Negative cashflow property - What would you do?

26 Replies

I own a 5 unit apartment building. It really is a very old house (I would guess built in the 1920's) that was converted into apartments sometime in the 80's.  This property has a huge hassle factor and is a headache.

The apartments are all on the same power, water and gas meters, so utilities are included in the rent. They are heated through gas boiler/furnace with radiators, and the only AC is window units.

The units are all different floor plans. 

The Math:

Income

Unit A: Rents for $525, 2 bedrooms, 1 bathroom

Unit B: Rents for $450, studio apartment with mini kitchen

Unit C: Rents for $475, 2 bedrooms, 1 bathroom

Unit D: Rents for $500, 1 bedroom, 1 bathroom, unit is upstairs

Unit E: Rents for $500, 1 bedroom, 1 bathroom, unit is upstairs

Total gross monthly rent: $2,450

Expenses 

Utilities total around $925/month: $450 for power, $250 for Gas and $225 for water.

Taxes and Insurance are $350/month

Management (I manage myself but charge 10% for the analysis): $245

Repairs/Maintenance (5%): $122.50

CapEx (5%): $122.50

Vacancy/Uncollectible Rent (10%): $245

Debt Service: $500/month

Total Expenses: $2510

Monthly Cashflow: -$60.00/month

Obviously this is not ideal.  As I said above, the property is located in a bad area. It's not a good piece of property. The property is one that the hassle factor is HUGE.  It's always been a huge headache and constant source of stress. I owe $67k on it and I have had it listed with an agent for 10 months.  I've had a couple of offers and I even accepted an offer of $52,500 which would leave me covering the difference.

This property attracts poor tenants, and decent tenants won't come near it. It's easy to say "get better tenants" but this property is just not in the location or condition to get good tenants.  I have performed nearly 10 evictions in 3 years on this property, the other 10 properties I own I have only had 1 eviction in 3 years.

Some options I have considered are updating the heating/air systems to more efficient systems to save money on utilities. Switch the meters to be unit specific for power, water and gas. This would be a huge investment, in my area it's around $5000 to have the heating and air system installed, so that alone would be $25,000.

I'm considering dropping the price to a ridiculous level and take my loss and move on.

I would love to hear any advice, or maybe just confirmation that I need to get rid of the property as fast as possible.

What happened with the $52,500 offer you accepted?? Sounds like even if you updated it to tenant paid utilities it still wouldn't be worth it, so if you can afford it I'd just take the loss to get away from it.

The buyer backed out based on an inspection clause in the contract.  However my agent believes, based on comments made by the buyers agent, it was due to one tenant being $700 behind in rent.

I don't see a negative cash flow here.  I see your rent covering all of your actual expenses, but not your potential ones.  There's a difference.

See my questions and comments below:

Total gross monthly rent: $2,450

Expenses

Utilities total around $925/month: $450 for power, $250 for Gas and $225 for water.

Taxes and Insurance are $350/month

Management (I manage myself but charge 10% for the analysis): $245  Q:  Who are you paying this too.

Repairs/Maintenance (5%): $122.50  Q: Who are you paying this too.

CapEx (5%): $122.50 Q: Who are you paying this too.

Vacancy/Uncollectible Rent (10%): $245  Q: Who are you paying this too.

Debt Service: $500/month

Total Expenses: $2510

Comment:  The way I see it, your actual expenses are only $1775, which means ...

Monthly Cashflow: -$60.00/month  Comment: ......your actual cash flow is $675 to the good

Comment: Yes, those other items are important to cover, but unless those are actual expenses they are not having an impact on your cash flow right now...with right now being the operative word.

My thoughts:

1 - If you are getting $675/month, or $8100/yr in cash flow, then you should take that money and convert your utilities to separate meters...and bill the tenants accordingly.  That alone would add whatever % of the $925/month you're paying out of pocket now to your cash flow.

2 - Put all of your tenants on an autopay system.  It's amazing how effective this can be to keep rents coming in on time.  With 5 tenants, the total cost to you would be around $20/month...that's TOTAL,...not per tenant.  This would make the sale of your property much more attractive.

3 - Focus on selling the property again.  If at a loss, it's at a loss.  That loss will be a one time loss, instead of a long term "bleed".  The object here is to stay in the game.  You'll be out of the game faster than you can say,"I'll take 5 new cards".  The number one rule orf REI is much like Poker...to "stay in the game".  Losing a hand isn't losing that money in the pot...the money is still on the table in a different pile.  If you keep throwing bids into a bad hand though, that money will be lost and you'll be out of the game...with no chance of recovering it.

