18 unit multi family - Advice Please

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18 unit multi family - Advice Please

John Pflederer
Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes

Hello All!

I purchased a 18 unit building 2 1/2 years ago in Central Illinois.   Prior to purchasing, I did as much research as possible and did my best as a new investor on the due diligence.   I am struggling to see cash flow and any profitability.  Definitely made some mistakes in my first deal, but chalk those up as learning.  At this point the property is doing pretty well, but the property manager is killing me with expenses.  For example last month i was charged $250 to put salt on the steps and sidewalks.  It just seems like there is always some big expenses that kill my profitability.  I feel stuck with the property manager because there are not many options in this area and they have been able to keep it leased up (with some turnover) Some details about the property:

  • 18 Unit / 12- 1bd and 6 - studio 
  • C+ property in C ish area
  • Safe area 500ft away from largest employer in area (hospital)
  • Hospital owns the land in front of my building and behind the building.  Possible exit strategy is the hospital will purchase.  However, i am not counting on that as my goal is to build my business / cash flow. 
  • When purchased rents where in the $430-$445 Range on the 1 bedroom.   Rents on the studios were $395 and have remained at that price.  I have raised half of the units to market value of $495.  The ones that have are still at the lower range are long term tenants that my property manager doesn't think we should raise. (10+ years)
    • The units that have turned get new vinyl plank flooring and paint.  I think this has helped rent and justify higher price as they show well.   
  • I have put about 30 - 40K in improvements and structural improvements in over the last couple years.  
    • New ceiling in carport
    • Inspector suggested some vapor barrier in the crawlspace of one building.
    • new railing on balconies
    • some new appliances and water heaters
    • New laundry machines

At the end of the day, I am still learning, but I am struggling to see what to do to make this thing profitable.  This year was better than last year because most of the repairs and things came out of cash flow.  I should have just enough for taxes.  Which i was able to get reduced 2k after purchase.  I have to be missing something here and would love to get some experienced advice in this space and size of building.  I can provide owners statements and any other info for anyone that might be willing to help me analyze this property.  

I believe in this way of investing, but simply not seeing the fruits of my labor in terms of returns.  

Thank you all in advance!

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Jason Stubblefield
Rental Property Investor · Braselton, GA · Member since 2013 · 119 posts · 36 votes
7y

@John Pflederer What is your expense ratio?  It's not uncommon to see expenses near 55%-60% on a C class building.  If you're expense are above that it sounds like you may be suffering from some mismanagement.  Here are some ideas:   

1) Override your property manager's decision about not raising rents.  We've offered to upgrade tenant units while they still lived there to justify the additional rent  

2)  Look into self managing the property yourself.  This isn't as easy but it's also not that hard.  There are companies that will handle all of financials remotely (you will need to give them copies of leases and rental checks).  Then you can hire a part time leasing agent and/or maintenance person at an hourly rate.  

3) You could shop the PM to other management companies and see how there bids align against your current company. 

4)  Find another owner and offer to share in their management cost.  Management fees get cheaper the larger the property is.  

Hope this helps. 

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  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @John Pflederer I'd have to see the numbers to comment.  We have some things in common.  I also bought an 18 unit, all studios, in a C neighborhood and am sprucing up units that come free with vinyl plank flooring, paint, etc.  I do my own property management, but I'd be fine even if I didn't.  I knew that it was undervalued when I bought it.

    Generally speaking, brokers make cash flow seem rosier than is the actual case by leaving various expenses out.  You'll be better able to evaluate the next one.  Take this as a learning experience.  It doesn't sound like you're getting crushed, so that is good.  And maybe some of your repair expenses are one-offs that will not recur, at tleast not before recovering the expense several times over.

    1Reply
  • Brian Metz
    Rental Property Investor · Fayetteville, NC · Member since 2018 · 65 posts · 43 votes
    7y

    @John Pflederer, just a thought and I know this goes against why you have a property manager to do these things, but can you set up a contractor/worker to do some of these smaller, high-expense items like the salt, instead of letting the PM coordinate? Maybe that would save you some money in the meantime as the PM may have been up-charging you. Also, that'll show them that you're not going to sit idle and pay those needlessly high-cost items through them, which could help leverage you relationship.

