Sit tight for a few minutes. We’re going to pull back the curtain on a secret most property management companies would rather not share.
But first, I’d like you to take off your investor hat and think as if you are the owner of a “normal” property management company.
The perspective of a “normal” property management company owner
As an owner of a “normal” property management company, you’d realize that you’re incentivized to put a new tenant in the investor’s property each year. Specifically, I’m referring to the tenant placement fee. A tenant placement fee would be earned by your property management company the first day you fill the property with a resident and you’d charge roughly one month’s rent for this service. So, if the investor’s property rents out for $1,000 a month, you just earned $1,000 of revenue on day one.
Then, as an owner of a “normal” property management company, you’d probably earn 10% of the gross monthly rents that you collect for the investor. In the current example, you’d earn $1,200 throughout the rest of the year.
But that also means you – the owner of the property management company – had to work an entire year collecting rent, building a relationship with the resident, handling any maintenance items, accounting and a laundry list of other items. And you know just how much work that is to basically make the same amount of money that you earned day one from renting the home for the investor!
Here’s the dirty little secret
The best dollar-per-hour activity for a “normal” property management company is actually re-renting your house. In fact, 25-50% of revenue generated by a “normal” property management company comes from tenant placement fees.
The perspective of the investor
Now, let’s put our investor hat back on our heads. As an investor, there is a direct correlation between the length of time your resident stays in your property and the return on investment you generate. The longer the resident stays, the better your returns will be.
As an investor, you’d love to pay one tenant placement fee and have your tenants stay for life (or at least many years). But if that happens, the “normal” property management company makes a lot less money.
Why the “normal” property management model is broken
This dirty little secret is why I believe the “normal” property management model is broken. Goals between the property management company and the investor aren’t aligned and someone generally loses.
Ultimately, this is why property management companies sign one year leases. And they don’t really pay attention to resigning leases because, of course, that means they don’t get new tenant placement fees.
Follow the money
When you follow the money and take a deeper look at how property management companies earn their revenue, it becomes clear that signing long term leases just isn’t a high priority. If you ask them to sign two year leases, in essence, you are asking them to cut their revenue in half while also asking them to work twice as hard to source long term tenants. Not many property management companies are going to take you up on that offer. It is your responsibility as an investor to find a property management partner that makes more money when your tenant stays longer.