For homeowners starting out in the vacation rental industry, property management may seem cloaked in mystery—especially when it comes to commission rates and other fees.
Nearly half, or 45%, of investment property homeowners expect to generate income from renting out their homes, and a third planned to use their properties as short-term rentals in 2018, according to a report by the National Association of Realtors.
Most homeowners see property management as a worthy investment in achieving their revenue goals, since property managers have expertise in customer service, rate setting, and property marketing. And, the headaches that come with a vacation rental are often too much to handle alone.
Our local team member in Gatlinburg, Tennessee, said choosing a property manager that is transparent and upfront about how they set rates and what they charge for their services is key for generating revenue on the property.
Most property managers charge a commission rate, along with some flat-rate fees for things like maintenance and repairs. But, these costs vary from company to company, she said.
We spoke to a couple of vacation rental property management experts to help demystify vacation rental commission rates.
What Are Commission Rates?
A commission rate is simply the rate that a vacation rental owner pays to the management company for their services. Usually, the rates are charged on the nightly booking amount, but exactly how the commission is calculated can vary.
Before deciding on a property manager, homeowners should make sure that the commission rates and the services provided in exchange for those fees align with their goals and budgets.
How Are Property Management Commission Rates Charged?
Some vacation rental property management companies base commissions on the gross booking amount, while others charge on the net amount. This is an important distinction that homeowners need to understand, because it can affect their bottom line. Our local team member goes on to say:
“Let’s say a reservation is $1,250 total.” “That includes the taxes, the cleaning fee, and the insurance for the property. Some property managers charge for the entire amount. And, then some companies, only charge based on what the net rent is. We don’t charge you commission on the cleaning, the taxes, or the insurance. We only charge you on what we’re charging the guest on a nightly basis.”
Wendy Schultz, founder and CEO of The Simple Life Hospitality, which manages properties in Wisconsin and Florida, said how property management companies charge their commission, whether based on the gross or net amount, is something to “keep a careful eye on.”
Even if one company’s commission percentage is lower than another’s, it could actually be costing more, she said.
“Someone might say they only charge 10% commission, but they may be charging on things that you wouldn’t think would be included or there are extra fees added on like a credit card transaction fee,” Schultz said. “Sometimes those are passed through to the owner.”
When considering a commission structure, Schultz says property management companies should be transparent about sharing with owners, it should be clear how the commission rate is charged: on the net or gross amount. Also, homeowners should have a solid understanding about what services they’re getting for the commission they’re paying.
How Much Are Commission Rates?
Different vacation rental property management companies charge different commission rates. Higher operational costs, higher minimum wage, and different local ordinances requiring different security or other measures can contribute to the higher commission rates in some areas.
What Other Fees Can I Expect to Pay?
There’s a big difference between the fees that various property managers charge.
Some don’t charge monthly fees or regular maintenance fees. That means owners are not charged for any small repair or maintenance, like changing a light bulb or replacing an air filter; it’s included in the regular commission rate. In this instance, owners pay the actual cost of other repairs or maintenance with no upcharge.
Other property managers may charge monthly maintenance fees on top of the commission.
Schultz said she has seen property management companies also charge cleaning fees, linen fees, and platform booking fees, on top of a commission and monthly management fee. The different fees and complicated rate structures are what inspired her to start her own property management company.
“The way we started was because we owned properties, and we were not happy with the way property management was done,” she said.
Along with offering full-service property management, Shultz said her company educates owners on how to get started with investing in vacation rentals and run them successfully.
Can I Still Use My Vacation Rental?
Personal use and enjoyment is a top reason that people invest in vacation rentals, with 49% of vacation homebuyers planning to use their homes for personal vacations, according to a National Association of Realtors report.
But, some vacation rental property management companies charge owners commission fees for staying in their own homes. Others do not place any restrictions on how much owners use the property. They just have to meet the minimum revenue threshold, which varies by location, and pay a cleaning fee or clean the home themselves.
It’s recommended to ask potential property managers about how they handle personal use of the home, including restrictions and charges, before signing up.
How Do I Know if My Property Manager Is Being Transparent About Fees?
Make sure you get a breakdown of all the fees you will be charged before signing up with a property manager for your vacation rental. You should also have a good understanding of what all the commission covers.
Schultz recommends that vacation rental owners ask property managers a series of questions before signing on, including:
- What is the breakdown of commission for the room?
- Where is the commission coming from: gross or net room rate?
- If there’s a discount on the room rate, is the commission coming off the net rate?
- Can I see an example of an owner statement?
- What services do you provide?
- How do you handle bookings?
- What happens if a guest has an issue?
- Do you file taxes?
- Is there a cleaning fee?
- How do you maintain the property?
- How do you handle lawn care and utility bills?
- What happens if something breaks?
- How are commissions handled if a booking cancels?
- Do room rates change seasonally or stay static all year?
She also suggests asking for references who have used the property management company.
“Those are all things that can help you determine how much service you’re going to get,” Schultz said. “So, then you can really see how everything is calculated and not be surprised when you get your first statement.”
The best property managers operate on consistency, integrity, and transparency, with no hidden fees.
“You know exactly what you’re getting into,” Schultz said. “It’s very much a collaborative relationship.”
Is Property Management Worth the Cost?
Even though property management comes with commissions and other fees, it’s an important investment for vacation rental owners. Property managers have the marketing and customer service know-how and offer exposure to properties that will help them drive bookings. This will bring a steady revenue stream to owners.
Plus, property managers handle all of the headaches and hassles, Schultz said.
“It’s just a good way for you to be able to stay hands off of it and just allow them to take care of your guests,” she said. “When you own a vacation property and it’s some place you like to enjoy spending time with your family, if you are managing it as a vacation rental, it becomes a second job and a little bit less enjoyable as a property to vacation to.”
Homeowners who try to manage their vacation rentals themselves often leave money on the table, Schultz said. And, this money is often well spent on paying commissions to property managers.
“A lot of do-it-yourself owners are not well versed in how to market their properties and how to price their properties,” she said. “A lot of times we’ll see them underpriced, or they’re not changing the rates depending on the time of year, the seasons, what’s going on in the area. With property management, they’re adjusting rates; they’re optimizing listings.”
Other reasons property managers are worth the cost include:
- They are knowledgeable of rental law and local statutes and ordinances.
- They know how to market vacation rentals to increase bookings.
- They offer 24/7 service to guests.
- They know how to set competitive rates.
- They handle all repairs, maintenance, and other issues.
- They can help you get the most out of your investment.
Understanding commission rates and other fees can help demystify property management. Taking the time to review what companies charge, how they charge, and what you get in exchange will help you maximize your profits and see a return on your investment.