If you’re an investment property owner, you’ve probably shopped for a property manager and wrestled with the same question many owners face. Is it better to pay a higher management fee with no placement fees, or to go with a lower monthly fee and pay a placement fee every time a tenant turns over?
At first glance, the math seems simple. A lower percentage feels like the better deal. But once you dig a little deeper, that conclusion is not always as clear as it appears.
How Property Management Fees are Typically Structured
When you start comparing property management companies, you’ll usually see one of two pricing models.
On one side, you have property managers who charge a higher monthly management fee, often around 10%. These companies typically provide more full-service management and either do not charge a placement fee at all or charge a very small one when a new tenant is placed.
On the other side, you’ll find managers who charge a lower monthly fee, sometimes 6% or even 5%. However, they make up the difference by charging a placement fee every time a tenant moves out and a new one is brought in.
As an owner, it’s natural to start running the numbers. You might think that if tenants only turn over every few years, paying a placement fee occasionally is not a big deal. On paper, the lower percentage can look like a win.
How the Math Breaks Down
The issue is not just the math. It’s the alignment of incentives.
If a property management company earns extra money every time they place a tenant, their financial incentive is not aligned with yours. As an owner, your goal is usually to keep good tenants in place for as long as possible. Turnover is expensive.
When a tenant leaves, you are dealing with a vacancy – aka lost income during that period. You also have the cost of turning the unit, which may include cleaning, repairs, and updates. On top of that, you pay the placement fee.
Even if turnover only happens every two or three years, those costs add up quickly. In many cases, once you factor in vacancy, turnover expenses, and placement fees, the lower monthly management fee no longer looks like the better deal.
The Incentive Problem
This is where human nature comes into play. If a management company benefits financially from placing a new tenant, there is a built-in incentive to turn units more frequently. That does not mean every company will act unethically, but incentives matter.
You might tell yourself that turnover every couple of years is normal and acceptable. But when the manager earns additional income from that turnover, the motivation to work harder to keep a good tenant in place can be reduced.
There are certainly exceptions. You may find a property management company that is highly ethical and consistently prioritizes your interests, even with a placement-fee model. The challenge is that it can be hard to know that in advance.
You Get What You Pay For
Discount models can be appealing, especially when you are trying to control expenses. But things that appear cheaper upfront are not always cheaper in the long run.
A slightly higher monthly management fee can sometimes save you money by reducing turnover, minimizing vacancy, and keeping tenants in place longer. Stability often leads to better overall performance, even if the headline fee is higher.
That does not mean you should automatically choose the most expensive manager. It means you should look beyond the percentage and understand how the entire fee structure affects your bottom line.
Final Thoughts
When choosing a property manager, it’s important to look past the surface-level math and think about incentives, turnover costs, and long-term performance. Lower fees combined with placement charges can end up costing more than expected once vacancy and turnover are factored in.
Many owners we work with appreciate taking a more holistic view when evaluating management options, rather than focusing on percentages alone. As with most things in real estate, doing your homework and understanding the full picture helps ensure you come out ahead. Contact us today for guidance on your multifamily investments.
