​A Real World 1031 Exchange - Part 5: Remote Landlording

A Real World 1031 Exchange             08/15/15
Part 5: Remote Landlording.

Because my Kansas City broker would become the property manager, we had already discussed several improvements that would be cost-effective in getting good tenants.   Among other things, he added a center fence to the duplex so each tenant had his own yard.

Most of the buildings were in good shape, so the PM concentrated on getting the current tenants' contracts in order and filling the vacant units.  The 12-plex was a bigger issue. The tenants there tended to be more transient so there were several vacancies.  Luckily, we inherited a good handyman with the property.   He knew the issues there, and he was also able to work at other properties.  This property actually consisted of two three-story buildings with two apartments on each floor.   For some reason, one building seemed to have higher utility bills than the other including over double for the water bill.  They searched for the problem for several months before finding a leak in the basement.  That accounted for some of the difference.

I only had one 4-plex in St Louis, and one unit was vacant when I bought it.  The property management company uses one contractor almost exclusively.  I had met him, and he seemed experienced, but his rate is about $70/hr so apartment prep can get expensive.

Shortly before escrow closed, there was a problem getting an inspection because a tenant would not let the inspector in.   I found that they were taking her to court for back rent.  I thought that would mean another empty apartment,but two days before closing, I found that the owner had let her stay on her promise repay all.  I warned my PM that she may be a problem.  Two months into my ownership, the PM said that she had not paid anything and would not answer the door.  It took another six weeks plus lawyer fees to evict her, and of course, she left the apartment trashed.

Seven months after purchase and $5000 later (including new furnace), we had a replacement tenant.  Oh, the first month's rent went to the PM.

Meanwhile, we had gotten a new tenant for the original vacant unit, but the PM had promised washer/dryer hookups not realizing that two of the units were not connected. ($600 to make good on her promise.)

The new tenant reported that his neighbor across the hall had asked him if she could run an extension cord from his apartment because her electricity had been turned off.   That continued to deteriorate until we had to ask her to leave.  Again, when the new tenant came in, they found that the hookups didn't work and had to be redone.  Now we have a fairly stable group of tenants, but after a year, I have decided to switch to a different property management company.   I will let you know how that works out.

I had bought five houses in the Center Point area of Birmingham, AL.  All of them were still being worked on when I made my visit.   They all had new roofs and new A/C units along with carpeting and fresh paint and fixtures inside.   They had all been vacant for several years before the rehab.  

Before we inked the deal, I was turned over to a property manager who had tenants ready to move in.  My rehabber, Justin Harrison, told the PM to call him for any issues that seemed prior to my owning the properties.  Of course, there were several of those.  No one had lived in these houses for years.   Water pipes and drains do not do well when there is no flow.   Also there were electrical issues which the rehabbers never noticed.  Justin was very good about taking care of most issues.  Unfortunately there is something of a disconnect when the rehabber turns you over to a third-party PM.  I would like to have the PM take responsibility for the rehab like I imagine a first-class turnkey would.  On the other hand, I would have missed the close relationship that I had with Justin. 

 My PM usually gives tenant calls to independent contractors. That prevents a lot of liability issues for them. Unfortunately, it can lead to multiple calls for the same problem where each contractor sees it for the first time. Also the out-of-state landlord is paying contractor prices for even trivial issues. And finally the PM never really visits the houses so doesn't notice other issues when on a plumbing call. This past winter there were three calls with three separate contractors before a heating issue was solved. That was expensive for me, but it must have been very frustrating for the tenant.

Another Birmingham rehab investor had told me that it takes about a year for most of the issues to come up. I must admit that things have been smooth recently, and the properties have been cash-flowing for the beginning.

I recently signed up for a program where the PM does a periodic inspection. I think this was the first time that they had seen the property since the tenants had moved in. They found things like debris on the roof and an unreported broken faucet, but they also reported that the houses seemed well cared for (which helped me sleep more soundly).

I would still like to find a handyman to clean gutters, make sure furnace filters and smoke alarm batteries are working, and alert me to any tenant issues.

My purchases were between August and September of last year. Based on my bank account, the first four or five monthes were about cash-flow even. (Mostly due to my St Louis problem child.) Since that time, the Kansas City and Birmingham properties seem to have been giving better returns than I had expected.

In order to do better analysis, I have spent the last several weekends trying to import the statements from my various PMs into QuickBooks.  I can't imagine trying to enter all of the transactions associated with thirty-two tenants every month.   Even when working from a report, I find that it is easier to put the info into a spreadsheet, then import it into QuickBooks.

I have imported the PM statements, mortgage payments, insurance and property taxes through July.   Now I need to try to make some sense of it.

When I began my quest for cash-flow properties, I used what I think is a fairly standard expectation of 10% for property management. I think that is understated since most PMs charge 8% to 10% per month plus they take most of the first month's rent for a new tenant. If you get a new tenant once a year, that is 16%. Also the vacancy factor of 8% seems low when you factor in rehab time & costs, plus marketing time, plus (often) time for the tenant to get out of his current lease. I hope to share my findings at some point in the next few years.