What Are Management Fees?

What Are Management Fees?

Traditionally in real estate, Management Fees often pertain to Property Management Fees. Management Fees are the form of payment to a property manager who oversees a selected amount of assigned properties and depending on the amount of tasks performed, the Management Fee can be higher or lower. These fees cover the day-to-day operations of managing properties by providing services such as: collecting rent from tenants, handling repairs, filling vacancies, evicting tenants, or keeping track of financial records for tax purposes. 

Management Fees are typically calculated from a percentage of the cumulative total of all the monthly rent of properties under management however, they can also be calculated as a flat fee. Traditionally, the fee is somewhere between 8-12% of the gross monthly rent however the larger the amount of properties managed, the lower the percentage will be. For example, smaller residential property management fees would be around 10% or more while a commercial property manager with 10+ units would charge a fee between 4-7%.

Management Fees (Real Estate) vs. Management Fees (Investment Funds)

Management Fees can be a broad term and one of the other common uses for this term refers fees given to investment managers who manage a portfolio of assets. Most people understand Management Fees in the context of investment funds, but there is a distinction difference between the two. 

In recent years Management Fees have been contested in the field of investments due to poor returns year over year from Hedge Funds and Endowments; many managed portfolios have underperformed the S&P 500 index and have called these fees into question. Management Fees in real estate have not been contested in the same way as this and this is one of the most crucial differences between the two. Management Fees for Investment Funds are declining, while Management Fees in real estate have stayed consistent.  

Similar to it’s real estate counterpart, Investment Management Fees traditionally are a percentage of the total assets under management by an individual or institution. Another distinction between these two fees is that real estate fees do not vary in terms of performance like some Investment Fees do, the variable in Real Estate is typically rent collections. 

How does this Pertain to Real Estate?

Oftentimes, as your portfolio of assets expands or if you are a large-scale developer, day to day management of properties can become overwhelming so it must be delegated out. If you have two projects with 100 units in each project, managing your existing units might cause you to miss out on your next deal. They can be a necessary expense if you are looking to scale quickly. To limit your liabilities in terms of this expense, negotiate your fee where it is a percentage of collected rent rather than rent outstanding.

Conclusion

Management fees are an expense that will take care of day-to-day operations for your individual property needs. They are multifaceted and if not negotiated properly, can cost you more than previously expected. Do not confuse them with Management Fees for investment funds, as they are similar in some areas but the current industry feelings towards the two differ drastically. 

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About the Author

Brittany Martin is TSM’s Vice President who has developed real estate financial models for an extensive range of property types. She specializes in land, hotel, and storage models. Please reach out to her if you have any questions about Management Fees or if she can help you with your modeling needs.