Looking for sage advice from experienced multifamily property investors? What is the most important lesson you learned from buying your first multifamily property?
My #1 - don't buy b/c of FOMO (fear of missing out). I'm working with several investors who are nervous they're going to miss the boat, so part of my job is calm them down and remind them not to overpay, don't exclude important contractual exit strategies (full inspection, lease reviews, rental income verification, etc.).
Screen tenants thoroughly. Then screen them again. Full credit, income & criminal checks are paramount.
Assuming no differential issues, treat everyone the same. Ex) Don't give rent due date extensions for a tenant who waves to you everyday vs never giving one to a tenant to repeatedly flips you off.
Do semi-annual inspections. Tenants are renters so it's not in their best interests to fix things when they become easily fixable vs costly fixable.
File late rent & eviction paperwork on first date available. Don't wait! Don't buy into sob stories. Especially true if you own in a tenant friendly state that gives tenants 15 days minimum for this, 30 day wait for a court date, etc. Before you know it, you're out 2-3 months rent for a simple eviction.
Hope that helps. I've seen more than my share of sob stories and con jobs, so follow the rules and use them to your advantage.
@Matt Castle , I really appreciate the great lessons learned. I will definitely need this advice going forward in my first multifamily purchases in the coming months. I plan to hire a property management company, so I will ask a lot of questions in the interview process to ensure that company has the right methods in place to avoid the issues you experienced with tenants. I also will try to develop an investor relations strategy to keep them seeing the big picture and set expectations, to lessen issues with FOMO.
Again, I really appreciate the help!
You are welcome. I've stepped on my share of landmines, so always willing to help others avoid them.
If hiring a PM, I'd recommend asking the following questions in addition to yours:
- How many people work for your PM firm? How much support do you have?
- Who is the principal broker? Do you have more than one broker in the firm?
- If only one broker, what is your contingency plan to allow your business to continue to operate? All/most states require a principal broker but the time to find a replacement varies widely state to state.
- Do you collect PM fees via scheduled income vs collected income?
- Will PM pay basic utilities, schedule municipality inspections, do non-tenant related activities, etc?
Look up their license before speaking to them. You can do so on your state's regulatory/licensing website.
Definitely google the PM too. I personally like the firms with a 2-4 star review out of total 5 stars b/c, if the tenants give them 100% rankings across the board, they may be "too tenant friendly". I personally want someone who is nice and follows the letter of the law, but also someone who is willing to get paperwork-nasty when necessary and evict the rule-breakers and problem tenants.
@Matt Castle Are you able to make deals contingent to tenant screening prior to closing?
I make deals contingent upon current lease reviews to confirm who is paying what and confirm it on the rent roll, to determine whose lease is up, who is on a finite lease vs month-to-month. Most bigger complexes will have the leasee's application, credit/criminal/income check, etc., so you can review their application within their personal folder.
But, theoretically, to answer your question, I suppose one could do as you inquired if you were so inclined. You, the buyer, are likely paying for all the screening costs b/c I can't think of why an owner would go through all that expense & effort again just to satisfy a contingency on a purchase agreement that may or may not happen. It might make your offer seem less appealing in a competitive market, so keep in mind you may lose the property putting in unusual contingencies.
I'm not a lawyer, so this is not legal advice, but I'm not aware of any state law that specifically allows or disallows a new owner to evict an existing tenant based on pre-ownership issues. Moreover, I'm not sure I'd want to rock the boat pre-purchase b/c the rental income is a key metric to you the potential new owner and the lender who may be underwriting the deal based on rental income itself.
That said, there are a few loopholes you can look into. Such as: if tenants are on month-to-month leases, or if they were on a 1yr lease and the current owner didn't resign them into a new one and they're automatically converted into month-to-month, many states only require a one month notice to vacate. If they inquire as to why, you can say you want to make repairs or do a total gut rehab. I'd suggest giving two months so the tenant doesn't get irate and damage your property for making them move on such short notice. However, if the tenant has a recent arrest for specific issues threatening the safety of the complex, I'm thinking you can evict without much notice for the safety of the other tenants.
Sorry for long-winded response but it's a complex question.
My ONE thing is fully appreciating the cost of capital and the dynamisitic nature of interest rates!