USA Property Management…The Real Truth Part 4

Again, I want to thank those that have contacted me with questions and comments, it is very much appreciated.

This part will cover what I consider to be the 2nd killer to all income property, and that is Maintenance. This topic in my opinion ranks 2nd on my list of killers, not so much the repetitive need for maintenance (though that can do it as well, if the renovation was sub-par), but more so, the costs and markups involved.

I will be the 1st to admit, I was unable to create a data sampling from those companies I interviewed for Parts 1-3. Those companies or any other company for that matter, will just not be as open in disclosing these items. I understand that, so I based this information on those clients that have transferred their properties over to me, and doing a careful examination of their financial records, as it pertained to those properties.

I will disclose actual costs involved in all 3 mechanical fields, and then show you what they were charged for this paticular service. I will be fair and say these costs are only in Kansas City, I am not claiming that these costs are nationwide or anything like that.

As we all probably know the 3 mechanical fields are Heating and Cooling, Electrical and Plumbing.

1. HVAC – The cost of the average 70-80K furnace in Kansas City is $400-500. This is for a NEW furnace in box, with full manufacture's warranty. This is for an average construction grade furnace, and not the top of the line furnace, which can run as high as $700. A seasoned licensed HVAC tech can easily install a new furnace inside of 2 hours, under normal installation practices. If the furnace is in the attic (there are some that are) or other odd location, you can figure an additional $200-300 labor cost for this.  The typical labor costs for this should be no more than $250, so this brings a reasonable price of $700-900 for a furnace replacement.  I better clarify this is for a gas furnace installation, not electric.  Typically this size furnace would cover 1200 sq. ft home or smaller, with the right conditions. There are tons of factors that go into sizing a furnace for any one home, but if the renovation was professionally done, this is a very accurate estimate.

  What my clients have actually been charged by previous companies….$1700-2200 for this furnace.

 The cost of an average 2 ton Central Air unit in KC is around $600-800, again NEW in box and manufacture's warranty. These units come packaged without freon for safety reasons, nor will they include line sets, power cords or disconnect boxes. There could be additional charges based on those factors, depending on that specific items condition. The other item needed will be a A-coil, and again these are not included, but almost always need to be replaced to match the new system. The average licensed HVAC tech, can install Central Air and A-Coil in 2-4 hours, these installations typically take longer as there are more steps required. You will have to pay for the freon, the cost to the HVAC tech is around $20-30 per lb, and they resell for $40-60 per lb. Total costs involved in a standard C/A unit should be in the range of $1300-1500.

What my clients have actually been charged by previous companies…$1800-2500 for Central Air.
This brings the total system charges to $2000-2400, as this is the amount I typically pay to have them installed in my renovated homes.
The total charges  that were billed to my clients $3500-4700! In my eyes there is no excuse for this, other than pure 100% greed. I have no issue with companies making money, as you have to earn a profit to stay in business, but there is a line that has been crossed here.

Anyone, and yes anyone, can call my supplier of furnaces and central air and they will in fact confirm these prices. I am NOT a licensed HVAC technician, but I can buy a furnace or central air unit without being licensed. I don't get the best price quoted, simply because I do not buy the volume as HVAC companies would, but in all honestly that cost difference is usually no more than 10%. Because I am not licensed, I cannot buy freon as this is a regulated fuel, but my HVAC tech has showed me his invoice to confirm these prices.

2. Electrical — This one is straight forward. In all cases the property manager should be using only licensed electricians and those companies that are in good standing with not only the state, but probably more importantly the city. This item can be a can of worms if it is not addressed during the renovation. Most licensed electricians will charge $75-125 per hour, they deserve every penny of this.
Typical costs involved in some more popular services involved in electricity.
Service upgrades – going from 60A to 100A, is fairly common, as alot of our homes in KC, are very old and are in fact on 60A services. I can quote what it costs my company to upgrade to 200A, as this is what I do on all my renovations. My costs including permits, inspections is exactly $1450. I honestly do not have a more recent cost for 100A service, as I have not done this paticular service in over 3 years. But I know it should be cheaper than I am paying for 200A service. The panel needed for 200A is much larger, as well as the entrance cable needed.

What my clients have been charged for 100A service upgrade, $1800-2600. Again, crossing a major line here. The issue here is they should of never been charged anything, as these homes were supposedly renovated within the last year or 2. How do you renovate a home and NOT upgrade the wiring? Just not right!

3. Plumbing – This expense is again straight forward and should be completed by only licensed professionals. This item is almost personal for me, as I am a master plumber with over 16 years experience. I was forced out of plumbing due to medical reasons. I still maintain my plumbing license, so I am very familiar with these costs. In this topic, I will address the most common items a plumber would be called for on a rental property.

Water heater replacement — This one is easy, cost of a 40 Gallon Gas Water Heater is around $275, labor no more than 1 hour! Licensed plumbers typically charge the same rate as an electrician, so total costs should be in the $400-450 range.
  What I have seen charged $450-750 dollars!

Faucet replacements (other than tub/shower faucet) – Basic Lifetime warranty faucet, $40-60, labor no more than 1 hour. Total costs should be in the $125-150 range. Most plumbers will reduce their hourly rate for this item, as it is such a simple change out. I did when I ran my company, and the plumbers I use today, do as well. Tub/Shower faucets can add an additional 1 hour labor to the charge, as the installation can be little more complicated, if there is no access or they have to make the access.
  What I have seen charged $175-225.

Toilet replacements – Costs involved $80 for new toilet and ALL the supplies you need to install it!  Labor should be no more than 1 hour! Total costs usually under $200. Again, these are so simple to change out, plumbers will reduce their labor costs.
   What I have seen charged $250-446! Yes, that is an exact amount of $446, for a toilet.

Drain Cleaning – What I pay for any drain to be cleaned, $95! Any drain up to 100'!
  What I have seen charged, $100-175. This one was not so outrageous as the other items, other than the $175 charge. I honestly feel if your paying under $125 for this service, it's acceptable.

Sewer replacements – This one can hurt bad! I have one client that had to do this, but to be fair it was 2 years after he bought the home, and was more bad luck than anything else. There are alot of factors involved in replacing sewer lines in the yard. I will discuss the 1 instance I have knowledge of. This replacement is what I would consider basic replacement, less than 50', no more than 12' deep and not  having to cut the street. If I was bidding this exact replacement, it would be in the range of $2800-3300, to dig and replace and install cleanouts in the yard.
  What he was charged $4175!

What I am showing here is other than not getting your property rented in the 1st place, this task can destroy the cash flow numbers of any property. When a property manager takes marking up a maintenance call by 20%, and insists on marking it up by at least 50%, this is where the problem is. There is no justification for this high of a markup, they are NOT doing the work themselves, they are simply making the phone call, this hardly justifies this markup.

Due some fact checking in your market for what the going rate is. I routinely call other contractors, just to make sure my contractor's are not getting comfortable with me.

I have been asked why I am "spilling the secret" when I am a PM myself. The straight forward answer is because it's the right thing to do. When a PM takes advantage of situations, and allows greed to dictate their business model, it leaves message boards full of the very complaints you see on here. The fact is they don't realize if they were just charging a fair price for their services, they would have more clients, and those clients would more than likely refer them. In other words, their business would be considerably better. What usually happens, is they start losing clients, so they have to "adjust" their markups to offset the loss of income, it's a never ending spiral.

Again, I hope all of this will help each and everyone of you make the choices necessary to have a profitable experience in any market. The US has it's problems, but not all of us think like that, nor do we operate our business' like that. Take what you feel is important and use it as you see necessary. If you need any additional information, feel free to contact me.

John