USA Property Management…The Real Truth Part 5

Well after a totally crazy week, I am back for Part 5 of this mixed review story.

As always, thank you to all who have contacted me and requested more information!

This section will be controversial, as it will not be in agreement by some, or possibly most. But it's what I believe, and when I'm purchasing property, it's one of many things I factor when determining to purchase or not.

Here it goes!

The Renovation!!!

I will just get it out there right now, my list of importance when evaluating a property is as follows:

1. Tenants
2. Renovation
3. Cost To Purchase/What It's Worth.

When I'm looking at a potential property, and all the OTHER factors (as discussed in earlier posts) have been satisfied, this is the list that receives the toughest grading from myself. When I am looking to Buy/Hold, I take absolutely no consideration of it's value, crazy huh?
The reason is this, if I am planning on holding it, it's pretty irrelevant on what it's worth TODAY, as it's not going to be worth that, when and if I decide to sell.  Now the best case scenario is it's worth considerably more, if I do in fact decide to sell, but there are other factors to consider, like tax penalties! 

Now obviously, if a client or myself, is looking to purchase, hold for short time and then resell, then the importance will obviously change, as I would want to make sure I am in a good area for resale. Again, it all depends on the client's needs and wants.

So now that I have that out of the way.

Why is the renovation so important? Why in my eyes, is in the 2nd most important?

In my opinion, the renovation is far more important than the purchase price. It does NOT matter how great of a deal you got on the property, if the renovation is done as cheap as possible, and shortcut after shortcut is taken, I can promise you this, you will pay for that great deal in numerous maintenance calls, once you get occupancy. I currently manage an apartment complex (24 units) that is in this exact scenario, and it is literally bleeding the owner dry. The owner bought this "great deal", on a short sale scenario, and it is in horrible shape. There are 6 units, that are literally boarded up, due to a roof that has been screaming to be replaced for 4 years at least. The leaks are so bad, it has collapsed the ceilings in 4 of the 6 units, the other 2 units are boarded because of a very strong mildew smell from the other units.  Once the owner has the funds to replace the roof, all 6 units will need to be gutted to do a complete mold remediation, and the rough estimates are 30-40K!

The fact of the matter is this, when any property is under renovation and regardless of how many contractors are on site, there is simply no way to accurately simulate what a property goes thru, when a family moves into it. The water usage is 10-20x higher, thus bringing out plumbing issues. The electricity used by contractors is minimum at best, they typically use 1-4 outlets and only for 7-8 hours a day, and only 5 days a week on average. A family uses electricity 24 hours a day, 7 days a week, thus exposing wiring issues. If these issues do not show up during the renovation period, they don't get fixed. Instead the tenants move in, and it almost never fails, the maintenance calls come pouring in. The fact is this, it is and always will be cheaper to fix them during the renovation, than it will be to send out the electrician, plumber or HVAC technician on a service call.

When I contract with a skilled labor technician to perform their expertise during a RENOVATION, it is around 30-40% cheaper on the labor, versus me sending them out on a service call. Most skilled labor techs in KC, will charge $75-125 per hour for service calls. This rate is for licensed contractors, I do NOT use unlicensed contractors for the major components of the property. The reasoning is pretty simple, when they are on the job site for 6-8 hours a day, they don't waste a lot of fuel driving around the city.

What HAS to be addressed with each and every renovation, if you truly want CASH FLOW!

1. Electrical — This in MOST cases means rewiring the property, most of KC"s properties are old, at least in the areas where cash flow is available. If you do not commit to rewiring the home, it will no doubt fail. Modern appliances use more electricity than they did 50+ years ago. These appliances have many more bells and whistles with them, so it's easy to understand why they use more juice. If you have older wiring, it will fail, plain and simple! And if you want to take advantage of "The Renovation", you will have to rewire the property.
Example:  I have a 4 plex under renovation right now, it is a all brick building that was constructed in 1909, it's original service entry cable from the pole, was 100A! That's is 100A of power for 4 750sq foot apartments! We are rewiring the entire building, and our engineered drawings call for electrical service entry cable that is a massive 748 Amps!! This required the power company to construct a new transformer, just for this building.

2. Plumbing – For much of the same reasons as electrical, you do NOT want galvanized water lines in anything you own. When these ancient lines are left in the property, you end up with tenants complaining of no water pressure, especially in upstairs bathrooms. The same can be said for a water heater, if it's more than 10 years old, get rid of it!

3. HVAC – Again, more of the same reasons! Age is not very kind to furnaces and condensers. The major problem here is if the furnace is more than 10 years old and is not replaced, here is a very real scenario. Since furnaces are only useful during the cold months (not referring to the blower motor), their problems don't surface until the tenant needs it to warm them up. So as a PM, I get a call at 6PM, when the tenant gets home from work, saying their furnace is not working and its 20 degrees outside. UH-OH! I call my HVAC tech, and send him out, he informs me that the part needed is not on his truck, after all there are only 100s of manufactures of furnaces (probably exaggerated, but there are alot), and there is absolutely nothing universal in furnaces. So now I have to make a decision, do I pay the HVAC tech $300 to get an emergency open at a supply house, for what is likely a $50 part, or do I call the nearest hotel and put the tenants up for the night?  You see what goes overlooked sometimes, is the PM's have to operate within state laws regarding tenants, and how to properly manage a situation that could be potentially deadly. All states in the US have landlord/tenant laws, and for those that choose to ignore them, here is what can happen:

1. Nothing more than a visit from a city inspector, and then a laundry list of things they want you to fix. Oh and if you don't fix them in a timely manner, in Kansas City, they can fine you up to $1000 per violation, per day!
2. The same visit from the inspector, can and has resulted in an order to immediately evacuate the property. This does happen on those cold nights when the furnace goes out. And the owner is left with this big adorable GREEN sticker, saying the property is no longer inhabitable, and your occupancy permit has been revoked.
3. Worst case scenario, you get sued!

I am not trying to scare you off of investing in any US state, but these are the realities that have to be considered! If you do not address the major components of a property during the renovation, these scenarios can happen unfortunately.

This is why I created "The Renovation", I don't have these problems, EVER!

This is why I contest the renovation is the 2nd most important factor in a property, when done correctly, it will protect the very thing you intended on, CASH FLOW! When done cheaply, it will lead to massive maintenance requests, that will kill the cash flow!

Everything else is mainly cosmetic garbage, that does not amount to a whole lot, but for some reason, more thought seems to go into this, than the list above.

What ever you do, insist on new items on the mechanical list above, it will save you alot of money down the road, I promise you that!

I do apologize if I have scared you, but as with any situation, there are professional rehabbers and property managers in every location in the states. These companies, will understand their significance in this equation.

I will say it again, the NUMBERS in the US are staggering, the numbers simply don't lie! What happens in almost all cases! Bad property management, bad rehab's, poor tenants! All of those things can be avoided, and your left with a very real deal, capable of silly cash flow numbers.

Again thanks to all that have taken the time to read this and all my posts. I hope you all enjoy reading them as much as I enjoy posting them.

John