How to figure out if a property is mismanaged vs. not profitable

Question

Hey guys,

I’m newer to bigger pockets but have been running my own home as a rental for 2 years now.

I thoroughly enjoy it. I’m looking to branch out and become more profitable in the passive income business. So I’m currently looking at a deal on a 9 unit apartment complex. It used to be managed by the owner but he had to move away for family reasons. He turned it over to property management.

He has told me he was very profitable when he ran it with great income.

I have ran the numbers at fully rented with guess on utilities cause it’s “all bills paid” the rent also hasn’t been raised in 10 years. So there’s room for things there. The numbers look great on that side.

So now I have gone to the local property manager to which my phone call wasn’t returned on the weekend. Plus was answered with “what?!”. I went to their office and they seemed to be arguing about things and very much not lenient to any tenant issues. I’ve got the real year end numbers from them running the property for a year which they said they can’t wait for me to save 4K a year by not hiring them. Turns out they have 3 vacant and 1 unlivable (remodel) property with most not being lived in all year. The numbers look terrible. As this place with all bills paid lost the owner about 19k last year.

Ive tried to find the vacant units online and on Craigslist apartments.com and several other sites but there’s no listings for them anywhere at all no pictures no information no for rent sign out front.... literally no info.

I’m wondering at what point do you say this property isn’t profitable versus this is really bad property management who doesn’t care and lost this owner a lot of money?

Thanks for all your help!

Bjorik Mutize · Answer

You are going to find many situations on where claimed numbers are not how they truly are is once you start peeling back the cover of economic and physical occupancy current standings. When you run income on fully rented that's best case scenario, before turning units, bad apples leaving etc. Compare what you are finding to market and comp standards on all of your underwriting.

Property currently not being profitable and bad PM, it could be both with the information given in the post. Nonetheless, explore what the owner was doing wrong and where expenses fell through.

Hopefully if you or whoever decides to proceed you can shop for better PM.

Jaysen Medhurst · Answer

@Taylor Holden, I think this is a great learning opportunity, but you are not yet ready to take on this deal.

Analyze this from front to back. Try to determine what it would take to sub-meter, do a local rent study to calibrate the market, look at all the value-add opportunities.

Talk this all through with your local mentor and let him blow holes through your assumptions. You’ll learn a ton.

Since you asked, NOI = Net Operating Income: the income remaining after all expenses are paid (excluding CapEx and debt service). This is one of the components that determines the value of a commercial property.

Taylor Holden · Answer

1. What are the market rates? I’d guess you mean the average market rental rate.

Id say that rate is probably 550-750 not bills paid.

2. Is there an opportunity to sub-meter all of the utilities?

This I do not know, I know that electric comes into the building separately, gas comes in as 4 services, water is 1. How would I go about trying to figure out how to sub meter?

3. What are the fixed expenses (taxes, insurance, etc.)?

Taxes-1200$ a year

Insurance- 1200$ a year

flood insurance-1200$ a year

4. What's the local Cap Rate?

once again sorry but I’m so new I don’t know what to do for cap rate.

5. How much would you need to put in to completely stabilize this property? How long would this take?

I’d guess that most expense would be making it look better and setting up new management systems. The vacant places are ready to rent. The other 5 are being rented and fine. Property could use some paint on the outside.

The front biggest apartment which used to be a store front is unfinished. I’ve just been told that the owner has plans to fly back from California and make that a rentable space in the next 30 days. I’ve also been told that he has a collapsed sewer pipe from the building that is being fixed immediately. This place is downtown with great walkability. I’ll say that all the units are either efficiency or 1 bedroom units and not very large.

He’s been running rent at 550$ for efficiency all bills paid.

Then the 1 bedrooms 650$ for all bills paid.

He also offers free satellite tv to his tenants that cost him 120$ a month for the whole complex along with free washer and dryer.

Which that’s stationed off the utilities of the unfinished apartment so I can see that the washer and dryer in bill usage alone cost him 1256$ last year.

So really let’s say I’d be happy to set aside 10k for oh no stuff but everything should be ready to go.

Jaysen Medhurst · Answer

@Taylor Holden, smells like opportunity to me!

If the current owner is losing money each month, he'll surely be more open to an easy solution.

It certainly sounds like this place is being mismanaged. You really need to dig into and understand the numbers.

• What are the market rates?
• Is there an opportunity to sub-meter all of the utilities?
• What are the fixed expenses (taxes, insurance, etc.)?
• What's the local Cap Rate?
• How much would you need to put in to completely stabilize this property? How long would this take?

Once you know that you can begin to formulate an offer and plan.

Post the details. The community will be happy to take a look.

Taylor Holden · Answer

@Michael Craig

What do you mean by NOI?

Sorry for the newbieness.

I mean I’ve been running calculations off his asking price. Yet that’s with it being fully rented which 4 units have been vacant for a year I’m thinking due to mismanagement. Along with the other 5 not really being full year rents.

How do I take the mismanagement into account for his 2018 numbers returning so badly in the negative?

As he doesn’t have 2017 and earlier numbers when he managed himself except saying he pulled between 2-4K in cashflow a month. My local real estate investing mentor has said he personally knows the owner and that he’s a truthful and honest guy and wouldn’t be making up any lies about what he previously brought in.

It’s worrying to me just to get a yearly report saying it’s coming back 19k in the negative.

Michael Craig · Answer

@Taylor Holden

Sounds like you have a motivated seller. With knowing the true NOI what price makes sense for you to buy? Seems like a lot of opportunity.

How to figure out if a property is mismanaged vs. not profitable

6 Replies