Raise all your rents by $25/mo. You may lose a tenant or two but you are losing them anyways. Firm up your payment policies. I know firsthand about properties that are a hassle. You need to retrain your tenants. Dont give up. Definitely dont sell at a loss. Good luck @Justin Whitfield . Keep us updated.

There are two ways to make it cash flow,  decrease expenses and increase revenue.  Check if the rents are at market for utilities included and spend time on screening.   Autopay may increase payments but it shouldn't cost $20 a month.  Look around at this options here.

Utilities that are more efficient may be your biggest winner even if you sell.   How old is the current furnace? What would you save in costs if you upgrade just the one furnace?  Have you considered if any of the units could go on their own electric (and maybe their own heat/ac using for example a minisplit)?  Whose AC units are in the property and how old are they?  These are real electricity hogs. Do you have a hot water heater,  is it on demand on the furnace or one per unit (electric or gas). If hot water heater is per unit I would want them paying their own electric/ gas or move to a central unit. If it is available in your area have your utility do an energy audit, they do this free and it may fall under the multifamily program with 5 unit.  They can help a lot since you have both electric and gas and they may have rebates for some of these items.

  For water - shut off the outside faucets, fix any leaks, and go to low flow fixtures.  I do hear people talk about RUBS where you charge water back to the tenant but that isn't something I know much about. 

My guess is with a little work you could get it working for you. I would see if you can get the situation improved and then if you want relist.  The headache factor is getting you I can see.

Also since you say the property condition is an issue make a list of fixes that need to be done and plan for doing them- some may get you a better class of tenant- if it looks terrible they don't even come in the door.  That being said if it is a war zone and  going down hill fast well then just sell.  

As an entrepreneur, take action!  Offer a better product by fixing things that need to be fixed,  accept a period of higher vacancy to filter out bad tenants, and do better marketing to let the area know how good of a value this place is.

Simply selling it off would be an irresponsible thing to do (if it truly is negative cash flow), because you're just simply passing off a bad deal to someone else.

Do you accept pets?  If not, start accepting well trained pets. Its an easy source of additional income.  Pets hardly do any damage.  Children cause way more damage than pets do. 

@John Ma    I would say on this issue of pets with old buildings noise is also a factor  so I would be inclined to expand only to cats if sound travels a lot in the building.  Also cleanup with pets can be an issue if it is a small land area. 

@Joe Villeneuve  Many of those expenses aren't just on paper and sit in the bank account. I have had 4 big repair costs for water leaks the past 3 months, around $175 each.  Believe me if it was really cash flowing $675/month I would know it.  The vacancy/uncollectible and repair costs are very real for this property and they are even more than that simple analysis shows. 

@Rob Beland Thanks for the encouragement. I have trouble renting them at prices much higher than what I'm getting. The market just isn't there in that area

@Colleen F. I have spent a lot of money doing improvements and fix ups over the past 3 years to make them more appealing, it doesn't do much in terms of tenant quality. It is in an area of town where good tenants just won't rent.  Good advice about the energy use inspection and utility upgrades.

@John Ma I'm very well aware of how to offer a better product and fixing the things that need to be fixed.  There's nothing "wrong" with the property in terms of obvious things that are broken. Last summer I spent 2 months fixing 3 of the apartments and spent a lot of money, they looked great, but I haven't seen any return on my investment for doing these repairs and improvements.

As far as it being irresponsible to pass it off a bad deal to someone else? That is not how I see it. Many times good deals come from fixing other peoples problems and headaches.  If someone came in with a fresh mindset, new ideas and had a lower price point (much lower than mine) they could make this property work.  I have taken other peoples problem properties or "bad deals" many times and they have been my best investments. 

What is your financing on the place?  It seems like you are paying a lot of interest and/or principal.  If it is a short loan your principal pay-down may be hiding your profit.

If you have other properties that are doing well, cutting your losses on this one sounds like it might be a good strategy.  

One strategy for a "fire sale" might be to cut price(or do a relist at a low price) - and give a date a week or two out for reviewing offers.  If you price low enough you might get some increase over the original asking price.

I think there are a number of suggestions that have been made that you should implement

I certainly would raise the rent.  At $25.00 a uni raise thats $1,500.  Not shabby.

Low flow units, more efficienct light bulbs in your common hallways and think about billing the water, and utilities directly.  All these things would save you money in the end and make your property much more salable,  In the meantime you are paying off principal and getting a tax loss.

  When anyone moves upgrade the unit and raise the rent some more.  You can do it.

