Analysis Paralysis - I'm stuck

17 Replies

The good news, I had no issues buying my first 3 unit in Worcester, MA. The bad news, its been limping along with bad tenants and horrible property managers. I've run the numbers inside out and upside down and don't know if I should outright sell and run away from multi's in this class C/D city or double down BRRR it and try to find a higher rate tenant.

The specs:

Its a large 3 family, 3 bedrooms each

Valued at ~300k

160k equity

current rates at $950/mo averaging an eviction every year

market rates (according to everyone I talk to) at least 1200 now and ~1400/mo if I spruce it up

Just not sure if rehabbing it will help if I can't bring in a PM that knows their a$$ from their elbow. I've tossed around idea of 1031-ing to something else. I looked at vaca rentals in NH. Lots of pros and cons with each...

Any advice for this paralyzed investor? or angles I haven't brainstormed around? Thanks BP!

@Caleb Heimsoth I would say it's a class C. A few streets down could qualify for C-/D+. It's been an improving city in general too. Lots of major improvements in the city, AAA baseball might be moving in, developers flipping entire neighborhoods I wouldn't have walked down last year.  

Alan,

I would fire your property manager ASAP. That is insane to have a property with an eviction once a year!!!

I have a buddy who is a 3rd generation landlord. They own 100s of properties. I was about to evict a tenant and asked him who is attorney was. He told me they haven’t had an eviction in the last 5 years and wouldn’t know who to refer. I was completely blown away. It was a great example of how to run my business. Have you thought of self managing? It will amaze you how few calls you get with the right tenant. It will also amaze you at how little PM do for 10%.

Hello Alan,

I completely agree with Kai's comment. Self management can be tricky if you do not take the right steps to protect yourself. Self management can also be highly profitable (more than just the 10% fee) and allow a great deal of control when selecting your tenants. 

As our screening process has become more strict, our quality of tenant has improved dramatically. I would suggest a detailed application form that includes the required permission for credit checking as well. This is completely legal where we are but should be verified for your area.

Greetings Alan... 

No question about it. You have to fire the current PM ASAP! Then, if possible, hire the best newbie PM you know - yourself! Unless you live very far from the property, you must manage this small property yourself if you wish to have a financially successful investment. 

There are many reasons to self-manage, but the #1 is control. You can and should (if time permits) manage a triplex yourself. During our first 20 years of owning, managing and doing all repairs and maintenance ourselves, I never formally evicted anyone. I asked one person to leave and they did, another time I was sued by one tenant for treble damages. Both of us were found to be at fault because the magistrate believed the lies the tenant told, but also said the tenant could not repaint my apartment interior any color she wanted. It cost me $115 in court costs. Her deposit covered most of her damages. I learned great deal from the experience so I chocked up the experience as cheap tuition.

I also was so tight (and naive) that I never ran a background check. This was before tenants expected to pay for background checks. I would absolutely run a check today. What I did instead was talk to the prospective renter for quite a while learning as much about his/her personality, credit history, etc., as possible. 

No PM will ever care about your property like you will. As soon as I traded into a much larger property, I had to hire a PM. That's when I passed the tenant problems off onto my PM, but a new crop of problems popped up. Costs started going out of control and I started having evictions. When I traded the smaller units for larger ones, I traded tenant management for PM management. Tenant management was actually easier because I had more control! 

Another benefit of owner/manager is that your residents will see you taking care of, or not, the property and will do the same as you do. Bottom line, be hands on, learn the processes, and you'll make a much better owner/investor now and in the future.

Alan,

I think before you make any decision's on anything you need to think about your exit strategy on this particular property. What do you want? Do you want cash flow, appreciation, Cash out refi, 1031 exchange, etc? I think when once you know what you really want go from there.

What are the surrounding properties comparable to your's going to rent for? What is the occupancy rate of the submarket that you're in?

It could be that the property mgr is terrible in combination with not a good class of tenant's.

But, you need to figure what it is exactly and go from there.

If it's the class of tenant's you might want to seek other options. 

Agree with everyone so far. Fire that management company. If it's three units, self-manage it. Nobody will care as much as you about the tenants you put into your property.

