What are Property Management expenses?
Property management expenses are the costs associated with the operation and maintenance of a real estate property. These expenses are incurred by property owners, landlords, or property management companies responsible for overseeing and maintaining the property. Property management expenses can vary depending on the type of property (e.g., residential, commercial, industrial) and its size, location, and condition. Some common property management expenses include:
1: Property Management Fees: Property management companies typically charge a fee for their services, which can be a percentage of the rental income or a flat monthly fee.
2: Maintenance and Repairs: This includes expenses for regular upkeep, repairs, and improvements to the property. It covers things like plumbing, electrical work, HVAC maintenance, and other repairs necessary to keep the property in good condition.
3: Utilities: Property owners often cover some or all of the utility costs, such as water, sewer, garbage collection, and, in some cases, electricity or gas.
4: Property Insurance: Insurance premiums for the property, including fire insurance, liability insurance, and other coverage, are considered property management expenses.
5: Property Taxes: Property owners are responsible for paying property taxes to local authorities.
6: Marketing and Advertising: Costs associated with advertising vacancies and marketing the property to potential residents.
7: Legal and Professional Fees: Expenses related to legal counsel, such as drafting leases and handling resident disputes, as well as fees for other professionals, like accountants or property appraisers.
9: Resident Screening and Background Checks: Costs associated with screening potential residents, including background checks, credit reports, and reference checks.
10: Administrative Costs: Office supplies, postage, and other miscellaneous expenses related to the administrative aspects of property management.
11: HOA or Condo Fees: If the property is part of a homeowners association (HOA) or condominium association, fees associated with these organizations are considered property management expenses.
12: Landscaping and Grounds Maintenance: Costs for maintaining the landscaping and outdoor areas of the property, including lawn care, snow removal, and tree maintenance.
13: Property Management Reserve Fund: Setting aside funds for future repairs, maintenance, or unexpected expenses is a prudent financial practice.
14: Vacancy Loss: When the property is vacant, the owner may incur expenses related to marketing, maintenance, and utilities without rental income.
15: Eviction Costs: Expenses associated with evicting residents, such as legal fees and repairs to the property if damage is caused during the eviction process.
It’s important for property owners and managers to budget for these expenses and keep accurate records to ensure that the property remains profitable and well-maintained. The specific expenses and their allocation can vary depending on the property’s location, type, and the terms of lease agreements.
For a free worksheet to track your property management income and expenses, check out this article.
Generating Income In Property Management?
Property management typically generates income for property owners and management companies through various sources. Here are some common income items associated with property management:
1: Rental Income: This is the primary source of income for property owners and property managers. It includes the monthly rent collected from residents occupying the property. Rental income can vary depending on factors like the property type, location, and market conditions.
2: Management Fees: Property management companies charge property owners a fee for their services. This fee can be a percentage of the rental income collected or a flat monthly fee. It serves as compensation for the property management company’s efforts in maintaining and overseeing the property.
3: Lease Renewal Fees: Some property management companies charge a fee when a lease is renewed with an existing resident. This fee covers the administrative costs associated with renewing the lease.
4: Late Fees: Depending on management contracts, property managers may charge resident late fees when rent payments are overdue. These fees can contribute to the property’s income.
5: Pet Fees: If a property allows pets, landlords or property management companies may charge pet fees or pet deposits to compensate for potential damage or additional cleaning required.
6: Application Fees: When prospective residents apply for a rental property, they may be required to pay an application fee to cover the cost of background checks and processing.
7: Parking Fees: If a property has dedicated parking spaces or garages, property managers may charge residents for their use.
8: Storage Rental: Some properties offer storage units for rent to residents which allows for additional revenue in addition to the rent collected.
9: Security Deposit Interest: Depending on local laws, property owners may be required to pay interest on security deposits held for residents. This interest can be considered income, although it is often a small amount.
10: Income from Common Areas: In the case of commercial properties or multifamily housing complexes, income may be generated from common areas or amenities, such as vending machines, laundry facilities, or community event rentals.
These income items can vary depending on the specific property, its location, and the terms of lease agreements. Property owners and management companies should keep accurate financial records whether manually with spreadsheets or with a designated property management software and ensure that all income is properly accounted for and reported.
What are the monthly expenses in property management
The average monthly costs in property management can vary widely depending on factors such as the type of property, its location, size, condition, and the specific services provided. Property management expenses typically fall into several categories, and the costs within each category can vary significantly. Here’s a breakdown of some of the most common monthly costs associated with property management:
1: Property Management Fees: Property management companies typically charge a percentage of the monthly rent collected as their fee. This is the primary way property managers make money. This fee can range from 4% to 12% of the rent, but it varies depending on the market and the services provided. On average, you might expect to pay around 8% of the monthly rent as a management fee.
2: Maintenance and Repairs: The cost of maintaining and repairing the property can vary greatly depending on its age and condition. Property owners should budget for ongoing maintenance, which might range from 1% to 3% of the property’s value annually. On a monthly basis, this equates to approximately 0.08% to 0.25% of the property’s value.
3: Property Taxes: Property taxes are typically paid annually or semi-annually, but they can be broken down into monthly costs for budgeting purposes. The monthly cost will depend on the property’s assessed value and the local tax rates.
4: Insurance: Property insurance costs can vary based on the type of coverage, location, and property type. On average, property insurance might cost between 0.25% and 0.5% of the property’s value annually, which translates to roughly 0.02% to 0.04% of the property’s value monthly.