    Hope it works out, sounds like you're on the right path!

    Cheers,

    Brian

    2Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    @Larry Turowski  Thanks for the reply.  

    0Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    @Brian Metz, I agree that i could outsource some of the things like salt, but i don't live near the property.   I have outsourced the mowing since they started charging me $20 more per time than last year.   thanks for the reply.

    1Reply
  • Edward Liu
    Palo Alto, CA · Member since 2017 · 230 posts · 200 votes
    7y

    I had the same issue with my 1st purchase of a 12 unit building during first 2 years - not as good cash flow as advertised and barely making a profit after mortgage.  I don't think you missed anything, just part of learning experience.  If there are no alternatives in Property Manager, then likely you will be stuck.  Try to sell it and likely it has appreciated within last 2 years. 

    2Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    @Edward Liu, Thanks for reply.  I might have gotten some forced appreciation, but in general not much appreciation in this market.  

    I think if I could lower the expenses from maintenance this could cash flow well.  However, I don't know if I am just trying to force this deal to work or if I should cut my losses and sell.  

    Does anyone have any experience with such a property as this that could cash flow, but similar expense problems?  Everywhere i read it says that this is common with property managers.  If that is the case how does anyone make money unless they get the property for next to nothing?

    0Reply
  • Jason Stubblefield
    Rental Property Investor · Braselton, GA · Member since 2013 · 119 posts · 36 votes
    7y

    @John Pflederer What is your expense ratio?  It's not uncommon to see expenses near 55%-60% on a C class building.  If you're expense are above that it sounds like you may be suffering from some mismanagement.  Here are some ideas:   

    1) Override your property manager's decision about not raising rents.  We've offered to upgrade tenant units while they still lived there to justify the additional rent  

    2)  Look into self managing the property yourself.  This isn't as easy but it's also not that hard.  There are companies that will handle all of financials remotely (you will need to give them copies of leases and rental checks).  Then you can hire a part time leasing agent and/or maintenance person at an hourly rate.  

    3) You could shop the PM to other management companies and see how there bids align against your current company. 

    4)  Find another owner and offer to share in their management cost.  Management fees get cheaper the larger the property is.  

    Hope this helps. 

    4Reply
  • Kirby Davis
    Fayetteville, AR · Member since 2018 · 95 posts · 62 votes
    7y

    What's your expense ratio? What cap rate did you buy at? And what are your expenses running vs what you originally projected prior to purchase? 

    Raise the rents on the long term renters. If you've raised the other rents, and the market supports it, let them know rent will be increasing to the market rate - and in return, they will receive new flooring and paint. This isn't negotiable and makes me question your PM's competency if the rate is supported by the market. Shop for other PM's. Are the PM charges legitimate needs? And, if they are, are the rates reasonable? 

    0Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    7y

    Pm charges can definitely add up. They mark stuff up as they often should, and they are licensed, and in many states the have to use licensed trades-gets expensive. We used a PM when we invested OS; but now that our properties are nearby my wife does all the coordination. Of course we have people, some licensed and some not, that we call upon as needed. We have a 'handy woman' who does an amazing array of stuff. Cleaning, painting, re-grouting, tile work, small repairs and even some plumbing. Very capable person and a wonderful resource. We pay her well. We have a tenant who opens doors for trades and so on. For her we installed new flooring in bathroom. Many ways to make things easy

    Showing apartments is one of the last things we do with prospective tenants we have them pretty well qualified by the time they get to see the apartment. Several times we even did background and credit checks prior to showing. Refundable if they did not take the apartment-but that has not happened yet. By the time they get to see the place they are very committed.

    Others have made some really great suggestions. How much time have you spent meeting with your PM, training them, and talking about how you like things done and how can you work with them to reduce those charges. Switching to another PM is of course an option; but which devil do you want? The one you know or the one you don't?

    You might try putting together a list of all the things that need to be done, see what can be handled and by whom other than a PM and perhaps eliminate the PM altogether. 

    PM charges are often 8-10% of gross revenue; if you calculate the impact on in pocket revenue it is a different story. Hope it works out for you.

    1Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @John Pflederer, I would have thought that vacancy would be killing you, not necessarily expense. 

