tenants breaking leases and excessive damage make it hard to be profitable

Memphis, Tennessee
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tenants breaking leases and excessive damage make it hard to be profitable

Damon Albers
Member since 2020 · 20 posts · 13 votes

Hi, 

I have two houses that I purchased from Memphis Investment Properties (M.I.P.) who still manage them. Property one is a 3 bdrm 2 bath with a garage that rents for $1,350 and property two is a 3 bdrm 1 bath, driveway parking, that rents for $950.

Before I bought the houses, M.I.P., provided a proforma on each property. They allowed in the proforma for a 3% maintenance. The proforma's would have been accurate but, what they didn't allow for, is the turnover cost between renters that left excessive damage. Also, the vacancy rate was understated.  

My first house had a tenant in it when I bought the house and they just up and left and left the house in rough shape. Then my second house which was freshly turned had a tenant that up and left after a couple of months and caused excessive damage. 

On the first property, we sued and won a judgement of over $6,000 but I have not seen a penny and it's been over 18 months since the judgement. We sued on the second home but don't have a ruling yet. Now my first property currently has a tenant that is not paying rent, so we started the eviction process. I expect that I may have excessive damage on this home as well. 

Out of 4 tenants, only one has abided by the lease. 

Am I just unlucky or is this  what I can expect in this market? 

I was really excited to be a real estate investor but having 3 out of 4 tenants break leases and cause excessive property damage as well as unexpected turnover cost from excessive damage, is making want to get out.

Thank you for your any input you would like to share. 

Damon





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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
1y

The only people that win with turnkey investments are the turnkey companies. If these homes were such great investments, they would keep them for their own portfolio.

When you purchase an investment, calculate your returns based on actual performance. Forecasted performance is your best-case scenario and shouldn't be relied on, particularly in a tougher market like Memphis. 

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  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    1y

    What kind of area are they in?  To me it seems they are in rough areas so you'll get these kind of tenants. If the tenants are bad they will not pay you back even if you sue. I would not go through that process, not worth the time and money. Can you sell them and move on?

    2Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    1y

    @Damon Albers, a few things to think about:

    1. When you are looking at estimated provided by the seller take them with a healthy grain of salt. They have a motivation to paint a rosy picture to make a sale at the best price possible for them.

    2. Even accurate estimates don't bear out on a small sample size. Having just a couple properties for a short time isn't enough sample size to determine what an accurate estimate should be.

    3. Use your own estimates when buying and estimate conservatively.

    4. Are you involved in the tenant placement process? The criteria used? Do you make any decisions as to the value-proposition offered the tenant. For example, do you allow pets? Provide appliances like a washer/dryer that other landlords may not. These are decisions to can make to subtly change the applicants to get and how long you keep a good tenant thereby affecting your vacancy/turnover costs.

    5. Judgements are often not collected on. The rate of collection is so low many landlords do not even bother suing. You need to have a plan of actions to take to collect if you even want a chance to see anything from those judgements. This will differ somewhat from state to state.

    3Reply
  • Damon Albers
    OP
    Member since 2020 · 20 posts · 13 votes
    1y

    M.I.P. has properties in A+,A, A-,B+,B,B-,C+,C based on number of renters and other factors. It's M.I.P.'s rating system. My properties are in B+ areas.

    I see in writing what they say they use to screen tenants and it looks as good as any I've seen. 

    I agree with you on not being able to collect on judgements. Not sure why any renter would abide by a lease if they are not enforceable. 

     

    2Reply
  • Damon Albers
    OP
    Member since 2020 · 20 posts · 13 votes
    1y

    Maybe I should sell. I get call daily in investors trying to buy them. Especially the 3 bdrm 2 bath with garage property. 

    1Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    1y
    Quote from @Damon Albers:

    M.I.P. has properties in A+,A, A-,B+,B,B-,C+,C based on number of renters and other factors. It's M.I.P.'s rating system. My properties are in B+ areas.

    I see in writing what they say they use to screen tenants and it looks as good as any I've seen. 

    I agree with you on not being able to collect on judgements. Not sure why any renter would abide by a lease if they are not enforceable. 

     


    Judgements are enforceable, but YOU have to do the work to enforce them!

    However, many times its just not practical or cost effective to put the work into it because in many cases its not easy to do.

    In some cases it is worth the effort though. For example, if you have a tenant who will want to buy a home later on. If they don't pay your judgement you file it as a lien at the courthouse and they won't be able to get a mortgage to buy their home until that judgement is paid because that lien would apply to any house they buy and be in 1st lien position BEFORE the mortgage. That is a simplified version of how it would work but a scenario where collection is much more likely.
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1y
    Quote from @Damon Albers:

    M.I.P. has properties in A+,A, A-,B+,B,B-,C+,C based on number of renters and other factors. It's M.I.P.'s rating system. My properties are in B+ areas.

