Does anyone else underprice the management cost on a 5-unit because it feels too small to count

Model 10% plus a per-turn leasing fee as the floor on anything under ten units, not a ceiling.

The misconception worth correcting is that 8% is conservative when it is actually optimistic at this scale, because the fee percentage is where PMs compress their margin on small portfolios, not where they give you a break.

The number doing the most work in your example is not the management percentage itself but the leasing fee, because at $875 average rent and normal turnover, a $350 per-turn charge on even two vacancies adds $700 annually to the management drag, which on five doors represents roughly 16 basis points of cap rate compression on its own if you bought at a 6 cap.

What is the assumed annual turnover rate in the current raise underwrite?

The assumption doing the most work in most 5-unit underwrites is that management cost scales with the asset. It does not. It scales with the PM's labor, and that labor floor is nearly fixed whether the building has 5 doors or 15. You have named the exact mechanism: the PM absorbed the underpriced fee for a year and then corrected to where the engagement actually penciled for them. That is not a PM being unreliable, that is a PM who quoted a number to win the business and then ran into their own margin.

The $4,100 NOI swing you described is worth tracing back to what it did to valuation, not just coverage. On a 5-unit in a market where cap rates are sitting somewhere in the 6 to 7 range, a $4,100 NOI reduction is roughly $58,000 to $68,000 of value gone before anyone touches a spreadsheet. At 1.11 DSCR the lender is not in default territory, but you are past the point where the numbers forgive much else going wrong, and a vacancy event or a capex call on a 5-unit hits proportionally harder than on a 15-unit because there is no spread.

The practical fix for underwriting is to get an actual LOI or fee schedule from two local PMs before you close, not after. Placeholder percentages belong in early screening. By the time you are modeling for a raise, you need a real number, and you need it to include leasing fees, renewal fees if they charge them, and any maintenance coordination markups, because those add up on thin rents faster than the base percentage does.

The risk you did not mention is that at 1.11 DSCR, a single prolonged vacancy, one unit sitting for 60 days, probably pushes you below 1.0 for that period. Confirm with your lender in writing whether their covenant is measured quarterly or annually, because that changes the conversation significantly.

What does your current raise model show for vacancy assumption, and did you stress it against the repriced management figure simultaneously?

@the poster, the part that caught me was "the PM's labor cost is almost the same whether it's 5 units or 15." That is true and most people treating it as a gotcha moment have not taken the next step, which is: if that's true, why are you buying a 5-unit and paying for professional management at all? On something this small the math only works if you are doing it yourself or you have a handshake arrangement with someone local who handles it as a favor-plus-cash situation, not a company with a portfolio and a pricing sheet.

I would not passive into a 5-unit in a market I do not operate in and model any third-party PM percentage and call it conservative. The structure is wrong before you get to the number. The buildings where I watch this go sideways in Macomb are the ones where the buyer is out of state, the PM is a real company with real overhead, and the rent ceiling is around $900 because the submarket just does not go higher. That combination means the PM fee argument is almost academic because the whole deal was priced assuming operating efficiency that a remote passive investor cannot actually access. What's the sponsor's plan if that PM walks or reprices again in year two?

The leasing fee is where small-building underwriting usually breaks hardest, because a single vacancy at $350 a turn on a five-unit can consume the entire management cost cushion you thought you had for the year. Before committing to that raise, I would want to see the current PM contract, whether it auto-renews and on what notice period, what the fee schedule looks like at the next tier up (some firms reprice at 8 units, not 10), and whether the leasing fee is capped per unit per year or truly open-ended on re-lets. The DSCR drop from 1.19 to 1.11 is the part that matters most here: at 1.11 you are one bad leasing quarter from a lender conversation, and if this raise involves any senior debt refinance, a lender pulling a stressed NOI with a 10 percent management load and a market leasing fee could push you below 1.10, which is where some agency programs require reserves or a rate adjustment.

Is the current PM under a new contract term after the reprice, or are you month-to-month with room to renegotiate before the refi closes?

The 6% number works when a building is large enough that the PM's fixed labor gets spread across enough rent roll to make a slim percentage pencil. On a 5-unit it almost never does, because the PM needs to show up for maintenance calls, handle lease renewals, field applicant calls, and run the books, and that labor cost does not shrink proportionally just because there are five doors instead of twenty. Take a 5-unit at $875 average, so $4,375 gross monthly rent, $52,500 annually. At 6% that is $3,150 in management fees for the year. If you add two turns with a $350 leasing fee each, you are at $3,850. A PM quoting 10% plus two turns is charging $5,250 plus $700, call it $5,950. The spread between those two assumptions is $2,100 annually, which on a thin-margin small building is the difference between a deal that services comfortably and one where you are watching your DSCR slide from 1.19 toward 1.11 exactly as you described. What I would add to that is the repricing risk you actually lived through: the first-year discount a PM offers to win a new management contract is real, and it belongs in your underwrite as a temporary condition, not a permanent fee assumption.

The raise you are running right now is where this gets expensive, because the underwrite you show investors sets their return expectation and the purchase price the deal can support. If you are modeling 8% flat and a real PM comes in at 10% plus $350 per turn on a building with two to three turns a year, the NOI shortfall flows directly to cash-on-cash and quietly resets what your IRR projection actually was. I would go get two