Comparing management quotes at 5, 6 and 8 percent on a 12-unit acquisition

Twelve units is the hardest size in this business. It is too big to run off a phone in the evenings and too small for anyone to put a person on site, and a company whose income comes from 200 unit communities has little reason to find it interesting. B is where the worry belongs. A portfolio manager who also handles two apartment communities will handle those first every single time, because that is where the fee is and where the boss is looking. Twelve units are a rounding error in that book. There is no malice in it. It is arithmetic. C being small is a feature at this size. Two people means you will talk to a decision maker. It also means that when one of them has a baby or a back surgery you have a problem, so ask what happens then. The annual capital plan C mentioned is the only thing in the post that addresses the actual question asked. A 1978 building needs someone tracking roof age, boiler age, service panel, sewer lateral. Nobody at 5 percent is doing that.

Check with your lender before you sign anything. On smaller commercial and agency-adjacent loans it is fairly common for the lender to require that the property be professionally managed, and sometimes that they approve the manager, and some loan documents let them force a replacement if a coverage test slips. Get the loan documents out and read the management covenant, and confirm what they will accept in writing rather than over the phone.

Your fee comparison is arithmetically right and it's answering the wrong question. A and B land within $110 of each other on your assumed turnover, so turnover is the variable doing the work, and you've assumed it rather than measured it. Get the seller's last three years of leases. At 12 units, moving from four turns a year to two is worth about $1,000 in leasing fees under A and $600 under B, and considerably more in downtime. At $1,050 average rent, a day vacant is $35, so an extra three weeks per turn across two extra turns is roughly $1,470 of lost rent. That dwarfs the spread between the three quotes.

On the flat per-unit offer: a flat fee per occupied unit removes the manager's benefit from rent increases and removes their penalty for vacancy, depending on whether it's per unit or per occupied unit. Ask which. Per occupied unit keeps some alignment. Flat per unit regardless of occupancy pays them the same whether the building is full or half empty.

The thing your post is missing is the scope of maintenance oversight in writing. Ask each company for their spending authority threshold, their after-hours process, and their vendor list with whether any vendor is affiliated with them. Also ask for a sample monthly report package from an existing 10 to 20 unit client with the numbers redacted. What comes back separates these three faster than the fee schedule does.

What all of this depends on: whether you're buying an asset you intend to hold through a boiler replacement and a roof, or one you plan to reposition and sell in four years. The capital-planning value that makes C worth 1.2% of collections only pays off on the long hold.

Ask all three for their written screening criteria and how consistently they apply it. Income multiple, credit floor, criminal history handling, how they treat co-signers, what they do with an applicant whose only eviction filing is six years old.

Months of reading on this has left me with one takeaway: inconsistent application is where fair housing trouble comes from, and a small shop making judgment calls unit by unit is exposed. You want the criteria on paper and applied the same way to everyone. If a company can't hand you that document today, that's your answer about how they run.

Pick the one whose monthly report you can understand without calling them. An owner who has to reconstruct a manager's statements in a spreadsheet every month ends up resenting everything else about the relationship, and that resentment outlasts any difference between 5 and 8 percent.

What's a lease-up fee for? Company C charges nothing for a new lease and the others charge $300 to half a month. If the manager is already getting 5 to 8% of rent every month, what's the extra payment covering? Genuinely asking, I'm at the very start of this.

@bmoreno23 it covers the marketing, showings, application processing and the paperwork on a new tenancy, which is real work concentrated in a couple of weeks. Whether it should be separate or baked into the percentage is a matter of taste. Separate fees make the manager's revenue lumpy and reward churn, baked-in fees mean you're paying for leasing in the months nothing is leasing.

@tashaford30 at twelve units one vacant unit is 8.3% of your revenue. That's the whole reason the fee argument is second order. Everything should be pointed at keeping the twelve full and keeping renewals, and I'd ask each company for the renewal rate across their small building portfolio last year. If they don't track it they aren't managing it.

