Hello! First post on here ... I'd like to ask for your advice. I live in the Seattle area. I have a 15-unit in Tucson under contract, and need to make a call on this in the next few days. The property has lower-income tenants, and rents are just a bit below market, but not much. The inspection has been done and is generally in good condition.
To make this deal have great cash flow, I'm trying to find creative ways to actively manage expenses in three categories: management, maintenance, and utilities. At the current price, the default option (full-service management at 10%, maintenance done through independent vendors, and water + sewer + garbage paid by the owner), the cap rate works out to about 7.5%. Not horrible, but nothing to get too excited about.
Here's the "creative" approach that I'm considering:
1. Put in place an efficient property management system, and tune it over time:
- https://www.rentecdirect.com/ or similar, for ~ $50 / month.
- That platform facilitates advertisements, online applications, background checks, leases, rent payments, utility billing, work orders, accounting, etc.
- I'm responsible for the business elements of management - making sure I have good screening criteria & lease agreements, contracting with vendors for larger repairs, and similar.
2. A local manager's assistant / handyman handles everything on-site:
- Clean, inspect, and maintain units between tenants
- Meet with tenants to show the units
- Manage paper documents for tenants who can't do it online for some reason
- Collect rent checks from any tenants who can't pay online; provide notice to and check up in person on tenants who are late
- Work orders go directly to the handyman via the software platform
- Handle any maintenance items expected to take less than two hours (bill me for actual material costs)
- Read sub-meters as applicable (see #3)
- Collect & deposit cash from laundry units and ensure they are in working order
3. Sub-meter the water, and bill water + sewer costs back to the tenants:
- New tenants pay 100% of actual usage
- Would likely have existing tenants (on MTM leases) gradually pay more over a year until they're paying 100% of their actual usage
- The property currently has a waiting list for vacancies, so I'm not too worried about a bit of turnover.
I've found someone local with experience handling the items in (2) above, who charges $33.33 per month per unit, when occupied. This works out to about 6% of gross rents. By my calculations, if this approach saves me 4% management, $2000 in maintenance labor, and reduces my utility bill by 75%, this takes me from 7.5% to just over 10% cap rate - now this is looking good.
Here are my questions:
- What's wrong with this plan? Am I insane for thinking this could work well?
- For what the local "man on the ground" is doing, does this look like a fair price?
- In this situation (assuming that all significant maintenance items are addressed before close), how much would you budget for supplies, repairs, and other contract services above and beyond labor provided by the handyman?
Thank you in advance for your advice!
The concept sounds like a very well thought out plan. Based on the type of property you are descending, one thing you may want to consider if you can implement is “pay period” rent payments. Either weekly or biweekly payment. It provides a number of advantages. You allow residents to pay when they get their check increasing your odds to collect, and you end up collecting an additional month of rent annually, just to mention a couple. Happy investing.
I think it sounds good. To me the boots on the ground handyman is the most critical in the deal. I'm not as long distance as you but have out of state property. I self manage myself still but have an awesome handyman that does everything. I submeter all of my units too. Basically I am doing what you are looking at right now and it's gone very well. The management and submetering is easy. Find a good handyman and don't let them go!
Hey Sean! Here are some things to think about.
1) I think that the 'boots on the ground' manager is critical in this plan. Do you have strategies in insuring that the job is completed, and how do you keep him/her accountable? If the local manager is honest and someone you can trust, as well as know what they're doing (which you said they have experience), then most of your problems should be eliminated. The same could go if you have a bad manager and your problems could be exponentially worse.
2) The price is cheap, @ 6% for the work that you are asking, however, a 'fair price' means nothing if he/she doesn't provide the value at the price. If he/she does a great job @ 6%, then it's a steal. But if he/she doesn't do a great job, it's not so much the price but the manager at hand.
3) Personally I'd budget 10% for capital-expenditures. This isn't from my own experience, but from the experience from other investors and those from the Podcast. So take that with a grain of salt, and to get a more accurate number, find all possible 'big ticket' repairs with cost estimates. Then amortize that expense over the life until replacement, and divide that up into a monthly cost + 10% for cushion and inflation. It's better to be prepared than not.
Hope this helps! Good luck!
It is possibly a good plan however you have nothing in place to handle the very real issues related to th equality of your tennat.
Low income tenants can be a handful in regards to issuing notices to pay or quit and dealing with evictions. These responsibilities should not be taken lightly and require qualified indivulaes that are competent and act swiftly in all situations. If he drops the ball on this portion of management it will not take long for you to be facing serious financial consequences.
At the very least you will have serious issues with 10% of your tenants possibly more. You can never tolerate any late payments otherwise the e whole thing will quickly come unravelled. No compassion allowed. No pay no stay is mandatory. Same applies to any tenant paying late more than twice....you must get rid of them, M2M leases will be your best friend to avoid costly evictions and lost income.
Good luck, you will need it.
PS: insist on your handy man giving you detailed weekly updates on everything. This job will take a great deal of your time to manage properly.
You will need to honestly evaluate whether the savings is worth dealing with tenants and related issues long-distance. An eviction or problem tenant would be a real challenge to deal with from several states away. I don't have the time or procedures in place to manage residential rental, which is why I have a PM for my eight unit building down I-35 in San Antonio. (They just started an eviction process the other day.) Heck, if I owned MF here in Austin I would still probably hire a PM!
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