Property management companies can be worth the weight in gold, especially if you are the type of person who would rather not deal with the trouble of the day to day operations of being a landlord or if you don’t live near your rental property. The companies deal with the tenants for you so you don’t have to. They will find and screen a potential renter, run criminal background and credit checks, and call references. They will also collect the rent, including chasing down delinquent rent and charging late fees. The property management company will even handle evictions and maintenance on the property.
If this sounds like something that would interest you, you might find yourself wondering how the property management company makes its money. There are 4 typical business models that a property management firm might decide to employ. Sometimes even a hybrid of these arrangements is used depending on the unique situation.
- Percentage of rent: This type of arrangement is the most common. The landlord signs a contract with the management company to allow it to rent out the units. The company generally takes somewhere between 5% and 20% of the monthly rent and gives the rest to the property owner. In this type of model, it isn’t unusual for the owner of the building to not even know who the renters are. This model is particularly useful because if there is no tenant, you don’t pay.
- Fixed rate: As its name would imply, this is a fixed amount paid to the company each month for their services. This type of business model is used when the property or lot is vacant. The property manager will monitor the property to keep it safe and secure from would-be vandals, squatters, or thieves. As there is no rent to take a percentage of, a flat fee is paid.
- Guaranteed rent: Not as common as a rent percentage or a fixed rate, another possibility is the “Guaranteed rent” arrangement. In this type of agreement, a fixed monthly rent is paid to the landlord and the property is sublet by the company for a higher rate. The difference between the two is the amount of profit the property manager makes.
- Revenue share: This type of arrangement is most commonly used in a commercial space. The property management company uses the property owners space in a fashion that generates revenue, such as a retail establishment, and a portion of the revenue is shared with the landlord.