property into its management systems.
It may also cover tenancy related documentation, and perhaps marketing materials if the PMC is tasked to seek tenants for the property.
2. Basic management fees
This basic management fee covers the day-to-day management of the multi-family or BTR-SFR property, such as collecting and administering rents, dealing with tenants, conducting annual property inspections, co-ordinating repairs and maintenance items, and dealing with emergency maintenance calls.
The management fee is usually calculated as a percentage of the gross “collected rent” ie the rent actually collected by the PMC—not the “due rent”, “expected rent” or “rental value of the units”.
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Some property managers charge a monthly flat fee and there are also cases where, if a PMC has full control over the financial aspects of the operation, they may be offered an incentive fee to maximise NOI and boost occupancy.
Some property management companies offer an all-inclusive fee which includes an array of services, whereas others provide core services for an agreed fee with a selection of other services to be added at an extra fee, according to the needs of the GP or property owner.
3. Fees for leasing units in the property
If they are required to seek tenants, PMC will charge a “leasing fee” which is, typically, generally equivalent to one month’s rent or perhaps between 50-100%.
A less popular alternative is a flat fee instead.
The leasing fee covers the costs of marketing the unit(s), showing to prospective tenants, screening applicants, preparing leasing contracts and undertaking move-in inspections.
4. Fees if a tenant renews their lease
Some property management companies charge a fee when/if a tenant renews their lease; and some do not. If charged, such lease renewal fee is usually around $200.
The fee covers assessing the current market rent, making any adjustments to the lease and having an update or new lease signed.
5. Fees for supervising repairs and maintenance
Depending upon the mandate given by the GP to the property management company looking after multi-family or BTR-SFR properties, there may be an additional “supervisory fee” involved. This may be for arranging and comparing quotations, selecting contractors and monitoring works.
Such fees only usually apply for non-routine or major repair or maintenance or improvement items, perhaps of a capital nature, and which the GP has given prior approval to
However, some property management companies will undertake such services as part of the base management fee.
6. Fees for eviction and related legal services
In the event it is necessary to evict a tenant for non-payment of rent or damage to a unit, many property management companies are able to handle evictions. However, in some cases they will need to contract the work to a local lawyer who specialises in residential evictions and may charge an extra fee for such supervision.
CPI Capital will contract out property management services for those multi-family or BTR-SFR syndicated properties with which it is involved, leaving the experts to get on with the business of day-to-day management.
CPI Capital carefully monitors the property management fees payable, as well as the performance of the engaged PMC to ensure that our passive investors are able to get the optimum investment returns. We believe that, as with other service providers, property managers should be clear and transparent with all their fees, no matter how large or small!
COO, Co-Founder CPI Capital