The High Cost of Low Management Fees

What if raising your monthly property management fee made everything better for both you and your clients?

To understand why this seemingly paradoxical idea makes perfect sense, let’s channel Adam Smith, widely regarded as the father of modern economics, who introduced the concept of the "invisible hand" in his landmark 1776 work, "The Wealth of Nations." Smith argued that in a free market, individuals pursuing their own self-interest and engaging in voluntary exchange unintentionally promote the greater economic good of society. As he famously wrote: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

Smith's insight wasn't that self-interest alone creates prosperity, but rather that self-interest operating within a framework of well-defined property rights, fair competition, and ethical business practices naturally directs resources toward their most productive uses. This efficiency emerges not through central planning but through the price mechanisms and incentives of the market.

In theory, this beautiful economic system should apply perfectly to our industry – property managers who create the most value for landlords should be rewarded with the most business through market forces. Property management companies that maximize landlord wealth should naturally attract more clients.

So why isn't that happening?

The uncomfortable truth is that our industry has an incentive problem. Many property management companies have fee structures that reward them most when things go worst for their landlord clients. This creates a fundamental misalignment that undermines the long-term success of both parties.

In this week’s newsletter, I'm tackling this critical issue head-on – the same topic I'll be discussing at the NARPM Broker/Owner Annual Conference panel later this month.

THE MISALIGNMENT PROBLEM: SHORT-TERM THINKING CREATES LONG-TERM LOSSES

Many landlords approach property management with a deficient mindset: they view it as a commodity service where the primary differentiator is the monthly management fee. This short-term, unsophisticated thinking often leads them to favor the lowest monthly fee option, not fully understanding the long-term implications.

Property managers, facing this reality, have adapted by:

• Offering artificially low monthly management fees

• Back-loading revenue through resident fees and turnover charges

• Creating fee structures that reward tenant turnover, whether intentionally or not

The Low Fee Lie

Some property managers lure clients in with low monthly fees by telling a deceptive story: "It only costs $X (flat) per month to manage your property because we're just that good—we've figured out a better, more efficient system." In many cases, this just isn’t true.

The reality? These companies exploit the scarcity of the rental property to make up the difference by forcing fees on residents for phony "privileges" and "benefits" they would never choose if given the option. This approach simultaneously engenders resident bad-will and strongly incentivizes resident turnover—exactly what harms a landlord's long-term returns.

Consider this (real) example in my market: A property manager charging only $75/month generates $300+ monthly RPU. The other $225+ comes primarily from fees forced on the resident and heavily weighted on resident turnover. For instance, 25% of one-month’s rent (upon move-in) just to have the privilege to start participating in a security deposit alternative fee program, then 6% of rent monthly to continue, all of which is revenue for the property manager and non-refundable to the resident (this kind of crap is inviting legislation imo).

When a property manager earns significantly higher profits from residents moving in and out frequently, their incentives directly oppose the landlord's best interests.

What truly serves landlord wealth?

• Highly qualified, low-risk residents

• Long-term resident stability with minimal turnover

• Regular rent increases over time

• Proactive maintenance that preserves long-term property value

• Reduced vacancy and turnover costs

But here's the paradox: While most property managers claim to serve these interests, their fee structures actively undermine them. As long as property managers earn more from resident turnover than from stability, their financial incentives remain fundamentally misaligned with landlord wealth-building.

The reality is the predominant fee structures in our industry reward the PM with the most profits when: The property leases to a marginal resident who pays late every month, lives heavy in the property, requests lots of maintenance and leaves after 1 year.

This misalignment persists largely because of another critical issue: information asymmetry but we won’t get into that here.

THE ALIGNED ALTERNATIVE: BUILDING BUSINESSES THAT WIN WHEN CLIENTS WIN

An ideally aligned fee structure would include:

• No client-paid leasing fees: Eliminating the incentive for unnecessary tenant turnover

• Minimal resident move-in fees: Reducing barriers to resident satisfaction and longevity

• Opt-in resident services: Making "benefit" programs truly optional, not forced

• Higher monthly management fees: A hybrid of flat plus percentage or custom percentage based on rent level and only earned when the property is occupied

• Supplemental asset management fees: For premium accounting and additional services

• No maintenance mark-ups: Eliminating the incentive for unnecessary repairs

• Shared late fees: Split 50/50 between manager and owner, aligning interests

• Investment incentives: PM contributions to a rewards account for owners who expand their portfolios

The measurable benefits for landlords working with an aligned Rental Property Business Manager (not just a property manager) are significant:

• Higher long-term cash flow

• Reduced maintenance expenses

• Increased resident retention

• Less stress and more predictability

• Improved property appreciation

With aligned incentives, greater transparency, and the right investment in client mindset transformation, returns will change dramatically for our clients. Not only will they have increased ‘wealth-building endurance’ (the most significant benefit), but if our partnership boosts ROI by 1% and their willingness to hold by 5+ years, their financial gains will DOUBLE:

$200,000 invested in rental homes over 10 years with 11% ROI is $567,000.
$200,000 invested in rental homes over 15 years with 12% ROI is $1,095,000. Nearly double!

BECOMING THE LEADER YOUR BUSINESS NEEDS

The path forward isn't just about changing fee structures – it's about becoming the leader who can guide both your team and your clients through a transformation in thinking.

As property management professionals, we have a choice: we can continue exploiting landlords' short-term mindset and the scarcity of rental housing to our temporary advantage, or we can elevate our industry by aligning our success with our clients' long-term wealth building.

The latter path requires more courage, more transparency, and more investment in client education; it also creates the foundation for dramatically more profitable, sustainable businesses that deliver extraordinary value.

Remember: You don't grow your business — you grow yourself, and your business follows.

Are you ready to align your incentives with your clients' success and become the leader your business truly needs?