5: Utilities: If property owners cover some or all of the utilities (e.g., water, sewer, garbage), these costs will vary depending on usage, local rates, and the number of units or residents.
6: Advertising and Marketing: Costs associated with advertising vacancies will depend on the property’s vacancy rate and marketing strategies. Budgeting for a few hundred dollars per month for advertising expenses is common.
7: Property Management Software: Costs for property management software can range from a few dollars per month for basic tools to hundreds of dollars per month for comprehensive platforms. There is a wide variety of softwares available so it is crucial to find the right fit for your wants and your budget.
8: HOA or Condo Fees: If the property is part of an HOA or condo association, monthly fees will be charged by the association and can vary greatly.
9: Landscaping and Grounds Maintenance: The cost of landscaping and grounds maintenance will depend on the property’s size and the level of care required.
10: Miscellaneous Expenses: These can include office supplies, postage, and other administrative costs associated with property management.
It’s essential to note that these figures are approximate averages, and actual costs can vary significantly based on the specific property and market conditions. Property owners and management companies should create a detailed budget to track and manage their monthly expenses accurately. Additionally, property management expenses can fluctuate based on unforeseen repairs, vacancies, and other factors, so having a financial buffer or reserve fund is often advisable.
What should I base my operating budget on as a property manager?
As a property manager, you will base your operating budget on several key factors and considerations to ensure the effective and efficient management of a property. These factors can vary depending on the portfolio mix of a property and its specific characteristics. Here are common elements that influence the creation of an operating budget for property management:
Historical Data: Property managers often start by reviewing historical financial data, including income and expenses from previous years. This data provides a baseline for understanding the property’s financial performance. Typically, property managers incorporate software to track this data, such as Property Meld.
Current Market Conditions: Property managers assess the current real estate market conditions, including rental rates, vacancy rates, and property values in their area. This information helps in making realistic revenue projections.
Property Type: The type of property (e.g., apartment complex, office building, retail space) plays a significant role in budgeting. Each property type has unique income and expense considerations.
Property Size and Units: The size of the property and the number of rental units or leasable spaces directly impact expenses related to maintenance, utilities, and common area management.
Lease Agreements: Lease agreements with residents outline rent amounts, lease terms, and any additional fees or responsibilities (e.g., utilities, maintenance) for both residents and property owners. These terms affect revenue projections and expense allocations.
Maintenance and Repairs: Property managers consider the condition of the property and the expected maintenance and repair needs. They estimate the costs associated with routine upkeep and necessary improvements.
Property Taxes: Property managers factor in property tax assessments and payments based on local tax rates and the property’s assessed value.
Insurance Costs: Insurance premiums for property coverage and liability insurance are included in the budget.
Utility Costs: If property owners are responsible for utilities, property managers estimate monthly utility expenses based on historical usage and local utility rates.
Vacancy Rates: Property managers estimate potential vacancy rates and account for the costs associated with marketing and preparing units or spaces for new residents.
Market Research: Property managers may conduct market research to assess the competitive landscape, evaluate rental rates, and identify potential opportunities for increasing income.
The operating budget serves as a financial roadmap for property management, helping property owners and managers plan for income and expenses throughout the year. It’s a dynamic document that may be adjusted as circumstances change, such as unexpected maintenance issues or shifts in the real estate market. Effective budgeting is crucial for maintaining the financial health and profitability of a property.
How do you calculate Property Management fees?
Property management fees are typically calculated as a determined percentage of the monthly rental income generated from the property. Property management companies charge this fee to cover their services in overseeing and maintaining the property. The exact percentage can vary depending on several factors, including the location, type of property, and the range of services provided by the management company. Here’s an example of how you can calculate the property management fee:
Determine the Monthly Rental Income: Calculate the total monthly rental income generated by the property. This includes the rent collected from all residents.
Choose the Percentage Fee: Property management companies typically charge a percentage of the monthly rental income as their fee. The percentage can vary widely but is often in the range of 4% to 12%. The specific percentage should be outlined and agreed upon in the property management agreement between the property owner and the management company.
Calculate the Management Fee: Multiply the monthly rental income by the chosen percentage to calculate the property management fee. The formula is as follows:
Management Fee = Monthly Rental Income x Percentage Fee*
For example, if the monthly rental income is $5,000, and the property management company charges a 8% fee:
Management Fee = $5,000 x 0.08 (8%) = $400
In this case, the property management fee would be $400 for the month.
It’s important to note that some property management companies may charge a flat monthly fee instead of a percentage of rental income, especially for commercial properties or properties with unique management needs. Additionally, there may be additional fees for specific services beyond the basic property management fee, such as lease renewal fees, advertising fees, or maintenance coordination fees. All fees and terms should be clearly outlined in the property management agreement to avoid misunderstandings.Failing to create a comprehensive property management budget can lead to property managers not setting aside enough for emergency maintenance repairs or to reach their growth goals. Without a set budget, it is easy to overspend which will have a negative impact on your ROI and ultimately affect relationships with property owners.
Property Meld can help you track maintenance expenses and compare them to previous years to help you create a budget that aligns with your goals. In addition, you can compare your average maintenance spend to others in your area to make sure you aren’t overspending or being overcharged by vendors.
Schedule a demo with our team, to see how we can help you maximize your profits.