     I have former partner that does MF.  His requirement is fewer than 1/3 of the units are less than 2 bdrm.  He finds it keeps his income consistent.  

    1Reply
  • Charles SoperPro Member
    Rental Property Investor · Merritt Island, FL · Member since 2015 · 253 posts · 178 votes
    7y

    1. What percentage are you paying your property manager?  On a property this size it should be 8 - 9 percent, every little bit counts when you're squeaking by on your cash flow.

    2. It's a risk but just because tenants have been in the building for 10+ years doesn't be they shouldn't expect an increase in rents.  You're expenses likely increase year of year so why shouldn't theirs?  A $100 bump spread out over say 4 years probably wouldn't be too painful but it could also be viewed as an opportunity to rehab a unit and charge market if they decide to move because of a $25 rent bump.

    Love all of @Jason Stubblefield's ideas for cost savings as well

    0Reply
  • Andrew Flora
    Rental Property Investor · North Vernon, IN · Member since 2018 · 136 posts · 192 votes
    7y

    Raise rents on remaining units.  If you want to incentivize the long term tenants consider $475 instead of $495, but if they have been there 10+ years they aren’t leaving regardless of rent, especially if you’re still at market rates, I mean they can’t save money by leaving right?

    Add application fees if you haven’t already, this can offset a small part of you PM leasing fees. $20 is fair.

    Schedule weekly calls with your PM, go over in detail all the maintenance expenses.  When something comes up that seems outrageously overpriced like the salt question it and let him know that you expect him to find better pricing for that service or you will have to step in.  Remember, he/she works for you and you must macro manage his actions to make sure he/she stays sharp.  Sometimes they get lazy scheduling maintenance because it’s not their money paying for the service so they likely don’t bother trying to make a few calls to get the right price.

    Negotiate your PM contract.  Try to get that expense down 1% or 2%.  Simply tell him or her the truth, if you don’t get expenses down you will have to terminate them and self manage or sell.

    Utilize utility bill back.  Utility expenses can break a multi-family deal.  If you must include utilities consider taking control of the thermostat away from the tenants and measure their water usage.  You might have a few dripping faucets and a toilet running occasionally costing you a few hundred extra per month.  If you must pay electricity weigh the option of investing in solar panels, you might be able to find a grant for this.

    Set cap ex budgets at the beginning of the year and if possible stick to the schedule and budget to make sure you aren’t blowing all the cash flow on unnecessary upgrades. 

    If nothing else hopefully you can break even for now and in the grand scheme of things the tenants will pay it off for you and in 15-20 years you will have significant equity and a good cash flowing asset that will help you retire.

    0Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    Thank you all for the time everyone took to provide feedback!  I am going to use alot of the feedback provided!   Specifically I plan to  Raise long term tenants rents, biweekly calls with PM, Create a cap ex budget.  

    I do have a few more questions:  

    • Has anyone had any experience with bed bugs?  I had one building get them and that was costly.  Hard to prevent or pinpoint who brought them to building, but any suggestions on minimizing that from happening again?  
    • Property manager sent me an email that one of the long term tenants wanted to paint their apartment if i purchased the paint.  I approved.  I then was billed $750 for the PM company to paint the place.  This happened a couple days ago and after I texted her about it, I resent my email with no reply back yet.  It did need painted, but I was under the assumption I would only be paying for paint...$100 tops.  Thoughts?
    • Anyone have any experience trying to read PM statements with AppFolio?  I feel like they are very confusing and wonder if there is a better way to have the PM format? 

    Again, I can't thank you all enough for your help!   

    0Reply
  • Jim Biggs
    Investor/Syndicator · North Aurora, IL · Member since 2013 · 167 posts · 70 votes
    7y

    Join local apartment owners association

    Networking through all Meetups and Reia's in Peoria area in order to find other PM and small apartment owners

    Consider starting your own PM, Association and meetup to become local authority. Grow organically, vertical integration.