Does 8% plus taxes plus insurance plus reserves still leave anything? The question matters because the goal here is income without a second job, and every one of these threads ends with the passive option costing 20% of NOI. On $141k of collections, $11,280 to a manager is a lot of months of somebody else's mortgage. None of that is an argument for self managing. It is an argument for seeing the number after debt service before deciding which quote is affordable.

@priya_n21 the alternative to paying for management carries its own cost, and that cost is you at 9pm on a Sunday with a water heater. @tashaford30 the failure mode with a company that looks like your B is well established. A mid-size firm with some bigger communities that takes a small building as a favor. The first four months go fine. Then the regional person leaves and the building gets reassigned twice, and the owner goes five weeks without a statement. Nothing catastrophic happens, but a tenant gives notice and nobody starts marketing the unit. Ask who specifically handles your property and how many doors that person carries, and ask what turnover has looked like in that role. Doors per person is the single number to get. Anything over 400 for a small building portfolio manager and you will feel it.

Run it per unit per year and the picture gets cleaner. A is $796, B is $805, C is $940. Then look at what a point of occupancy is worth: 1% of $151k gross potential is $1,510, which is more than the entire spread between the cheapest and most expensive quote. So the decision is only about fees if you believe all three will hold the same occupancy and the same expense line. You don't believe that, or you would not have posted. Separately, collections of $141k against $151k potential is a 6.6% loss. Ask each company what they would forecast that loss to be in year one under their management and make them write the number down. Then you have something to hold them to, and the difference between someone who says "about the same" and someone who says "4.5% and here's how" is worth more than 1.2%.

Worth pinning down whether the 5% is on collected rent or on gross potential rent. Both appear in management contracts, they are different numbers on a building with a $10k gap between the two, and the quotes as written do not say.

@raj_mehta14 that is a fair question and the second thing worth checking. @tashaford30 said collected for A and "6% flat" for B, which is ambiguous and needs pinning down. On the numbers: 5% of collected $141k is $7,050. Five percent of gross potential $151k is $7,550. Five hundred dollars, so small. It matters more for what it does to behavior. A manager paid on collections has a reason to chase delinquency and fill units. A manager paid on gross potential gets paid the same on an empty building. Get it in the agreement as collected, and define collected so it excludes security deposits and reimbursements passing through. Also @tashaford30, A's 15% on capital projects is high and it is the line nobody has flagged. You have a 1978 building. If you spend $60k on a roof in year two that is a $9,000 fee for coordinating one contractor. Negotiate a sliding scale or a cap now, when you have three bidders, rather than in year two when you have one manager.

What is the exit clause on each of them? Thirty days without cause in the first year is the standard to ask for from a company you have never worked with, and you want to know whether they hold your tenant files and deposit records hostage while the transition happens. Ask specifically how a handoff works and how long it takes to get the ledgers.

Second time through this and security deposits are what I keep snagging on. Who holds them under each quote, and does it go into a separate trust account or into the operating account? I've seen that deposit handling rules differ quite a bit by state, including whether interest has to be paid and to whom, so I'd ask each company to explain their process and then check it against your own state's requirements with someone qualified.

Contrary view. The reason this is hard is that a 12 unit is an awkward first asset if you cannot be near it, and you are solving a structural problem with a vendor choice. That is the point @brandonlee36 made plainly. This is no argument to walk away. You are under contract and the building may be fine. But if the plan is twelve units at a time from a distance, the management overhead repeats with every building and never gets easier. Worth knowing whether you are building toward 60 units in one submarket where a manager can put someone part time on site, or collecting scattered twelves.

@aaron_fitz10 that's the scale point and it's real. The economics of professional apartment management improve a lot once a property can carry its own part-time staff, and that's usually somewhere north of 40 or 50 units in one place, depending on the market and how the building is laid out.

@tashaford30 if the working submarket has more of these 1978 walkups, the interesting question is whether you and one manager could get to three of them within a mile. Same vendor list, one person covering all three, better fee negotiation. That path makes the 8% quote look like an investment in a relationship instead of an expense on one building.