@Alan Lambkin

If you live close to the property, you may want to consider managing the property yourself, so you can screen the potential tenants and be in control of this process. The most important job of a property manager is to get the right tenants in the door 

@Caleb Heimsoth I agree with everyone else about considering self management. Also as a property here in CT I also show my clients the full credit history/report/application of the potential applicant as well as their references. in reference to the amount evictions you are having one per year did you ever take a look at any of the tenant application packets before the PM signed a lease with the tenant? If not maybe you are too relaxed with your current PM and also may you need to manage the manger closely.

If you are having to evict so frequently then it is obvious to me that during the discovery phase of the application, the PM is not doing their due diligence as best they could. Typically there would be some red flags, ie: low credit, debt to income, no employment or even gaps in employment, previous eviction. Sometimes their references will give you some insight in whether or not they are good tenants by asking qualifying questions. I even ask the same question just worded differently to the reference. (if its a previous landlord how much rent does the tenant pay--> sometimes this may differ than what the tenant has written on their application, if its not the same amount the "landlord" reference may not even be the landlord, in the last 6 months how did you receive any payments that included a late payment)

I have some great tenants in the C-/D even F areas who always pay their rent on time if not early in most cases. We set the standard with the tenant, also the owners I work for/with communicate with me sometimes daily depending on the situation. How much are you communicating with the PM? Put some fire under them, remember you are paying for a service they need to be on their toes at all times and have a great line of communication with you at all times. 

They should also be giving you updates about your property so that you can for see any issues happening the future before they even occur. 

Thanks all. After doing a lot more research in my area, I've decided to keep the property for at least another year. Firing the current PM was a given, now on to my 4th in 4 years. I plan to work as close to the new PM as possible, review all tenants prior to accepting, putting all my expectations out there from day one. If nothing else I have learned a lot from this experience.  I wish I could manage myself, but my FT job is just too much right now.

Exit strategy is in place, appreciation has been awesome and even if the bubble pops a little, it's a nice little pay day if I have to sell next summer.  

  

Unless you have explicit experience managing a properties, I do not recommend managing this yourself. 

This is a tricky situation. Holden seems rural, which makes me suspect that there may not be many great PMs in the area. Your property is small so larger PM firms may not find incentive to expend resources. 

Obviously, the first step will be to fire the PM company. It looks like you have some real equity in the property. If this still aren't working out, you might consider selling. 

@Alan Lambkin Sorry but I stopped reading at an eviction a year. Who is doing your tenant screening? Fire them. If you are averaging an eviction one out of every three tenants, then you have to reevaluate the business you are in. Either self manage and fire PM or sell the property or take a ride to the casinos and roll some dice, you may have better returns.

@Alan Lambkin - I have been there. Been at this game for 10 years now. You said you have been dealing with Horrible property managers. If you have not moved onto another property manager then that's your first step. You must rip the bandaid off and go to another property manager before you do something else.

1) Your rents are about 3k potential a month so really a property manager at 10% is only going to make 300 a month max. here in lies the problem of small number of unit count and the reality of small unit property manager. however hope is not lost. Find a PM that has some other units in the area so they can add 300 bucks more a month to their revenue stream. If the PM does not have anything near then you may end up in the same place. Also if 300 a month , 10% is not something you can stomach then you should lean towards self management.

2) If you are getting bad tenants you may want to consider talking to the various agencies in the area like catholic charities etc. You will need to make your place nice though , meaning sec 8 inspection quality. Some landlords in this space try to get away with everything on the cheap (not saying that is you) but you can have success with govt agencies if you can deal with the brain damage of the inspections and paperwork, but it can provide more stability 

3) dont give up yet. take some deep breathes and get over some of that failure thoughts that are going through head. So many people in the real estate space run around peacocking and chest pounding talking about how amazing everything is and how amazing they are. They never talk about the head aches and trials they went through. This industry is filled with major ********.

Use this experience as a learning lesson, try to figure it out. Go to REIA meetings in the area. Learn who the other owners are in the area. Call them. Ask them for advice. Find out who they use. Make friends with them. There are other owners in the area having success in that asset class and they may be able to help or at least provide you with connections to resources who can help. This business is about relationships, people and connections. Dont be shy and not call these owners. Some will be total A holes and others will be super cool dudes and dudettes who have been in your exact shoes and will provide some intel.

Limit the head looping and take action. You got this.