Holland & Picht

What is a good cap rate?

If you’ve been around real estate investing for any period of time, you’ve likely heard the term “cap rate”.

But what is a cap rate? What is a GOOD cap rate? As an investor, when should you use cap rate? Does cap rate really matter?

In this article, we’ll dig in to answer those questions and aim to give you some real life perspective on the value of cap rate.

Let’s go.

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In this episode, Thom Holland and Jason Picht discuss Thom's recent rental renovation and the lessons learned through it.

How much does property management cost?

If you own rental properties, chances are, at some point, you’re going to start trying to wrap your head around property management fees so that you can make a wise decision as to whether or not to hire a property management company to manage your rental properties.

The intent of this article is to help you make that decision.

Let’s dig in.

Variables That Impact Property Management Fees

So, how much does a property manager charge?

As you might suspect, there are a handful of variables that could end up impacting the property management fee a property manager ends up presenting you.

Let’s review a few for context.

Property Condition

Older or neglected properties tend to need more love and attention.

In most cases, that means a property manager will want to charge you a higher management fee as it will likely take them more time to manage the property.

What makes a rental property in “good” condition?

A good rental property is one you feel great about renting to others. If you feel a bit guilty about taking renter’s money, something isn’t right.

To get a bit more practical, in a spreadsheet, list out each major component of each room in a column (doors, lights, flooring, etc).

Next, create a drop down list that populates the second column. The drop down list should contain the following three options:

1. Rent-ready

2. Needs minor repairs

3. Needs complete replacement

Once you have your spreadsheet laid out, go through and inspect your properties for each of the items you’ve listed. Once you have everything “rent-ready”, you have yourself a rental property in “good” condition.

The Holland & Picht Approach

We always start by helping property owners develop a property improvement plan. The goal here is to improve the property to a point in which it is capable of being rented. The plan also includes what improvements should be made over time and when. Since this typically happens before we even find tenants, property condition doesn’t have a direct impact on the monthly management fee.

We also don’t charge a fee for helping Owners develop or execute a property improvement plan.

Property Location and Crime Rate

Similarly, property management costs will likely vary based on the location of your rental property.

There are really two questions a property manager is looking answer here:

1. Is the rental property within my service area?

2. Is the rental property within an area that has an acceptable crime rate?

The Holland & Picht Approach

At the moment, we only manage properties within or near the Tallahassee city limits. For us, we’re not willing to charge a higher fee for one or two properties outside of our service area as we don’t think we’d be able to provide the same level of service we do to the properties we manage within our service area.

Crime rate, however, is very important to us; as we’re only interested in providing housing in safe and clean neighborhoods. Similar to location, for us, crime rate does not impact the monthly management fee as it would some other providers; we simply will not agree to manage unsafe properties.

With that being said, here is an example of how those of you in Tallahassee can determine the crime rate of your rental property’s neighborhood:

1. Go to https://www.talgov.com/gis/tops/

2. Apply the following “historical search”:

   • Address

   • Incidents

     • Aggravated Assault

     • Aggravated Battery

     • Arson

     • Assault

     • Assault LEO

     • Battery

     • Battery LEO

     • Bomb or explosive

     • Bomb threat

     • Carjacking

     • Homicide

     • Homicide - Attempted

     • Kidnapping

     • Prostitution

     • Robbery - Armed

     • Robbery - Snatching

     • Robbery - Strongarm

     • Sexual Battery

     • Theft - Grand

     • Weapons Violation

   • Days = 365

   • Buffer = 1/4 mile

From there, you can create a scale that objectively evaluates the neighborhood:

• 0-2 crimes = safe neighborhood

• 3-4 crimes = not a safe neighborhood

Property Management Services Included

As illustrated in the image above, pulled from a report published by Buildium, property management companies can often provide a wide variety of different services to their clients.

As you can imagine, what services you are receiving will impact the property managers fee.

Let’s take a quick look at some of the common property management costs in the next section.

Overview of Common Property Management FeesInitial Setup Fee

As I mentioned earlier, we don’t charge an “initial setup fee” and we don’t tack on a fee for helping property owners get their property up to speed.

However, it’s very common for companies to include a fee in the $300 ballpark for setting up your account and preparing your property to be rented.

This typically covers the costs associated with those activities.

Monthly Management Fee

A monthly management fee can range any where from 6-12 percent.