Originally posted by @Justin Whitfield :

@Joe Villeneuve Many of those expenses aren't just on paper and sit in the bank account. I have had 4 big repair costs for water leaks the past 3 months, around $175 each.  Believe me if it was really cash flowing $675/month I would know it.  The vacancy/uncollectible and repair costs are very real for this property and they are even more than that simple analysis shows. 

OK.  I assumed you had arrived at some of those numbers as actual expenses paid, not just allocated towards future use.  Your post didn't differentiate between the two though. Having said that, do you know what your actual cash flow is?

My suggestions are still valid though. It appears as though you need to run from this as fast as you can.  Your future holds problems that can't be fixed based on your description of them. 

However, this is only a problem if you continue to try to "play this hand out".  You need to accept the loss from a sale, whatever that may be, and move on.  You can't let this continue to effect the positive cash flow properties that you have.  Once sold, the bleeding will stop, and you can move on.

Look at it like having a leak in your roof.  you can either continue to patch it, and fix the constant damage it does, over and over again, or pay more to fix it once and for all.  The immediate cost (loss in your case) is a one time cost.  You hang onto it, and you're living out Einstein's definition of insanity.

Justin, have you thought about options for reducing your utility costs without major upgrades?  I imagine that a tenant who doesn't pay for utilities doesn't care much about running the heat or AC all day or leaving their lights on.

Do you have programmable thermostats?  Maybe you can work with your tenants and set a thermostat schedule that is in line with their schedules?  

What are your setpoints for heating and cooling?  Do you control these systems or do the tenanst control them?  

Replacing incandescent lighting with CFL's could also save you some money.

Originally posted by @John Ma :

Do you accept pets?  If not, start accepting well trained pets. Its an easy source of additional income.  Pets hardly do any damage.  Children cause way more damage than pets do. 

The pets of responsible pet owners may or may not cause damage, but the pets of irresponsible pet owners most certainly will. If the tenants are not responsible tenants at this point, adding pets will just compound the problem. 

I once bought a co op in a building where the sponsors upgraded the entrance way to the building.  All they did was wallpaper the entrance way,   put in shinney new mail boxes, paint, and put in a nice center  light fixture.  I thought the place was nice  enough for me to buy an investment co op (big mistake).  So what I am suggesting is that you update your entrance way so the tenants will  get a really good feeling about renting an apartment there as you raise the rents.  Also if you have room to upgrade to a washer dryer connection in the apartment that would be a plus.

@Justin Whitfield "As I said above, the property is located in a bad area. It's not a good piece of property. The property is one that the hassle factor is HUGE."

I suggest you look for a local REI mentor (a successful landlord) who would be willing to look at the neighborhood, the property, the current tenant mix and your property management practices, so they can provide you with some meaningful and honest feedback. It may be that you could turn this around, or it may be you have given up on the possibilities and just want to escape.

We buy C properties and turn them into B properties. We do this through using sound property management practices, doing what we can to improve the property and the surrounding neighborhood, and forging positive relationships with neighbors, social service agencies and law enforcement. We don't start out with D properties in war zones, but if we did I would find a mentor who has been successful in such areas. Find someone "on the ground" who can help you see past the problems and guide you in realizing the possibilities.

Good luck!

If this was my property what I would consider is converting one of your 2 bedroom/1 bath apartments (A and C?) into two (2) studio apartments and renting them at $450 or $500 each.  Just put in  mini kitchen.  Small under counter refrigerator, and a small microwave and small bathroom with shower.  That would help you cash flow and even sell the place. 


@Barbara G.    that is a good thought and worth considering  but it may trigger city issues and additional upgrades.

Someone mentioned heat set points.  I would recommend what i have used which is landlordstats from Chicago temperature control with upper and lower limits with some good results plus some insulation so that is worth looking into. Nothing obvious on it and no asked about the heat not going higher.

Hi Justin,

Firstly, hang in there. Prudence investing additional capital is wise if not knowing your longer commitment level or having a detailed plan with the thin margins and limited options so described. Changing floor plans or taking on numerous capx upgrades to purge the conditions might be an excessive start until later: zoning, permits, and 2nd egresses come to mind unless a basement unit can be added. Not sure what your cost basis is with repairs  but -$60 seems manageable on paper especially if you had intended to bring cash to closing. What do you think could be accomplished if taking some of that $ to buy time or as covered earlier to reduce expenses while increasing revenue? It is apparent this will be a tiered approach and not resolved overnight. Therefore,

What is the Section 8 FMR for your county? Would converting get you 10-20% more per unit and more stability or is it already Sec 8?

