During my daily activities driving around town looking at properties, I see many Rent By Owner signs on the lawns of vacant rental properties. Looking at these signs, I find it interesting that the owners haven’t asked themselves, is it really worth it?

I wonder if the property owners have really asked themselves some key questions:

• Am I really saving money by doing it myself?
• Am I prepared for the responsibility?
• Do I have all the tools I need, such as applications, credit and background checks, lease agreements, eviction forms, notices, repair and cleanup resources?
• Will the cost of doing it myself really save me money or will it cost more?

As a full-time professional property manager, I know from experience how difficult and expensive it is to manage a 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 income property management. My time is valuable! Why, as an income property owner, would you want to spend the hassle, effort and time it takes to earn a few extra bucks a year renting out a property yourself, when you can hire a reputable company to do it for you?

It’s a no-brainer to me. Isn’t your time worth more than $10.00 per hour or $33.58 per month or $403.00 per year for property? What I’m talking about? Let’s take a look at how I arrive at these numbers… Before we start looking at the costs associated with property management, let’s lay down some ground rules and identify and define some terms.

Rate

Property management companies charge between 5% and 35% for their services depending on:

• The rental term – Short, medium or long term
• Services offered – Concierge, cleaning service, etc.
• Repair services: on staff or contracted as needed
• Local Market – Some areas receive higher administration fees than others. Example: Los Angeles, California can charge rates of 20-30% for long term rentals where my market area charges much less.
• other factors

Property management services in my area for medium to long term rentals are approximately 10% of each month’s rent. Sometimes additional first month’s rental fee is charged to cover initial setup costs.

Lease Terms

I classify lease terms as:

• Short Term Rentals – Less than 1 month
• Medium term rentals – 1 to 6 months
• Long term rentals – 7 months to 1 year

The variables for renting in my market area depend on several factors:

• The season – Being a mainly tourist area; We go through several tourist seasons where our residence grows.
• Transfer in and out of military personnel and families
• increase construction

Seasons

Let’s break down the type of tenants by season so that we can estimate and evaluate the types of tenants we will typically have in any given season:

• Winter – During this season we have several types of renters including “snow birds”. “Snowbirds” tends towards medium 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 break” as well as families taking advantage of the holidays during the school year. An exciting aspect of the spring is the biannual relocation of military families to one or more of our local military bases.
• Summer – This season is mainly made up of short-term and medium-term renters. Visitors from all over the world travel to our area during the summer, staying anywhere from 2-3 days to 1-2 months. While visitors from the United States tend to stay short term, European visitors are more inclined to stay for 2 weeks or more.
• fall out – This is an interesting season and often the time of the year when local residents change their residence. It is also part of the biannual transfer of military families to one or more of our local military bases.

List of vacancies

An important factor to consider in estimating the costs to manage a revenue property is the Vacancy Rate. The vacancy rate is defined as the amount of time a rental property is vacant compared to the amount of time it is not.

The vacancy rate is governed not only by the seasons mentioned above, but also by:

• unit price
• Amenities – Pool, spa, allows pets, etc.
• the local economy
• Marketing
• Unit Availability
• Other factors defined by the area

In my area, we typically see an average vacancy rate of 2-4% for long term small multi-family rentals (duplexes and triplexes). However, during tough economic times, we might expect to see ratios as high as 6-7%! I have recently seen vacancy rates as high as 10-12% for various areas.

For ease of calculation, we will use a 5% vacancy rate as it is in the middle of the vacancy rates we expect to see in my market area. These may or may not reflect the proportions of expertise from other areas. It is advisable to seek the assistance of a qualified property management company in the local area to obtain accurate data.

Let’s do it…

Now that we have some guidelines to work with, we can make some informed estimates:

• List of vacancies
• Expected Rental Terms
• Property Management Costs

Using these guidelines, let’s look at the average costs for using a property management company. In our example we will be using a 2 bed 1 1/2 bath apartment that typically rents for $700.00 per month, utilities are not included and pets are not allowed.

The 10% property management fee will provide the following services:

• Marketing and Advertising – General (lawn sign, website, print, etc.)
• Tenant Screening/Application Services – Credit and Background Checks
• Unlimited Unit Showings: Using an average of 5 pre-qualified tenant showings per unit prior to renting.
• Online transaction processing for tenants and landlords
• monthly accounting report
• Monthly unit inspections for the first 3 months
• Tenant Notices: Breach of Lease, 3-Day Rent Notices and Late Payment Notices, etc.
• Tenant Evictions – NOTE: Only the start of this process is included. Expenses for complete evictions of tenants are generally paid by the landlord.

Our formula to calculate rental income will be:

Rent * term = Gross rent minus Vacancy rate = Net income:
$700.00 * 12 = $8400.00 – $420.00 = $7980.00 annually

We expanded this formula and included a 10% property management fee

Rent * Term = Gross Rent minus Vacancy Rate = Revenue – Property Management Fee = Net Revenue:
$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 intent of the article is to identify if using a property management company for a rental unit is worth the cost. Therefore, our example uses a simple net income calculation and not net operating income, which is much more complex and is 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. Now let’s put a price tag on just a few of the services we’ve identified being offered by the property management company using average prices:

Application Services – Application forms will cost approximately $5.00 for 5 forms

Marketing and Advertising – Yard 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 Show – $10.00 per hour, 5 shows (1 show per hour) = $50.00 (This is an extremely low rate and is used simply as a guide. I’m sure your time is worth much more than $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’ll skip the remaining example property management services, as they wouldn’t normally be provided by a landlord anyway. Not including advertising costs, when we add these costs together we have an expense of $155.00. If we use our 5% (or 6 week) vacancy rate and calculate our advertising costs, we will need to add $240.00.

The cost of an owner-managed unit not using a property management company is calculated as:

Rent * term = Gross Rent less Vacancy Rate = Rent less simple operating costs = Net Rent or:
$700.00 * 12 = $8400.00 – $420.00 = $7980.00 – $395.00 = $7585.00 annually

Wow, an owner who rents a unit for himself makes $403.00 more per year or $33.58 more per month than if he hired a qualified property management company!

However, I don’t know too many homeowners whose hourly employment rate is $10.00 an hour, considering someone making $10.00 would have a hard time getting financing to purchase property income!

The question then is, how much is your time worth?

If your time, exasperation, and effort to rent a property by yourself is worth the additional income of $403.00 per year or $33.58 per month, then you shouldn’t hire a property management company! If instead, less hassle and effort and your time is worth more than $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 hassle, but it also saves you money. What would happen if the unit had been vacant for more than 6 weeks? Advertising costs would have wiped out all or part of that $403.00 a year I was earning!

Really worth it? I do not think.

If you own a rental property, do yourself a favor and hire a reputable and qualified property management company.

Services like:

• Tenant screening: credit and background check
• service application
• unit showing
• Online transaction processing with tenant and owner reports
• Monthly account reports
• Electronic Funds Transfer

They are part of the standard services of most property management companies.

In addition, property management companies have full-time professional staff to help you with all your needs: from creating the most efficient advertising campaigns, to screening and background checks of tenants, to consulting for repairs and the staging to get the most revenue for your rental units.