How Property Management Companies Make Money

By Chris Wilson


Property management is a big business. Bloomberg reports that the US's biggest property management company has just over $32 billion in property under management. Top property management companies earn anywhere between $75 million and $500 million annually. 

Going by these metrics, you can estimate that even a relatively small property management firm can earn well over seven figures annually. Tell you what; these enterprises are not making money on management fees alone. There is more to this game. Read on and find out how management companies make serious bank.

Management fees

Yes, the management fee is often the first line of revenue for property management companies. Different companies structure their fees in different ways. The most common method is to take a percentage of the collected rent, and the industry considers this the easiest revenue structure for property under management.

That stated risk and other factors could change how the management fees are collected. Some companies will charge a fee per door. That means every property attracts a management fee regardless of its rented out or not. The argument here is that the management company uses resources to either actively maintain the property as it looks for clients or markets the property to prospective tenants.

The management fee can also be collected as a flat fee for every occupied unit. Under this structure, the landlord pays the property managers a flat fee for each unit's services under occupation. The flat-fee for doors under occupation is favored by landlords who wish to keep their rent cashflow separate from their fees paid to property managers. 

More often than not, that management fee is passed onto the tenant.

Maintenance fees

Depending on the lease agreement, the property managers might have to either pay for all repairs or have the landlord pay for the costs. In the first scenario, the property management company will charge an equivalent of what it costs to make the repairs then add additional amounts for their time.

The second scenario is often more lucrative than the first. Instead of passing on the cost of repairs to a third party, the property management company forms a subsidiary that handles property maintenance. The property management company then contacts the subsidiary to undertake all repairs within managed houses. 

Where the management company does not own a repair subsidiary, the management firm can hire a go-to firm that handles all their repairs. The property managers can make money by marking up repairs. Where marking up repair costs is impossible, the property management firm makes money by negotiating below-market repair prices with the third-party repair firm. The landlord or tenant is charged at the market rate for the repair works. 

The difference is what the property managers earn. Under this structure, the third-party repair firm is happy to work with the property management company under market price in exchange for volumes of work and exclusive access to repair contracts.

Signing-up fees

Managing a property takes time and costs money. A landlord or developer might want to concentrate on their core competency and leave the hassle of managing a property to a third party. 

Property management companies typically maintain a database of segmented tenants. The database could contain prospective tenants that developers and landlords are willing to pay to access. A property management company with a significant database can charge signing fees to the landlord who wishes to offload their management to the property managers. Such a fee can either be a flat rate or a percentage of potential income from the property. 

More often than not, the sign-up fee is correlated to the size of the property. A property projected to earn six-figure monthly will typically attract lower sign-on fees than a smaller property because the property managers know they will make more money on the recurrent management fee than on sign-up fees.

Viewing fees

The property manager can make money from the tenant and the landlord. When tenants are looking to view a house, the property management company can charge a fee. Many property management firms charge because it costs time and money to show a property. 

Additionally, the potential clients are saving time and effort by getting shown properties they are interested in. Potential tenants can be happy to pay for the convenience, especially in upmarket competitive areas where finding houses to rent can be a daunting task. Viewing fees can range anywhere from $50 to $200. 

Now, consider property management firms showing a house to five families every month. At an average of $150 a month per show, the company can earn well over $750 monthly before the house is even rented out. Viewing fees are part of the reason why many property management companies will be eager to list houses before they are even repaired or fully finished. 

Money can be made before any tenant ever sets foot in the house.

Lease fees

Tenants often have to pay lease fees when renting a space. Lease fees are supposed to cover the drafting of contracts, legal costs for the property managers, and credit processing fees when qualifying the potential tenants. 

In reality, the property management company already has contracts drawn up and stored as templates. Therefore, the fees charged for the legal drawing of the contract are almost always nearly all profit. Further, property management companies often have established efficiencies for establishing the credit status of potential tenants. 

Any fees charged for processing credit reports might be marked up, creating opportunities for more profit.

Real estate broker agent presenting and consult to customer to decision making sign insurance form agreement, home model, concerning mortgage loan offer for and house insurance.

Late fees

When the tent is late with their rent, the property managers often slap the tenant with late fees. There are two ways property managers can make money on late fees; the conventional way is to take a percentage of the late fees collected. The landlord agrees to pay that percentage in exchange for the service of collecting the late rent.

The second way is through charging tenants a convenience fee for any late rent payments, returned checks, and notices for late rent payments. The money collected this way is deposited directly to the property management companies accounts; the landlord does not get any part.

blond businessman happy expression

Consultation

You probably have heard marketing people say 'data is the new oil.' It's true; data is an asset class in today's world. 

The world's leading property management company has over 500,000 properties under management. The company manages properties in luxury homes, commercial spaces, student accommodation, affordable housing, market-rate housing, and senior homes. 

All these are categories that real estate investors and developers are looking to get into actively. 

A property management company with over 500,000 doors under management already has data on which real estate sectors perform the best. Such data can even be extrapolated to estimate the future earning potential for different real estate segments.

 Property management firms can create exclusive reports on the real estate industry's state and sell them for thousands of dollars.

Further, the property managers already have an idea of which locations are growing fastest. The leading property management company in the US has over 51 international offices and 19,000 members of staff. To put it mildly, that company has the depth to provide insights into real estate's direction to a significant degree. 

There are developers and real estate players who would pay millions for such insights. Considering real estate contributes between 15% and 18% of the US gross domestic product (GDP), it is apparent why insights from management companies are worth high dollar amounts.

Another avenue for monetization of existing data is insurance companies. Insurance companies need to know which areas are likely to experience growth then use that as a factor for calculating the risk profile for future real estate developments in the market segments. 

An insurance company would, for example, wish to know how the student accommodation industry is likely to grow in the next decade. Such insights can inform the risk associated with insuring student housing developments and ultimately affect how much an insurance company makes in the long-term.

Conclusion

Real estate is a multi-billion-dollar industry. At every pressure point, solutions cost money. Property management companies have access to multiple pressure points along the real estate product chain. All these pain-points form multiple opportunities to charge fees, and property managers legally make money from both the landlord and the tenant.

 By monetizing their unique position, property management companies have managed to create an industry that now has multi-billion-dollar players. After considering the discussed money-making avenues for property management companies, it is rational to conclude that the last piece of the puzzle is volumes. 

While there might be variations due to differences in markets and revenue structure, the number of doors under management is often the best metric for estimating how much a property management company makes. With more doors under management, the property management company finds ways to create a multiplier effect on their revenues. 

If you are looking to get into property management, the first step should be a plan on how to amass a big number of properties under management. With volumes, monetization should be easy.

Chris Wilson

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