    Partner with local RE brokers to form above

    Start hanging out every morning for at least a week at local lumberyard/HVAC/plumbing/electrical supply house and collect cards in order to build a list of go to vendors

    Ask every SFR and MFR investor who they use for every service you need

    Create a mastermind to share best practice, vendors, group discounts etc for investors

    Raise rents to market immediately and hope the long term tenants move out so you can rehab and raise rents

    Sell "use master lease" to another investor and continue to make money from cash flow and possible interest from eventual owner finance

    Network, Network, Network,Network,Network,

    https://www.pjstar.com/news/20170117/peoria-landlords-to-form-group-100-attend-first-meeting

    https://principleproperty.net/

    https://www.phoenixpropertymanagementinc.com/peoria-property-management

    2Reply
  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    7y

    @John Pflederer I'd say you have a number of issues going on. 

    First, lower end apartments like that in the $400/month range are just hard to cash flow. Especially when you're rehabbing them. I can rehab a $800/month apartment for about the same as a $400/month apartment. Vinyl Plank and paint costs about the same for each.

    Second, when I buy a value-add apartment I don't really count on it cash-flowing until I have rehabbed all the units and replaced all the tenants. You need to bite the bullet and raise rents on the hold-over tenants. If they stay, great. If not, you will have some more expense to rehab those units.

    But what you will find is that once you go through that process your cash flow will get much better. Even if you get some turn-over after the rehabs it is not nearly so bad because the vinyl plank won't need to be replaced. So mostly you're just looking at painting and cleaning.

    One more caution and one encouragement.

    Caution - if we get a recession this is exactly the type of property that will have trouble because the tenants can't pay their rent.

    Encouragement - it is fairly impossible to replace lower end apartments in small towns theses days. Cost of construction is very high so no one is building them and your rents should continue to rise over time.

    1Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    @Jim Biggs - I agree creating a group is something i need to do.  However, I am about an hour away from the property.  Struggling on time with current job to do this, but you make time for what is important... 

    That said, I dont know of any mastermind in the area and there is most likely a big opportunity to do one.  Really appreciate the input.

    0Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    @Jeff Kehl - Thanks for responding.  Couple questions on your post.  

    1. The type of jobs these type of tenants have are low level positions that don't seem to be as impacted by downward market trends.  Also, Illinois typically doesn't see the big swings like most of the country when the market shifts.  My hope is that it wont crush me when the market DOES pull back, because it will.  

    2. I completely agree with your thoughts on cash flow doesn't count until its all rehabbed.  My BIGGEST mistake was not capitalizing this property appropriately.  I should have brought more capital to the table and just did a complete remodel of the units and appliances.  Instead, I have been trying to pay for this out of cash flow.  Maybe over the long haul it will work, but definitely causes a lot of anxiety in the meantime.    Do you typically just suck it up and put the money in to the rehab or pay for some out of cash flow?  

    Thanks man!

    0Reply
  • Taylor Chiu
    Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
    7y

    @John Pflederer Have you considered bringing a handyman on via some sort of retainer? Like you will pay them a certain fixed amount each month, in exchange for doing all general repairs for just the cost of materials. Any large rehabs are separate, but this could allow you to stabilize your expected cashflow each month, since you won't have to dish out an unexpecte $250 each time someone's drain clogs up. 

    Another option you could consider if all of the other advice doesn't work - sell the property and move on to the next one

    0Reply
  • John Pflederer
    OP
    Investor · Morton, IL · Member since 2017 · 13 posts · 3 votes
    7y

    @Taylor Chiu - I like the idea of having a handyman on retainer.  Would you recommend then having a leasing agent deal with leasing up the units?  I am assuming my property manager would not want to "only" do the lease up and rent collection.  

    I have thought about selling, but I believe that if I could get expenses under control it would cash flow pretty well.  

    Maybe it would be helpful for the group to get some numbers on the property.

    Purchase price: $430K

    Debt service: $2,265

    Utilities: $550-700

    Insurance: $488

    Taxes: $1,000/month

    Revenue this year:   Jan-$7884 / Feb- 7360 / March- 8692 / April - 7628 --- Ave $7891 or $94,692 

    Laundry - $50-100 / month

    7% PM fee / 8% if 2 or less units vacant

    Additional details: 

    -1/2 of units flooring and appliances upgraded

    -  performed ~ 30-40K cap ex after purchase.  (Bought from an elderly lady that did her own PM and repairs so it needed some professional attention)

    - Raised about 50% of the rents from $430 - $495 when units turned

    - There is an opportunity to update and complete a 2 bd unit in basement for 3-5K. and should rent 495-550

    Look forward to hearing everyone's thoughts on these numbers.

    thank you!

