Rental property owners often ask if they should use a lease only service or a property management company for leasing their rental properties. Rental properties can be great investments, and like any investment there are different ways of managing them to maximize their potential. Each has its pros and cons, and each may appeal to a different type of investor. So this post will explore the basic differences between lease-only services and property management services.
Some rental property owners prefer to take a hands on approach and manage their own properties, instead of hiring a property management company. One of the benefits of this approach is the investor/owner can save money on property management fees. But for many rental property owners the most time consuming, most stressful, and most costly part of self managing their properties is locating suitable tenants and avoiding vacancy. Vacancy loss can destroy the income potential of a rental property if it is not kept in check. That’s where lease only services come in handy.
For the investor/owner looking to maximize cash flow on their rental properties and minimize vacancy loss the lease only services or leasing only can offer a great solution. Lease only services are designed to handle the upfront task of obtaining tenants for a rental property. Lease only services will usually include the following: all advertising and marketing of the rental property, fielding all phone calls from prospective tenants, prequalifying prospective tenants, showing the property, providing feedback to the property owner regarding showings, rental rates, and marketability, and providing tenant screening and lease document resources. Once the property owner approves of the tenant and the lease is signed, the lease only services are completed.
For the investor that is more “hands-off” and doesn’t mind foregoing some of the cash flow to have a third party acting on their behalf to oversee the operations of the investment, property management may be the way to go. Property managers can be responsible for rent collection, scheduling repairs and maintenance, property inspections, accounting functions, and more. Typically they will require a long term contract at least for the term of the lease. And the property manager will typically act as an agent for the property owner in all matters dealing with the tenant relationship. Because property management companies will likely require a contract it is important to make to review the contract carefully with your attorney.
There are important cost differences between a lease only service and a property management service. A typical property management contract charges an ongoing recurring monthly fee to the property owner based on the percentage of monthly rent- such fees can range anywhere from 7% to upwards of 30% of the monthly rent depending on the type of property- the fee is charged for each month of the lease term. Many times there is also a tenant placement fee and renewal fee in addition to the monthly management fee. On the other hand, lease only service typically charge a one time fee, sometime based on a percentage of the first month’s rent and sometimes a flat rate fee- and the fee is typically only due when the tenant is secured approved by the property owner.
With a lease only service there is no ongoing recurring fees and typically no renewal fees. For this reason lease only services can save property owners thousands of dollars in rental income over the course of a lease term. But only if the property is properly managed by the investor during the ongoing lease term.
A poorly managed property can also end up costing the investor more in the long run. For rental property owners that want the ability to manage their own properties, are able to handle basic management duties, but not the hassle and expense of securing tenants, lease only services can be a great way to go.
Rental property leasing services are different from property management services in a number of ways, both in the fees involved and the services performed. This by no means covers every leasing service or property management company that is out there but lets summarize the basic differences.
Compare the services performed:
- Lease only services: focus is on quickly obtaining suitable tenants to minimize vacancy costs. Handling the upfront tasks of advertising, showings, and screening tenants.
- Property management: focus is on the ongoing management activities for the property such as: rent collection, scheduling maintenance and repairs, accounting, and property inspections.
Compare the costs of service:
- Lease only services: One-time fee due upon lease execution. A percentage of first month’s rent or flat fee. No recurring fees, no renewal fees.
- Property Management: Recurring fee due for each month for the term of the lease. A percentage of each month’s rent for the term of the lease. Often renewal fees in addition.
As a side note: Both lease only services and property management fees are typically tax deductible as an expense of operating the rental property- **always consult your tax advisor to determine if this is the case for your property**.
Rental property owners/investors have a multitude of choices when it comes to renting out their properties and protecting their investment. Regardless of which way you decide to go, hiring a professional to help can make your life easier and the ownership of your investment more enjoyable.