During my daily activities driving around town looking at properties, I see many For Rent By Owner signs on lawns of vacant rental property. As I see these signs, I find it interesting that the owners have not asked themselves, is it really worth it?
I wonder to myself if the property owners have actually asked themselves some key questions:
Am I actually saving money doing it myself?
Am I prepared for the responsibility?
Do I have all the tools I need such as Applications, credit and background checks, leases, eviction forms, notices, repair and cleaning resources?
Will the cost of doing it myself actually save me money or will it cost more?
As a full time professional property manager, I know from experience how difficult and costly it is to manage 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 managing income properties. My time is valuable! Why would you as an income property owner want to invest the aggravation, effort and time it takes to make a few extra dollars a year renting a property yourself, when you can hire a reputable company to do it!
It’s a no brainer to me. Isn’t your time worth more then $10.00 per hour or $33.58 per month or $403.00 a year for one property! What am I talking about? Let’s take a look at how I arrive at these figures… Before we begin to look at the costs associated with property management, let’s set a few ground rules and identify and define some terms.
Property management companies charge anywhere from 5-35% for their services based on:
The rental term – Short, mid or long term
Services offered – Concierge, housekeeping etc
Repair services – On staff or hired as needed
Local market – Some areas receive higher management fees then others. Example: Los Angeles California may charge 20-30% fees for long term rentals where my market area charges much less.
Property Management services in my area for mid and long term rentals run approximately 10% of each month’s rent. Sometimes, an additional first month’s rent fee is charged to cover initial setup costs.
I classify lease terms as:
Short term rentals – Less then 1 month
Mid term rentals – 1 to 6 months
Long term rentals – 7 months to 1 year
Variables for renting in my market area depend on several factors:
The season – Being a primarily tourist oriented area; we go through several tourist oriented seasons where our residency swells.
Transfer in and out of Military personnel and families
Let’s break down the type of renters by season so we can estimate and gauge the types of renters we will typically have in a given season:
Winter – During this season we get several types of renters which include “snowbirds”. “Snowbirds” tend towards mid 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 breakers” as well as families taking advantage of breaks during the school year. An interesting aspect to spring is the semi annual transfer of military families to one or more of our local military bases.
Summer – This season consists primarily of short term renters and midterm renters. Visitors from all over the world travel to our area during summer and stay anywhere from 2-3 days to 1-2 months. While visitors from the United States tend towards short term, European visitors lean more towards 2 weeks or more.
Fall – This is an interesting season and often the time of year local residents change residences. It is also part of the semi annual transfer of military families to one or more of our local military bases.
An important factor to consider in estimating the costs to run an income property is the Vacancy Ratio. Vacancy ratio is defined as the amount of time a rental property is vacant compared to the amount of time it is not.
Vacancy ratio is governed by not only the seasons as mentioned above, but also:
The price of the unit
Amenities – Pool, spa, allow pets, etc.
The local economy
Availability of the unit
Other factors defined by the area
In my area we typically see on average a vacancy ratio of 2-4% for small multi-family long term rentals (duplexes and triplexes). However, during difficult economic times we could expect to see ratios as high as 6-7%! I’ve recently seen vacancy ratios as high 10-12% for several areas.
For ease of calculation, we will use a 5% vacancy ratio since it is in the middle of the vacancy ratios we expect to see in my market area. These may or may not reflect the ratios other areas experience. It is advisable to seek the assistance of a qualified property management company in the local area for accurate data.
Let’s get to it…
Now that we have a few guidelines to work with, we can mak