A Complete Guide to Vacation Rental Management Fees
Learn about types of management fee structures for vacation rentals, how they vary, and what to look out for when choosing a property management service.
Vacation rental property management services can make all the difference in rental home portfolio management. Still, with so many different companies out there, it can be overwhelming to know where to start. You may even be wondering if self-management is an option to consider.
This complete guide will explore the different types of management fee structures to help you narrow the search for the right service. Whether you're a new or experienced vacation rental owner, this guide will provide valuable information you'll need to make informed decisions for your vacation rental business.
Understanding Real Estate Management Fees
Choosing the right property management company is an important consideration in your overall investment strategy. You may be familiar with property management companies working with long-term rental property owners. Still, some property managers specialize in helping short-term rental property owners manage their vacation home investment portfolio through offering services such as:
Maintenance and repair
A high-quality property manager may handle maintenance tasks like cleaning, landscaping, and even more complex repairs and renovations. This can be particularly helpful if your rental isn't close by.
Guest experience management
All aspects of guest management, including responding to inquiries and booking requests, managing check-ins and check-outs, and guest communication during a stay, are all tasks that are typically delegated to a property manager.
Marketing and Advertising
Property management companies can be expected to create and manage listings on vacation rental sites like Airbnb and Booking.com, as well as manage social media ads, email marketing, and more.
Revenue Management
Property managers often employ dynamic pricing algorithms to optimize rental rates based on several factors such as location, demand, local events, and more.
Financial Management
You may find management companies who assist in the financial management of the property, including collecting and disbursing rental payments, processing credit card payments, paying bills and taxes, and keeping track of income and expenses.
Legal Compliance
Property management companies may also offer legal compliance consulting, ensuring your rental aligns with all the rules and regulations for rental properties in your city and state, including building codes, zoning ordinances, and safety regulations.
In return for these services, management companies collect property management fees. However, how companies charge those fees may vary. Let's explore some standard management fee structures you can expect to encounter.
What Property Management Fees You Should Expect
Management fees can vary depending on several factors, such as location, size of the rental property, services offered by the management company, seasonal demand, and rental income, either before or after operating expenses. Generally, property owners can expect to pay between 20-50% of the property's cash flow each month, but this all depends on the management fee structure.
Typical management fee structures include commission-based fees, guaranteed income fees, flat fees, and subscription-based fees. Let's explore each of these fee models to help you determine the best value for your investment.
Commission-Based Fees
Commission fees are a percentage of the property's rental income the management company charges for its services. The commission fee typically varies between 10-30% of the rental income, depending on the location, type of property, and amenities provided.
The commission model promotes aligned incentives with management companies looking to maximize nightly rates and occupancy. This can lead to more cost-effective and proactive management of the property. This fee structure, however, offers little predictability and could lead to companies prioritizing higher cash flow properties. Nevertheless, this fee structure is a good option for owners who want to maximize their rental income and can tolerate some level of financial ambiguity.
Guaranteed Income Fee
A guaranteed income fee, also known as a minimum income guarantee, is an agreement where a vacation rental property management company guarantees the property owner a fixed monthly sum. If a property generates more than the guaranteed income, the property management costs and profit are taken from any remaining revenue.
The risk to the property owner is missing out on extra rental revenue during high occupancy months. If left unchecked, this fee structure can consume more than 50% of the property's monthly cash flow. On the positive side, if the property doesn't generate enough revenue to cover the guaranteed sum, the management company has to make up the difference to the owner.
This agreement works well for owners who value a consistent passive income from their property. For owners who need a full-service management company, guaranteed income can offer peace of mind during down markets or if major repairs are required. Another benefit is property managers are highly incentivized to maintain a high occupancy rate.
Flat Fee Management
Flat fees are a common type of management fee structure in which property owners pay a fixed rate to the management company regardless of the rental income generated by the property.
Flat fees are great for the property owner that prioritizes predictable costs and straightforward structures.
This structure is also particularly attractive for rental property owners on the lower end of the rental market because it de-incentivizes management companies from prioritizing those higher-end rentals.
However, it is important to note that flat fees may be higher than commission-based, leaving little incentive for management companies to optimize pricing and occupancy as these hold no weight over the company's revenue.
Subscription-Based Fees
With the subscription fee structure, property owners pay a monthly or annual fee to access management services as needed, regardless of income generated. Unlike a flat fee, where owners pay for a specific set of services in exchange for an agreed-upon set of services, subscriptions allow owners to access a wider range of services only as they are needed for the management of the property without any added fees associated.
This comprehensive solution is excellent for owners with dynamic or seasonal properties that may require robust services during the high season and less attention as they head into their low season.
It's important to note that while lower management fees may seem attractive, they may come with less comprehensive services or lower-quality management. On the other hand, higher management fees command more services and better management quality. Therefore, it's important to carefully consider the services provided and the management company's experience before choosing the fee structure that is best for your vacation rental property.
Extra Fees To Watch Out For
Some management companies charge additional fees, such as a service fee, a booking fee, or a cleaning fee, which can reduce your monthly cash flow. Before selecting a property management partner, make sure you understand all the contract exclusions and factor them into your pricing strategy.
Here are some potential additional costs to look out for:
Repair and Maintenance Fees
Some management companies charge extra for maintenance and repairs that can be higher than the actual cost of the work. If you're not planning to hire a contractor or do the repairs yourself, be sure to fully understand how the management company prices their work and what availability you can expect so your vacation home doesn't sit for long periods while you lose out on potential rental income.
Cleaning Services
Cleaning services are necessary for any short-term rental, but not every property management company includes them in their standard fees. The industry standards for cleaning services usually fall around $150 for standard cleaning, $200-$300 for a deep clean, and $100 for a turnover clean. With high turnover rates in short-term rentals, these fees can add up quickly, so be sure to ask your property manager if this service is included in your agreement to avoid a surprise bill at the end of the month.
Advertising Fees
Some property managers charge an additional fee for special advertising. Most fees include advertising on the property management website, but there may be additional fees for adding your listing to popular platforms like Vrbo and HomeToGo. Make sure you understand how much this fee is and what is included in their marketing services. Be particularly cautious if you are on a flat-fee or subscription-based fee schedule, as the company may have little incentive to provide high-quality advertising.
Upfront Fees
Some management companies may require you to pay an upfront fee before they start managing your property. While this fee may be reasonable, it is vital to understand your financial obligations before entering into a binding contract, as some of your capital for furnishing or upgrading your home may now need to be allocated to your property management agreement.
Long-term Contracts
Some management companies may require you to sign a long-term contract, which can be difficult to get out of if you're not satisfied with their services. Ensure you understand the terms of the agreement and the fees for early termination.
Experience the Difference with OwnerRez
OwnerRez makes the fee structure for property owners easy to understand with transparent reporting. Whether you are a homeowner tracking fees for your own property, or a vacation rental management company managing properties for others, OwnerRez makes it simple to track costs and fees and allows you to send reports with only a few clicks. Contact our team of vacation rental management experts to learn more about how OwnerRez can make a difference for your short-term rentals.