pennies

Are our property management rates too high?

Pear Tree Property strives to make investing with us as painless as possible, which includes managing the properties.  We view this as a service to the investors and we don’t want to make money off it.  It’s a “commodity” not a “profit center.”  The theory is that as we get larger and economies of scale kicks in, we’ll drop how much we charge and the investor’s returns will jump.  It’s been a while since I’ve checked that our property management rates are low enough.  Who knows, we might be raking in the mula!  Let’s check shall we?

Expenses

How much does property management cost us?  A good place to start is with our 2012 tax returns:

expenses for property management rates

There are a couple of expenses that are not included here, including mileage to and/from South Bend and distributions back to the owners.  For now, I’m ignoring those.

Thanks to staff turnover and raises, the wages will be different in 2013, but not much.  For the sake of this conversation, we’ll run with this number.

Income

We charge 10% of rent as our management fee.  Our research indicates the norm for South Bend is 1/2 of the first month’s rent and 10% of additional months.  This also matches what I’ve seen in Kirksville, MO, and seems to be standard in rural areas.

In 2012, our management fee income was $66,135.  To any investors reading these words: you’re welcome!  We subsidized your returns!  **grumble**

Glib comments aside, we knew when we started this operation that we would be feeding the property management side of things for a time until we reached critical mass.  In 2012 we grew quite a bit, so let’s see how these numbers changed.

From January 1st, 2013 through September 11, 2013 (the first 253 days) we’ve received $70,284.43 in management fee income.  Using some simple math magic, that means for all of 2013, we’ll receive $101,398.49…ish.

Wrap It Up: Property management rates are…

Good news for everyone!  We’re almost breaking even!

What now?

As we grow, the profit needle will swing into the black.  Once we’ve built a sufficient safety margin, we’ll drop the percentage we charge for our property management services.  We might even get radical and pass the expenses back to the companies.  Either way, no need to worry about that today.

The more we grow, the more everyone prospers!

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During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Keep up to date with everything he's doing on twitter!

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