? re mark up rates and fees to tenants

General Landlording & Rental Properties
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? re mark up rates and fees to tenants

Diane Menke
Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes

We do a little landlording renting out SFH's. We try to run this like a business. The tenants are our customers and we provide services in the form of clean decent housing. Usually it goes well.

Over the years we have had some bad tenants who seem to always have problems like mice, bugs, damage, stuck drains, they move out leaving huge piles of debris we have to haul away, and they leave the place so dirty it needs sanitizing and a full paint job.

We try to shift these expenses to the tenants via charges to their security deposits. More recently when I had to pay the pest control guy a 3rd time to take care of mice in a house where the tenants were storing garbage in the kitchen, I thought to bill THEM for this visit. Ditto the clogged drains caused when they jammed uneaten cereal into the pipe.

Typically we bill the tenants for the cost of the service multiplied by a Mark Up. Right now our MU is 1.5. So if it costs me $100 it costs them $150.00.

Does anyone else mark up costs and if so by how much? What things do you cover as normal maintenance and what do you bill for? Pests? Unusual wear and tear? Hauling? What rate do you use to you bill for your own time?

Thanks very much
Diane

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  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    17y

    You might want to check state/local law regarding the mark-up on out of pocket expenses. I know in some states that's not legal.

    I never used a per-hour charge for my time, instead I realized that I was UNDERCHARGING on a lot of things that needed doing on move-outs. I haven't had rentals since '98 or so, but here were some rates that I was charging back then:

    Mowing lawn-$50. I had people complain that "the guy that cuts the neighbors only charged $35". I'd tell them that's because the guy was coming every week, since I couldn't guarantee him a weekly job I had to haul my mower over, which costs $50.

    Changing a burnt out light bulb-$10. It's not the cost of the bulb, but the fact that I had to get the ladder, take down the globe, clean the globe, wait for it to dry and put it back up.

    Picking up piles of dog poop out of the yard-$5 per pile. Twice I had people bring this up, my reply was, "let's go see Judge Yeoman, and see how much he thinks is fair". End of discussion.

    Hole knocked in sheetrock by doorknob-$75! BTW, a door stop on each door was an "initialed" item on my move in check list! I know it's only a 4" X 4" piece of sheetrock, but it's cutting out the old piece, gluing in the braces, attaching the new piece, taping, floating, painting. If that's the only thing the house needs you could spend a lot of time waiting, or making 3 trips!

    Cleaning oven-$50. OK, then if it's so easy why didn't YOU do it?

    You get the idea. Don't shortchange yourself, but don't break the law either.

    Frank

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Thanks Frank,

    My business partner is a lawyer so we will look into the legality of the bill rates/methods we use.

    It is surprising how the tenants think all this service comes for free and is so easy. Like you said 'Why didn't YOU do it?". It certainly all takes a lot of time.

    In remodeling we mark up costs a straight % to arrive at price. I can't imagine how a management company might make any money if they are not allowed to MU a cost.

    Happy holidays
    D

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Property management companies do mark up their maintenance costs. That's billed to the owner, though, not the tenant.

    From what I understand, if you try to deduct a charge for your labor from a security deposit, and the tenant disputes it and takes it to court, the judge will typically disallow the charge. If you have a hired employee, and charge their hours for the repairs, you could probably make it stick. For your own time on your own property, not so likely.

    I've not had a problem yet where a tenant caused a service call. When that happens, the tenant will get the bill, the straight amount I was billed. My lease says any money I get goes to late fees first, then any other charges, then rent. So, it will have to paid with the next rent payment to avoid having it turn into late rent and starting an eviction.

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    So if we created a management service company, this company could then create a bill for during lease service charges or charges incurred after move out (all costs marked up) , and this bill could be presented to the tenants without grounds to dispute?

    I would just as soon not do the work myself anyway. But I am a super fast painter so I am probably cheeper in the long run than a painter who I would have to hire at $200 a day.

    Our lease document does state any cleaning costs, unusual wear or damage...these things would come out of the security deposit. So we suggest tenants hire a hauler and a cleaning co to make the place rent ready when they leave.