There are a few important things to consider and keep in mind:

• Flat fee vs Percentage of Rent - A property management company will either charge you a flat fee or a percentage of the rent. At Holland & Picht, we will charge $75 per unit or 11% of rent collected; whichever is greater.

• Rent Due vs Rent Collected - When you are reviewing your management agreement, make sure that it clearly states that the monthly management fee is paid when the rent is collected. Otherwise, you could end up owing money even if no rent was collected.

Tenant Procurement Fee

When a tenant moves out, there is a considerable amount of work the property manager will need to do to get the property back up to speed and to secure another great tenant.

It’s common for a tenant procurement fee to be half or equal to the 1st month’s rent.

At Holland & Picht, we charge an entire 1st month’s rent.

We do this because we are willing to cover the eviction costs associated with any tenant that we place in a property.

In other words, we’re confident in our ability to place long-term, low maintenance tenants.

Vacancy Fee

It’s hard to believe that any property manager could get away with charging a vacancy fee; as filling a vacancy for you should be at the core of their job. However, it’s possible in some cases.

If there is a vacancy fee, it will typically be around the $50 per unit park.

Holland & Picht will never charge you a fee for a unit being vacant.

Repair Management Fee

It’s common for property management costs to include a repair management fee of 3-10%.

This typically covers the costs associated to resolving maintenance requests that arise at your property.

At Holland & Picht, we decided to charge a slightly higher monthly management fee and NOT nickle and dime customers with additional property manager fees like this one.

However, if a property management company is charging you a lower management fee, it’s likely that they will want to also charge you for managing and coordinating maintenance repairs.

Property Reserves

A good property manager will require you to keep some amount of money in store for emergency repairs. There typically is not a fee for managing this reserve fund.

At Holland & Picht, we encourage property owners to contribute a property reserve that is equal to 1 month’s rent. This fund is kept in a separate, non-interest bearing bank account at Holland & Picht and is used to resolve maintenance requests less than $300. For expenses greater than $300, we always get Owner approval first.

Eviction Fee

So this is a big one and one that we feel strongly about.

Most property manager fees will include eviction fees. In other words, when a property manager needs to evict tenants, they will pass on the eviction costs to you and, in some cases, even charge you a fee to manage that process.

This could be any where from a few hundred to a few thousand dollars.

On top of this, they will then turn around and charge you a tenant procurement fee for finding another tenant.

See the misalignment?

At Holland & Picht, we place serious effort into finding great, long term tenants up front to avoid the eviction process altogether. To further align on this with property owners, we offer to cover the eviction costs for those tenants that we placed.

Is it worth hiring a property manager? (hint: cost isn’t as important as you think)

To wrap this up, I’m hoping by now that you’re realizing “how much does a property manager cost?” is the wrong question to be asking.

Assuming you’ve purchased your rental property correctly, it is almost always worth hiring a property manager to professionally manage your property.

Once you’ve purchased a rental property at a price that allows you to hire a property manager, you’ll notice that cost becomes much less of a factor and the focus is more on WHICH property manager to hire.

With that in mind, I’ll leave you with a few questions to consider about potential property managers:

• What are your goals and how can the company help you reach them?

• Are quarterly inspections ACTUALLY performed AND acted upon?

• Are there service level agreements in place?

• What testimonials are available?

• What experience do the founders have and how does it provide value?

• What’s the culture of the company?

Best of luck :-)

In this episode, Thom and Jason answer a common question from the #mailbag - should you create an LLC for a rental property? They talk about a number of advantages and disadvantages before finally providing their 2 cents on how you should go about it.

In this episode, Thom and Jason discuss how real estate investors can find investment properties. They talk about finding investment properties through the traditional brokerage process and dig in some to the unconventional "off market" tactics that the more seasoned Investors can use.

Enjoy!

In this episode, Thom Holland and Jason Picht sit down with Tallahassee’s Jeremy Floyd to talk recent Real Estate developments in Tallahassee and how each project had challenging hurdles to navigate.

Tune in to hear:

How Floyd thought his stay in Tallahassee would be short lived but ended up being a pleasant and long term move for him and his family.

Floyd’s thoughts on real estate trends in and around Tallahassee.

How Floyd and the team played a role in recent real estate developments such as Braemore Park and the Freight Yard and