How to Guarantee Your Property Management Company Succeeds
Money talks. If you want your property management company to perform exceptionally, it may be wise to consider one of the following incentives to incorporate into your property management company (PMC) contract.
1. Percentage of Net Operating Income
What I like about this option is that it takes into account both the income the PMC collects as well as the expenses. It doesn’t really matter how much money you collect on a property if all of it is being spent on outrageous expenses.
The potential problem with this incentive is that the PMC may defer maintenance in order to increase the property’s NOI. They may also argue of what qualifies as an “expense” of the property. Will they consider your bookkeeper that will check their monthly reports a legitimate expense or not? If you use this technique you must be specific of what qualifies as an expense of the property.
2. Flat Yearly Bonus for Certain Objectives Being Met.
If your goal is to have a certain net income (after debt service) and they meet that goal a flat bonus can be offered.
The main thing I don’t like about this is that it doesn’t account for how much or how little over the objective they perform. For instance, if the net income goal is $100,000 and the incentive is a $5,000 bonus, then it doesn’t matter if the net income is $100,001 or $150,000. They get the same amount. That doesn’t really seem fair.
3. Sliding Monthly Commission for Obtaining Certain Occupancy Goals
If you have negotiated a 5% monthly commission fee for the services of a PMC you may want to provide them an incentive for obtaining a high occupancy rate.
For instance you do it like this:
95% occupancy or less 5% commission
96%-98% occupancy 6% commission
99-100 occupancy 7% commission
This provides a monthly goal for the company to obtain and it can be combined with any yearly incentives you may offer. You must make sure that the PMC is not filling units with non qualified tenants or at lower rental rates just to make a higher commission.
4. Sliding Monthly Commission Based Upon Rental Income Collected
This is an alternative to number 3. It provides a incentive for the PMC to keep occupancy high and to rent at the best rental rate possible. For instance if you purchased a property generating a monthly income of $30,000 that would be the “base” for which the 5% commission would be paid.
$30,000 or less 5% commission
$30,001-$32,000 6% commission
$32,001 and above 7% commission
This would have to be adjusted annually to reflect the increase to rents or eventually the PMC will always be at the 7% commission. They must have an incentive all the time to perform efficiently.
The disadvantage with this option is that the PMC has no incentive for keeping expenses low.
You also have the choice not to provide any kind of incentive at all! It is not the “norm” to do, but what I do know is that property management is KEY with the success of the property. When you have a ton of money on the line you need to do everything you can to ensure your success. Offering incentives is a just one extra measure you can take to make that happen.
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