    From what you guys are suggesting, we should double check our proceedures to be legal, and if necessary, create that small property services company so we can bill as needed.

    Its not that we want to gouge tenants but when we get a house full of students they tend to think "mommy and daddy" are going to clean up and fix everything they leave behind. Its astonishing. Typically what they leave behind in junk and damage, plain filth, can eat up a $1400 -$3000 security deposit very quickly.

    Thanks again guys all good information!
    Diane

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    I would try to find some other landlords in your area and talk with them about local custom. No direct experience, but I've been told by people around here (a property manager) that the owners labor cannot be deducted from a security deposit. His recommendation is to always pay to have work done, even if you could do it yourself, and then present the receipt to the tenant.

    Now, you might get away with forming another company. But, a judge might probe more deeply, find out its really your labor and view the attempted obfuscation badly. Keep in mind that tenants can come sometimes get back double or treble damages for improperly withheld security deposits.

    For your house full of students, I'd hire people to do all the cleaning and fixing, deduct the actual charges, and leave it at that. If that exceeded the security deposit, I'd go to small claims court and get a judgment, for what that's worth. The excess charges are part of the business.

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Jon,

    I appreciate what you are saying. I can hear the experience and wisdom in your points.

    We have a few entities now so creating another is not a big deal but it initiates a self reckoning.

    It makes me wonder why anyone would want to landlord and do the day to day work themselves. Jeez you could loose your GP for the year if you didn't charge for expenses and every single one of them.

    By the way my wonderful CPA has discussed with me exactly what you articulate. If I as landlord physically involve myself, that is not passive income so its taxed at a higher rate. So make it passive ASAP.

    OK thats good to know and certainly a cue. There is ANOTHER way to do this. "Stop being a hobby. Make it a business. "

    It also makes me ask "why am I doing this?"

    So far I do "this" to develop wealth and cash flow/income.

    So far so good.

    Its the buying and holding that have helped up create a nice cash flow and pool of wealth. Hey the rent is a nice perk. the good tenants I love 'em.

    Now, the thing I want to do is get the pool of wealth to grow. In the past its always been equity we "farmed". Equity is on a no growth curve at this time. So perhaps the thing to do is grow the wisdom we have gained so far???

    What is my next move? Something tells me its gonna be a little bit different. I really do not want to be distracted by tenants who destroy a rental season for me - or my houses!

    But I love buying and selling and putting developing projects together. I have a great remodeling team and a great spec development team.

    I am gonna be pondering these things over this holiday as part of my NY planning.

    Cheers and thanks for your helpful insight. Toast the NY to come.

    Diane

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  • Josh Green
    Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
    17y

    i'm interested to see what MikeOH has to say on this....he has tons of properties and manages each one himself and blogs about it....

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  • Timothy W.
    Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
    17y
    Originally posted by J20A00G:
    i'm interested to see what MikeOH has to say on this....he has tons of properties and manages each one himself and blogs about it....

    What you're able to do varies state to state and locality to locality. Not sure Mike's advice would apply to Pennsylvania. I'm able to use a lease that says at the very top, "Take this lease to your attorney before signing it. Tenant gives up consumer rights by signing this lease." It's legal where I'm from but I hardly doubt judges in more liberal areas would care for that.

    As for me, my lease pretty much charges them every time I have to do something besides collect rent. I'm out of town and away from my leases right now but when I get back I'll see what language in there I have on mice.

    Tim

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    When we first started having tenants, we wanted to be sure to capture all possible income. The cash flow was good. But we could see how even a few expenses and a bad tenant could sap the positive cash flow.

    My partner the lawyer wrote the lease to cover any potential problems like this. When we give the potential tenants the lease ap. we take the time to tell them to read the doc, and we tell them what it says about the security deposit and any fees.

    In our city, renting a house means that you pay your own utilities, you run it like your own home. You keep the yard nice and the house sano. Problems come into play when we have a tenant who doesn't know what clean means, or that they need to call us when there is a leak, or that the garbage belongs outside and cat food in a bowl - stop feeding the mice already. Of course I want to take care of any pests before the problem gets too big. So if I bill them for that, maybe they will just not let me know about that problem. So a conundrum of sorts.