    I see in writing what they say they use to screen tenants and it looks as good as any I've seen. 

    I agree with you on not being able to collect on judgements. Not sure why any renter would abide by a lease if they are not enforceable. 

     


    Frankly there is no way those are B + areas your describing C - and D.. like the houses are in Fraser or something like that.
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  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    1y

    I would sell then buy in a better location. 

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    1y

    I agree with selling and buying in a better area.  I'd do your own leg work on vacancy rates and turnover costs.  While you're basing it on 2 properties, you've had problems with 3 of the 4 sets of tenants and two of those caused excessive damage (guessing the one you are evicting will as well).  I'd also walk through them once the tenant is out to see what shape they are in.  I had two problem tenants back to back-one was a long term tenant and I don't know what happened with her (possibly drugs), the other covid hit and her and her husband split up and she got in with some troublemakers who she knew from high school.  It was a pain, but in the end, I came out ahead as there are rent caps in the area and got good tenants.  Within a year of the higher rent more than covered both the damages and lost rent...in both cases.

    1Reply
  • Gregory SchwartzBusiness Member
    Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
    1y

    Good tenants can significantly reduce vacancy rates, turnover costs, and maintenance expenses.

    Many property managers I know are quick to fill vacancies, often asking, "Do they meet the minimum requirements?" If the answer is "close enough," they move forward without much hesitation.

    While it's true that higher-quality tenants are easier to attract with nicer homes in better areas, I’ve managed C-class properties and had fantastic tenants. The key? Rigorous screening.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y

    @Damon Albers

    Sounds like these properties are in a class c area and your manager is not doing a good job vetting them

    But this is not out of ordinary for c class rentals which is why people look at cash flow and be like wow but one $5000 bill can wipe out 4-6 months of rental income and properties never make money and rarely appreciate

    This is why we do not do lower class rentals as stated cash flow vs reality are typically not close

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  • David B.
    Investor · Worcester County, MA · Member since 2016 · 122 posts · 72 votes
    1y

    Based on the rents, I would guess the $1350 house is in a C+ or maybe B- area, and the $950 is in a C- area.

    What neighborhoods or zip codes are these in?

    1Reply
  • Damon Albers
    OP
    Member since 2020 · 20 posts · 13 votes
    1y

    David B. - 

    The address of the 3 bdrm 2 bath, garage is 4655 Royal View Drive, Memphis TN 38128

    The address of the 3 bdrm 1 bath, driveway parking is 3082 Parker Rd., Memphis TN 38109

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    1y

    The only people that win with turnkey investments are the turnkey companies. If these homes were such great investments, they would keep them for their own portfolio.

    When you purchase an investment, calculate your returns based on actual performance. Forecasted performance is your best-case scenario and shouldn't be relied on, particularly in a tougher market like Memphis. 

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  • David B.
    Investor · Worcester County, MA · Member since 2016 · 122 posts · 72 votes
    1y
    Quote from @Damon Albers:

    David B. - 

    The address of the 3 bdrm 2 bath, garage is 4655 Royal View Drive, Memphis TN 38128

    The address of the 3 bdrm 1 bath, driveway parking is 3082 Parker Rd., Memphis TN 38109

     Hi Damon,  the Royal View house in 38128 looks decent to me. The house value of around $160K - $175K is just under the median for Shelby County and I think that area only has county property taxes, which is good. I would say "B" or "B-" class. I think you are just having bad luck with tenants on this one.   The 38109 house is in a tougher area.....I would get some advice from local experts on this one.

    2Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    1y
    Quote from @Damon Albers:

    Hi, 

    I have two houses that I purchased from Memphis Investment Properties (M.I.P.) who still manage them. Property one is a 3 bdrm 2 bath with a garage that rents for $1,350 and property two is a 3 bdrm 1 bath, driveway parking, that rents for $950.

    Before I bought the houses, M.I.P., provided a proforma on each property. They allowed in the proforma for a 3% maintenance. The proforma's would have been accurate but, what they didn't allow for, is the turnover cost between renters that left excessive damage. Also, the vacancy rate was understated.  

    My first house had a tenant in it when I bought the house and they just up and left and left the house in rough shape. Then my second house which was freshly turned had a tenant that up and left after a couple of months and caused excessive damage. 

    On the first property, we sued and won a judgement of over $6,000 but I have not seen a penny and it's been over 18 months since the judgement. We sued on the second home but don't have a ruling yet. Now my first property currently has a tenant that is not paying rent, so we started the eviction process. I expect that I may have excessive damage on this home as well. 

    Out of 4 tenants, only one has abided by the lease. 

    Am I just unlucky or is this  what I can expect in this market? 

    I was really excited to be a real estate investor but having 3 out of 4 tenants break leases and cause excessive property damage as well as unexpected turnover cost from excessive damage, is making want to get out.

    Thank you for your any input you would like to share. 