Maybe put some feelers out as suggested earlier for a management for % equity partner with benchmarks while allocating some of that walk away $ for a last turn-around strategy then re-evaluate a sale. 

Can the debt service be lowered or if sensible*** a 3-5 yr % only with intent to re-list in 18-24 months while the details of phase 1 of the turn around play out?

Marketing to tenants who are in the trades that can help improve the building with your oversight for credit back at end of lease or renewal. 

Hope this helps.

Gregg

problem=utilities. include as additional rent (or just charge additional rent) or split it up.

make the house nice. nice people will come because they want to be in a nice place...even in a bad area. Or sell it. your financial situation will dictate the proper course of action for you.

Is there potential for re-financing the place and extending the period for payback?  This would reduce your fixed costs with the mortgage.  Plus you could still raise rent by $25, separately meter power and charge for water and power.  Also more energy efficient light bulbs, and etcetera. Just my thoughts.

Originally posted by @Justin Whitfield :

I own a 5 unit apartment building. It really is a very old house (I would guess built in the 1920's) that was converted into apartments sometime in the 80's.  This property has a huge hassle factor and is a headache.

The apartments are all on the same power, water and gas meters, so utilities are included in the rent. They are heated through gas boiler/furnace with radiators, and the only AC is window units.

The units are all different floor plans. 

The Math:

Income

Unit A: Rents for $525, 2 bedrooms, 1 bathroom

Unit B: Rents for $450, studio apartment with mini kitchen

Unit C: Rents for $475, 2 bedrooms, 1 bathroom

Unit D: Rents for $500, 1 bedroom, 1 bathroom, unit is upstairs

Unit E: Rents for $500, 1 bedroom, 1 bathroom, unit is upstairs

Total gross monthly rent: $2,450

Expenses 

Utilities total around $925/month: $450 for power, $250 for Gas and $225 for water.

Taxes and Insurance are $350/month

Management (I manage myself but charge 10% for the analysis): $245

Repairs/Maintenance (5%): $122.50

CapEx (5%): $122.50

Vacancy/Uncollectible Rent (10%): $245

Debt Service: $500/month

Total Expenses: $2510

Monthly Cashflow: -$60.00/month

Obviously this is not ideal.  As I said above, the property is located in a bad area. It's not a good piece of property. The property is one that the hassle factor is HUGE.  It's always been a huge headache and constant source of stress. I owe $67k on it and I have had it listed with an agent for 10 months.  I've had a couple of offers and I even accepted an offer of $52,500 which would leave me covering the difference.

This property attracts poor tenants, and decent tenants won't come near it. It's easy to say "get better tenants" but this property is just not in the location or condition to get good tenants.  I have performed nearly 10 evictions in 3 years on this property, the other 10 properties I own I have only had 1 eviction in 3 years.

Some options I have considered are updating the heating/air systems to more efficient systems to save money on utilities. Switch the meters to be unit specific for power, water and gas. This would be a huge investment, in my area it's around $5000 to have the heating and air system installed, so that alone would be $25,000.

I'm considering dropping the price to a ridiculous level and take my loss and move on.

I would love to hear any advice, or maybe just confirmation that I need to get rid of the property as fast as possible.

 ------------_________________-------------------------------------------------

Well Justin everyone  has  given you input and now we would  like to hear what you have deceided to do.  If it's nothing that is OK but I think we want to know what ideas you are considering since we have invested in all these varied suggestions in problem solving.

Thanks

Barbara

Sorry about no response yesterday, was a very busy day.

It is still listed with an agent to sell, and if someone makes an appropriate offer I will absolutely sell it. I don't want to take a huge loss, but I am willing (and I can handle) a small loss. I agree with @Joe Villeneuve that it is better to take a small loss and stop the bleeding.

For some other suggestions about rent increases, people in these apartments are on fixed income and most cant afford any rent increase, even $25/month. The apartments also have a hard time getting rented when they are much higher than current prices.

Some good news that came in yesterday was my premium for insurance was reduced by almost $60/month so that helps out. I am looking into more efficient methods for the utilities to reduce my expenses there as well.

Account Closed I completely disagree about nice people coming to bad areas if the place is nice.  People call about the listing for rent and when you tell them the street they immediately say "oh never mind". It may be different in some cities/areas, but not this one.

Thanks for the advice from everyone and I have definitely taken it all in and to heart. I think my goal for now is to make improvements and changes to try and get cash flow positive and build equity until it sells. I don't see it ever being a big money maker.

"nice people" = people that pay rent consistantly and will take care of the house because they like what it offers.

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