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

New to Real Estate · Member since 2024 · 16 posts · 16 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.

Hi Ruchit - sorry to hear about your loses with real estate. I also live in Bay Area and interested in OOS investing. May I ask where you are investing in?

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Damon Albers

OP

Member since 2020 · 20 posts · 13 votes

1y

Memphis

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Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

1y

@Damon Albers

I hate the alphabet rating system because it is such an arbitrary thing that boils down many important factors to one letter. Neither of these properties is a median-type homes in Memphis, no matter how you measure. They certainly are not above average which B+ implies. The 38128 is slightly below the median and is in a decent area, but definitely an area on the more challenged end of the spectrum in Memphis. Your experience is not normal for Memphis and not normal for this zip code.

The 38109 property is likely an absolute no-go for out-of-state investors. This property, in particular, is in an area many local investors will not own, visit or even entertain as an investment. There is zero demand from owner occupants and little to no demand from local investors. If you can dump this property for break even, I would make that move as soon as possible. I'm not trying to be hyperbolic. These are not great investments and while the experience is not typical for Memphis, nothing I've read or seen should lead you to believe your experience will improve.

Best of luck to you as you go forward. Not sure I can offer any help, but if you need advice or direction, I'm happy to help if I can.

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Jordan RayBusiness Member

Real Estate Agent · Memphis, TN · Member since 2023 · 630 posts · 323 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

Hey Damon, it's crazy because I was just commenting on another post about the same thing. I personally would stay away from turnkey companies because there is just way to many things they don't tell you.. and you will overpay. Thats how they run their business. There is plenty of property for sale in Memphis TN that can meet the 1% rule and you wont overpay for it on a "promise" (The inflated profits via the pro-forma they gave you). Find an agent with a team that you can build a longterm working relationship with that will make sure you won't overpay for a property and overall will land you an actual deal. Let me know if I can help in any way!

[email protected]662-642-1458

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Robert BellBusiness Member

Lender · 38119 · Member since 2021 · 70 posts · 71 votes

1y

Comparable sales are the most reliable way to determine value. We drive to the property for every loan we make and get a feel for the street scene. We steer our clients away from houses that might technically have high rent but are in a stagnant or declining area.

Real estate investments should be about long-term appreciation, not just a snapshot of today's cash flow. We want our borrowers to succeed and return again and again.

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Damon Albers

OP

Member since 2020 · 20 posts · 13 votes

1y

Hi Chris,

Not sure you have the correct address. One property is 4655 Royal View Dr. and the other is 3082 Parker Rd.. Both in Memphis.

Thank you,

Damon

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

1y

@Damon Albers

I don't know anything about Memphis and don't invest there but just looking at the maps, it seems like the one on Royal View Drive is in a better area, and rents for above the median rent in the Memphis area. The other one I don't need to know anything else about after looking at it on street view...

Not sure if this will make you feel better, but I've had rough turns in good areas too. I don't let it bother me - I fix it up, re-rent, and move on. You have to hold rentals for years to smooth it out. Sounds like you've had some good appreciation on that first one and maybe it's helped offset some taxes on your W2 income? So the total return is probably better than just the 'cash flow.'

With that said, property ownership is not passive and cash flow is lumpy. Hope this perspective helps. Keep us posted

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Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

1y

Quote from @Damon Albers:

Hi Chris,

Not sure you have the correct address. One property is 4655 Royal View Dr. and the other is 3082 Parker Rd.. Both in Memphis.

Thank you,

Damon

Gotcha. Those were the addresses I had found earlier in the thread. As I said, Royal View is the best property, and you should not expect repeated evictions or failed leases. That is not normal for that area, but it is sometimes how things go.

If you Google the street view of the Parker property, you will see that, in my opinion, it is not an area you want to be in long term. Of course, everyone gets to set their expectations. We invest in 38109 on a limited basis when a client requests properties in the area, but further north and east. It looks like it is for sale now at $112,000, and I wish you the best of luck getting it sold.

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Jay Fayz

Investor · MD · Member since 2024 · 15 posts · 3 votes

1y

Quote from @Theresa Harris:

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.

Where can you find information of vacancy rates and number of turnovers in an area? Is it from experience of there are tools out there that show numbers on specific areas? I was also thinking of just calling some local property managers to get some insight about the areas. Would love to hear what you say.

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Jay Fayz

Investor · MD · Member since 2024 · 15 posts · 3 votes

1y

Quote from @Mike Dymski:

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.

Hey Mike, are zip codes the way to look at things? I know some zip codes in my area that one part is a very high class neighborhood and house are over 1 million while on the other side of the zip code is low class and house are going for 80k?

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Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

1y

Quote from @Jay Fayz:

Quote from @Theresa Harris:

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.

Where can you find information of vacancy rates and number of turnovers in an area? Is it from experience of there are tools out there that show numbers on specific areas? I was also thinking of just calling some local property managers to get some insight about the areas. Would love to hear what you say.

Where I am, you can usually google vacancy rates and get that info.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

1y

@Damon Albers

Since those properties are used for investment they would qualify for a 1031 exchange. This would allow you to indefinitely defer the tax on the property and use it to purchase larger property/properties in a nicer appreciating area. Or in your case, maybe even change classes of property and use what's known as a consolidation exchange to combine the sales into a larger asset like a multi-family or commercial property.

Even if you aren't making a lot of money on any appreciation, you've been taking depreciation each year. And this adds up quickly since the IRS makes you pay that depreciation back when you sell. If you don't do a 1031 exchange.

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Wale LawalBusiness Member

Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes

1y

@Damon Albers

So sorry for your "not so good" experience.

It seems you bought a class C property in a class C neighborhood. I tell my clients all the time that the quality of your property will directly determine the quality of your tenants.

This is a very important rental property investing fundamental most new investors always forget or ignore simply because they are just too desperate for "Cash-Flow". It's cheaper on the front end but very expensive on the back end.

Somethings it even more expensive than buying a new construction in a class A neighborhood.

The turnkey investments are not always the best option for every investor especially if you are just getting started and low on cash or you don't have reserve/emergency funds to deal with issues like maintenance and vacancies.

Most turnkey companies proforma does not tell the complete story and that is why is called "PROFORMA" OR "PROJECTION", they don't account for the true vacancy, leasing fees, holding costs, and Headache factors that come with a Class C and D properties and neighborhoods.

Hopefully, they can help you get to 100% occupancy and sell the property so that you can re-invest in a better neighborhood and relatively newer property like 2020 or newer if is possible in that market, or just go to another market you understand better or have some kind of connection with.

All the best and keep us posted on your progress.

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ 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

That's the rub with low income tenants. They are friggin savages dude. If they did what they were supposed to do, the properties you could rent to them wouldn't be anywhere near as cheap as they are.

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

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

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