    Damon





    If anybody tells you, it’s easy, they have a a special agenda to sell or they are simply clueless.
    1Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    1y

    They have probably appreciated a lot depending when bought them. Just sell and reinvest in a multi unit A or B+ area

    0Reply
  • Damon Albers
    OP
    Member since 2020 · 20 posts · 13 votes
    1y

    Thx for all the input. My first property has appreciated from $138,100 to around $185,000 since I bought it 3 yrs ago. The second one is close to what I paid for it. 

    I think I'll follow several members advice and sell them both. 

    0Reply
  • Adam Michael Andrews
    Investor · Austin, TX · Member since 2017 · 107 posts · 89 votes
    1y

    Quality tenants and quality management are key parts of your success. If you are having trouble sourcing either over a years-long period I agree selling makes the most sense.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    1y

    Median household income for 38109 is $35k or ~$31k after tax.  $950 rent x 12 months = $11k annual rent.  $31k after tax annual income - $11k rent = $20k or $1,600 per month net income left to cover all other expenses (utilities, cars, insurance, groceries, kids, activities, etc.).

    Median household income for 38128 is $41k or $36k after tax.  $1350 rent x 12 months = $16k annual rent.  $36k - $16k = $20k or $1,600 per month net income left to cover all other expenses...same as above.

    Median household income in the US is over $80k or more than double these two zip codes.

    1Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    1y
    Quote from @Damon Albers:

    David B. - 

    The address of the 3 bdrm 2 bath, garage is 4655 Royal View Drive, Memphis TN 38128

    The address of the 3 bdrm 1 bath, driveway parking is 3082 Parker Rd., Memphis TN 38109


     38128 is good for rentals.  38109 you have to be careful where.  I’m on mobile and in a rush so not looking at your exact houses.  I think you’re with the wrong turnkey company.  You can do MUCH better, believe me. 

    1Reply
  • Taz Zettergren
    Real Estate Agent · Memphis, TN · Member since 2019 · 365 posts · 264 votes
    1y

    @Damon Albers hate to hear you've had a rough start in your real estate journey. If you've personally seen the applications and trust what they're doing on the front end to screen these residents it seems like this is an anomaly, at least for the 38128 property. We own and manage quite a few in that zip code and have had great success. 38109 on the other hand is a very challenged zip code so it makes investing tough. Personally I won't buy anything west of 3rd st which is hwy 61 if you're looking on a map. So if you are thinking of selling I would sell that one first but if you're a long term investor I would hold on to the property in 38128... and if you don't call me! I might be interested in buying in or have a client who is

    2Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    1y

    This is the risk of buying turnkey properties. Especially in the hood. If you have vacancies within 3 or 4 years, that crushes your profits. Not good. Great for property managers, but terrible for investors. I self manage 29 SFR and keep them all below market rent (except for my sec 8 properties). My tenants have no incentive to leave because rent would be much more expensive if they move out and go somewhere else. Plus I don't charge pet fees. So I rarely ever have vacancies. And some of mine are in the hood where I wouldn't feel safe walking around at night. lol. Keep rents lower than the going rate and give them an incentive to stay like no pet fees or upgrades to the homes.

    2Reply
  • Damon Albers
    OP
    Member since 2020 · 20 posts · 13 votes
    1y

    Good advice but I wouldn't say the 3 bdrm 2 bath 2 car garage is in a bad or dangerous neighborhood. Maybe the other property is?

    If I can get a decent price for them, I think I'm out. I was sold on the idea that I could be a "passive" investor. I'm learning that's not the case, at least for me, and I think Memphis Investment Properties (M.I.P) is probably one of the better (truly) Turnkey companies. 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Damon Albers Unlucky break for sure. May be the wrong properties or in the wrong location. But there also may be a way to salvage something here. If you feel like the properties have appreciated, you might consider doing 1031 exchange.

    A 1031 exchange would allow you to move into better properties in different locations while indefinitely deferring all tax on gain and depreciation recapture. Instead, You get to use the tax for your own benefit and purchase better property/ properties.

    Even getting out with a small profit will add to your return as long as you don't lose it all in taxes. Sometimes things just happens and if you can walk away with a little gain but get out of a problem situation you call it a good day!!

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  • Ruchit Patel
    Bay area, CA · Member since 2021 · 383 posts · 306 votes
    1y

    oh my god, @Damon Albers so sorry to hear that. I totally understand the excitement learning and dreaming of becoming rich one day, and you are left to regret that you would have been on top, if you never did the investment. 

    I know the feeling, same happened to me. I lost money for many years in real estate, while my friends were enjoying life with their savings. I thought one day it will be justified, but nope, now I lost money and my time to enjoy both!! 

    It's really unfortunate that people flash their wins on internet, and then other thousands of people naturally try to replicate that. But not all will win. Yes, there could have been many other things you could have done differently, but yes, you got quite unlucky. There is no denying that. 

    May the luck be with you. 

    1Reply
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