Why “What’s your Percentage?” is the wrong question to ask your rental agency.
I am often asked by my clients a number of questions when it comes to renting their beach homes.
-Who should I call?
-What is important in a rental agent?
-What is the management fee (percentage)?
These are just a few of the many questions I am asked by those new to the property rental business. I began to think about it after a lengthy conversation with one of the most prominent rental agents here on the Gulf Coast. She told me 90% of the time the first question of a prospect is “what is your percentage” or “what is your management fee?” This seems an obvious place to start but I believe it misses the broader point. What I feel most people are really asking is “What will my net rental income be after management fees?” And this is a very different question, indeed. Taken to the extreme, we could pose the question like this. Which of these scenarios would you choose?
Rental company A: Charges 99% management fee which nets you $45,000 annually after the fee is paid.
Rental company B: Charges a 1% management fee which nets you $39,000 annually after the fee is paid.
Clearly, you will find neither a 99% or a 1% management fee in the marketplace. I use the analogy only to make a point. To ask about management fees in the absence of other data assumes that all things are equal.
All things are NOT equal.
Some good questions to ask the rental company you are interviewing are these.
1. How will my home be presented online? Will you use your phone and take a few pictures, or will you have a professional photographer take appealing professional photos.
2. How many websites will my property appear on? How do you determine which sites those will be? Does your company pay to have my property appear at the top of Google search results? What does your company do to manage and attract “clicks”?
3. Are you available to help me stage the property? If I have things delivered to the home can you help me take delivery?
4. Do you offer decorating consultation a part of your service?
5. How will you market my excellent reviews and mitigate any sub par reviews?
These are but a few of the things you should be concerned about over and above “What is your management fee?” In all business transactions, I implore my clients to remember this critical point. Remember the difference between COST and PRICE. This is a distinction it will pay you to remember no matter what you are buying. PRICE happens one time and one time only. At the time of purchase. COST happens continuously after price has happened. It takes into account everything that happens after the purchase, including the sale. As I love extreme examples for making a point obvious, let me offer one more. Which of these opportunities represents the better investment.
1. Condo purchased for $100,000 with a rental income of $5000 per year that is sold 5 years later for $90,000.
2.Condo purchased for $500,000 with a rental income of $25,000 per year sold 5 years later for $650,000.
While the PRICE on condo 1 seems more attractive and the rental percentages are the same, clearly condo 2 has a significantly lower COST, all things considered. To bring this full circle, while one rental agency may have a PRICE of 20% compared to another’s 25%, that number misses the point. The lower PRICE actually increases your COST. Therefore, the correct question to ask is “What is the COST of your management?” In so doing, you are maximizing net rental income, and isn’t that the point?