    0Reply
  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    7y

    i would suggest that you research your own handymen and contractors in that area. Then if the property manager goes off your list they need a reason. $250 for salt seems about twice what it should cost. Does the property manager have an open check book or do they need to contact you to authorize expenses over $100.00?

    3Reply
  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    7y

    @John Pflederer hard to say without knowing exactly where your property is, but looking at your numbers I'd say you have a winning property but just don't know it yet. In fact, if you decide to sell, let me know and I will take a look.

    To answer your 2 questions.

    1) I just generally assume lower end apartments are rented by people on the edge, paycheck-to-paycheck. When the economy gets tough they get layed off. May not be the case there but generally true. I have lived in Decatur, Monticello and Champaign, IL so I'm generally familiar with central Illinois. I would disagree with your general assessment of it. The overall state has horrendous debt problems that will pass along to the residents in higher property taxes. There is no good reason for an employer to locate there and more and more they will move out of the country or south to friendlier states.

    2)  I regularly pay for the rehab of new properties from the cashflow thrown off by older properties. It's a great strategy as long as you know that's what's going on. If instead you think you have a money losing property part way through and sell for a loss it is not a good strategy :)

    Also, I forgot to mention in my last post, many of the comments above where people suggest you find some of your own contractors/service providers are good advice. Your PM is probably doing a good job but it's just good practice to shop your business around. If they won't do it then you should.

    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    7y

    What about utilities?  Can you decrease them at all?  I am thinking energy efficiency and water saving .  Are you all LED and low flow fixtures. If not go in that direction if you pay water. LED in common areas means less changing of bulbs.  See if you can get a free or low cost energy audit from your power company.  

    Do have any possibilities for  short term hospital employed tenants?  Like residencies, internships that might go for a higher price for a rotating terms.  Could be a furnished unit. Not sure if it is that kind of hospital.  

    1Reply
  • Account Closed
    Specialist · Denver, CO · Member since 2018 · 40 posts · 35 votes
    7y

    With a hospital right there you should be able to take some of the units and make them monthly furnished rentals for traveling nurses.  Here is an article to learn more: 

    https://www.corporatehousingbyowner.com/blog/2013/06/traveling-nurses-corporate-housing/

    2Reply
  • Steve Sanchez
    Investor · Peoria, IL · Member since 2014 · 76 posts · 44 votes
    7y

    @John Pflederer welcome to Central Illinois REI, I'll PM you our landlord groups info. Lot's of local landlords willing to share info!

    1Reply
  • Taylor Chiu
    Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
    7y
    Originally posted by @John Pflederer:

    @Taylor Chiu - I like the idea of having a handyman on retainer.  Would you recommend then having a leasing agent deal with leasing up the units?  I am assuming my property manager would not want to "only" do the lease up and rent collection.  

    I have thought about selling, but I believe that if I could get expenses under control it would cash flow pretty well.  

    Maybe it would be helpful for the group to get some numbers on the property.

    Purchase price: $430K

    Debt service: $2,265

    Utilities: $550-700

    Insurance: $488

    Taxes: $1,000/month

    Revenue this year:   Jan-$7884 / Feb- 7360 / March- 8692 / April - 7628 --- Ave $7891 or $94,692 

    Laundry - $50-100 / month

    7% PM fee / 8% if 2 or less units vacant

    Additional details: 

    -1/2 of units flooring and appliances upgraded

    -  performed ~ 30-40K cap ex after purchase.  (Bought from an elderly lady that did her own PM and repairs so it needed some professional attention)

    - Raised about 50% of the rents from $430 - $495 when units turned

    - There is an opportunity to update and complete a 2 bd unit in basement for 3-5K. and should rent 495-550

    Look forward to hearing everyone's thoughts on these numbers.

    thank you!

     Yep, I imagine you could have a leasing agent and then the combo of the two would take care of your PM needs.

    0Reply
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