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Posted over 7 years ago

​2 Keys to Successfully Heal Any Neglected Rental Property

This article is aimed to help new investors/managers who are inheriting tenants or worried about the potential problems that come with inheriting tenants. I found these keys to be critical in turning an overwhelming and dysfunctional 76 unit apartment complex into a smooth operating cash cow. These two keys will help you achieve long term success with even the most neglected rental property.

The beginning of my real estate career was a trial by fire so before I jump into explaining the keys I used to heal a dysfunctional rental property let me give you a brief background of the situation I was in.

Background:

It's 2011, a slow job market, and I'm fresh out of College with a Bachelors in Finance. I had no real estate experience and had never held a full time job. After many interviews and resume submissions, I woke up one morning to an exciting Job offer: Property Manager of a 76 unit apartment complex.

They wanted me to start immediately.

Me: "EXCELLENT!"

After a few days at the corporate office, being familiarized with the accounting system, customer information database, and my basic day to day tasks I was sent to my small one man on-site office. Essentially the guidance given to me was to collect rent, evict residents who had not paid rent, start renting apartments, answer phone calls/emails, and handle any resident issues.

I quickly discovered that the previous management had not been managing the property; it was a classic case of the inmates running the asylum. I was the third new manager within the previous 6 months since the current management company had taken over the property. And the longer tenured residents let me know that many more managers had come and gone over the years. I was looked at as a short term problem by most residents with little authority to make change or enforce policy. The previous managers had simply lasted as long as they could under the circumstances; covering up problems, avoiding confrontation, and making promises they couldn't keep until they were fired or quit. I had my work cut out for me.

Below is a list of problems I encountered during the first few months as the Manager of this Property.

  • Hoarder Tenants
  • Drug Addicts/Drug Dealer Tenants
  • The No Rent and Late Rent Payers (~30% of residents were delinquent or being under invoiced)
  • Below Market Rents (Average Rent was between 15-20% below the direct competition)
  • Partiers/Noisy Residents
  • Biker Gang Member Resident
  • Bad Pet Owners
  • Subletters/Illegal Roommates
  • Mentally Unstable/Ill Residents
  • Unable to Retain Good Residents Due to The Problem Residents
  • Unaddressed Maintenance Issues
  • Maintenance Cutting Corners on Vacant Apartment Turnovers
  • High Vacancy (2X market)
  • Out of date records and resident information
  • Apartments that had not been inspected for years

In my experience, this property was an extreme example of neglect. I've takenover many more properties since, and this one was the biggest job.

Okay, that is enough background. Let's get to the 2 Keys that I used for the foundation of healing this neglected property.

KEY 1: Have a Comprehensive Rental Lease Agreement | Over explain and be detailed in making sure it is understood by all residents | Enforce the Lease

I was lucky that the majority of residents were signed to a well written and comprehensive rental lease agreement on my first property. So many of my problems were a direct result of the lease not being utilized and enforced.

The lease is everything when it comes to efficiently and effectively managing a rental property. You need to maintain the integrity of the lease, anything that is written in your lease should be enforced, especially when you are dealing with multiple residents. If your residents see each other violating the lease, it is a green light for them to violate another section. You will be running around like a chicken with its head cut off from violator to violator, explaining yourself, turning tenants against each other, looking like you don't know what you're doing and not getting anything accomplished.

If you aren't lucky enough to inherit a good lease you can amend it as needed at the end of each residents agreement. Most residential leases are 12 months or less, so no matter how large your property/company is you can fully implement any lease changes within a year. The lease amendment and renewal period is a perfect opportunity to reset and confirm expectations with your inherited residents, discuss the lease with them and determine if you are going to keep them as a resident.

I'm not going to go into detail of what should be in your lease. There are already a number of very good articles on BP on the subject. (38 Addendums Every Landlord Needs for a Battle-Ready Lease)

For new residents, be sure that they read and understand the lease in whole. I took the time to read and explain every line of our 12 page lease to new residents. I found that many of the residents at my first property were unfamiliar with the lease they signed. I was horrified to find that in some cases residents were given keys and allowed to start moving in before ever seeing the lease. The manager would just tape the lease to their door for them to read and return at their leisure! (This explains why some of my residents did not have a lease)

KEY 2: Do not rent below market | Know the Fair Market Value of your Rentals | Raise rent to market when leases come up for renewal

Renting below Fair Market Value (The Ultimate Guide To Fair Market Rents) seems 'easy' and is tempting sometimes for both investment owners and managers just to start getting something for a unit that would otherwise be vacant. In my experience renting below market comes with heavy cost to daily management and the long term success of the property. Not only are you getting less than optimal return from your investment every month, but when you do eventually do go to raise rent on that unit you will run into problems.

  1. Your resident rented the unit because it was 'cheap', in many cases these residents are caring for your property as if it is cheap.
  2. When you eventually try to increase rent, the resident you rented to below market value will no longer see the value in the apartment and will decide to move-out, leaving you a vacant and likely damaged apartment that has been producing below market returns for the last 12 months or more.

If you are having trouble renting a unit, look for ways to increase its appeal to renters in ways other than discounting rent. See what your competition is offering that you might be missing, find the advantages your property might have and update your marketing. Ask for feedback from people who viewed your apartment but decided to rent somewhere else, a lot of times it is something simple like needing a little additional cleaning or a fresh coat of paint that could make the difference. It might be time to update old carpeting or appliances. Be creative in finding a way to cost effectively improve the unit so you can get the fair market value from a resident.

In the case of my first 76 unit property the average rent per door was $550. I estimated the Fair Market Value for each unit to be between $615-640. So conservatively estimating, the property was losing out on $4940 of potential rent each month.

Actual Monthly Rent $550 x 76 units = $41,800

Potential Monthly Rent 615 x 76 units = $46,740

Below Fair Market Value by $4,940 every month

The impact of being below Fair Market Rent is easy to see on a larger property like this. With a total of nearly $60,000 lost annually. That is revenue that could be put back into the property to compete with the competition and win better quality residents.

Increasing rent is a delicate process and you will lose good residents with rent increases. But you will keep some good ones as well, and if you are following the first key on your property you will replace those that leave with higher quality residents and get the property moving in the right direction. 


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