    We will keep looking at it. Thanks fellas.

    D

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    17y
    Originally posted by Diane Menke:


    By the way my wonderful CPA has discussed with me exactly what you articulate. If I as landlord physically involve myself, that is not passive income so its taxed at a higher rate. So make it passive ASAP.



    Diane,

    You need a different CPA.

    A rental property activity is a passive activity, by default, regardless of your level of active partcipation. "Passive" is an IRS term applied to the character of the rental income and how it is taxed, but does not preclude you from directly (actively)participating in the operation and management of your rental property.

    If you truly have a passive role in the rental operation -- that is, you have no say in how your rental is run, no choice in tenant selection, no right to approve repairs and repair expenses, and no say in how and when income is disbursed -- such as a limited partner in a real estate partnership, then you have a passive role in the sense that your CPA is suggesting. In this case, your passive rental losses are suspended and carried forward. You can not use the net passive loss allowance on your 1040 regardless of your income.
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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    17y
    Originally posted by Diane Menke:
    Its not that we want to gouge tenants but when we get a house full of students they tend to think "mommy and daddy" are going to clean up and fix everything they leave behind. Its astonishing. Typically what they leave behind in junk and damage, plain filth, can eat up a $1400 -$3000 security deposit very quickly.
    We have college rentals and we hire other college students to do this kind of clean out. Then it is a documented, direct expense deducted from the deposits.

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Sounds like a nice approach.
    Thanks
    D

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  • Tom C
    Real Estate Investor · OH · Member since 2008 · 1k+ posts · 86 votes
    17y

    Tim,

    "As for me, my lease pretty much charges them every time I have to do something besides collect rent. I'm out of town and away from my leases right now but when I get back I'll see what language in there I have on mice."

    Are you saying that if you have a leak under the sink and have to fix it, you charge the tenant for that fix?

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    No any repairs due to normal aging and wear and tear are on me.

    What I want to be able to charge for at a nice MU is things the tenant damages, damage more than normal wear and tear, the piles of stuff they leave behind that we have to pay to haul, and I want to be able to bill for carelessness that leads to pests and drain glogs.

    Not to be a sexist but the young guys we rent to are generally much smarter about not glogging the drains or atracting pests.

    Thanks
    D

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  • Josh Green
    Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
    17y

    "Not to be a sexist but the young guys we rent to are generally much smarter about not glogging the drains or atracting pests. "

    I can attest to that as well. When I was in college, I did notice that my guy friends took better care of their apts/dorms than my firends that were girls. Interesting.

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    17y

    You need to read your local landlord tenant law. The law in my state tells me that I can only charge the tenant for actual costs. If I hire a contractor to fix the problem, I can charge the tenant whatever the contractor charges me. If I fix the problem on my own, I can not charge for my own labor.

    By extension, I also interpret that to mean that even if I outsource the repair work, I can not add a "supervisory fee" and mark up the charge to the tenant.

    Let us know what your attorney says.

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Indentured servitude! Wonderful!

    The nice thing is I do own a remodeling company too. So need be I can hire my own company and often I do. My crews and subs take care of things on the houses for me and they bill me at regular rates.

    We will certainly look into all this.

    D

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  • Timothy W.
    Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
    17y
    Originally posted by Tom C:
    Tim,

    "As for me, my lease pretty much charges them every time I have to do something besides collect rent. I'm out of town and away from my leases right now but when I get back I'll see what language in there I have on mice."

    Are you saying that if you have a leak
    under the sink and have to fix it, you charge the tenant for that fix?


    Honeslty Tom, water leaks are a bit different. I will get onsite immediately to check out a water leak to stop it from damaging the property and then to determine if it was my fault or tenant's. If they threw stuff under the sink that caused the drain line to break then yes, I would charge them/their security deposit. The discussion at hand lent itself to mice and/or clogged drains (which I see as on the level of lost keys). It's something outside my realm of responsibility and I'll be paid for my time. If I have to prove the value of the repair, I use estimating software.
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