Seeking advice for improving returns on my portfolio of 8 units

61 Replies

Hello BP. I have been thinking about how I can improve my rental property portfolio consisting of 8 unit streams. I have been tracking returns on my properties with a spreadsheet I created for myself, and I have identified that 4 of the 8 units I own have been consistently underperforming the rest of the portfolio for 3 years now. I am tracking my returns based on cash flow numbers only (for conservatism reasons - I look at appreciation as icing on the cake).

A little background:

The underperforming units are all part of a small multifamily compound in a lower income neighborhood that I purchased in 2018 that looked great “on paper” but after tracking their performance for a few years, experienced less than expected returns due to one issue or another that has cropped up (more capex up front, tenant that I couldn’t evict for 10 months through covid, multiple vacancies causing turnover costs). They are older units (1960) so I will likely see other capex items sooner rather than later if I kept them for 30+ years. They have very little appreciation potential, which I don’t mind if cash flowing well. These properties have strengths of being very low mortgage cost, room to grow rents over time (they are almost 2% rule), and in a affordable rental class that seems to have a major shortage in today’s world. They still make enough cash flow to allow me to hold them if I choose.

So my questions are for experienced investors who do this sort of purge analysis on their rentals, how long do you typically give underperforming properties a chance to meet potential? Is my 3 year “leash” too short sighted if I decided to cut bait and 1031 exchange into something else newer build in a better neighborhood?

I see both pros and cons to keeping the properties in my portfolio, and I always envisioned keeping everything for 30 plus years, but I am now wondering if I should tweak my expectations. Thanks for your opinions and advice!

That equity you refer to as a "bonus" is your answer.  I have three questions for you:

1 - How much equity do you have on each property?
2 - What is each property worth?
3 - What is the cash flow for each property?

@Joe Villeneuve thanks for the reply.

1- the 4 units are 2 duplexes. I owe 57k on each duplex. Recent sales in the neighborhood (of all similar duplexes) have gone to 125k. So I’ve got roughly 68k equity on each duplex.

2- 125k-130k based on recent comps in last 6 months and condition of my units.

3- I forecasted my cash flow for 2021 to be roughly $180 per door for the 4 units. This was based on the expectation I would set aside 12% of monthly rents for capex, plus 8% for vacancy, plus 8% for other miscellaneous repairs, plus Prop Mgmt 12% of rents. These are cash flow calculations I expected to be on the conservative side.

Cash flow for 2021 has been closer to $100 per door. Which I guess is still OK. But compared to my single families in better neighborhoods, my SFH are crushing that and have better appreciation potential as the cherry on top. Has me thinking…should I just 1031 into a couple more SFHs.

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Post all the numbers you can. The numbers are the only way to tell whether or not to keep them. Need:

rental income
mortgage payments
monthly principal payment
expenses, property taxes, repairs, insurance, water, electric, etc.
ability to increase rents every year.
amount paid
balance on loans
current value
how much have they appreciated in value

What are 8-unit streams?

Any less and everyone is taking wild guesses

The duplexes are failures on epic proportion,  Get rid of them ASAP...sooner if possible.  They have absolutely no value, except in the equity which is useless to you...unless you sell.  So SELLLLLLL!!!!!!  EVery month your duplexes gain equity, and lose cash from negative cash flow (yes, $100/month is negative cf...just waiting to happen), they are losing money for you....big time.

Repeat after me.  "Sell, Sell, Sell, Sell,Sell,Sell,....SELLLLLLLL!!!!!!!



@Jack Orthman thanks for the reply. That could end up being a really long post if added numbers for my whole portfolio. Without getting into all the nitty gritty details, I’ve got a lot of data on my tracking spreadsheet that tells me I’m only really collecting about 55 percent of the cash flow I expected for the 4 underperforming units. I was anticipating $180 per door and currently running about $100 per door. Still in the black but not as good as I forecasted “on paper”. Mostly due to getting slammed by more capex items, vacancy, turnover costs than I predicted.

I bought each duplex for 80k. Probably a C- neighborhood. Current comps support value of $125k. I owe 57k on each. They are contributing to my overall portfolio but not quite to the extent of my SFH. They are not local so I have them on PM at 9% of rents (after other fees I estimate PM at closer to 12% and run my numbers as that's the case). I think I could 1031 each of the duplexes into a newer 2000s later build SFH in the 185-200k range and mitigate a lot of the vacancy/capex issues I've been having w the older duplex units. Cash flow could be a wash or slightly improve while appreciate potential would surly get better w the SFHs.

The other 4 of the 8 streams are my SFHs. Each of them make on avg 400+ per month on cash flow assuming the same reserve allocations as I added in the post above to Joe (Approx 12% capex, 8% vacancy, 8% miscellaneous repairs). They are in C+ to B+ neighborhoods. Bought for 95k, 100k, 112k, 145k at 20% down all since 2016 so pay down has been minimal. But each has appreciated nicely at 75k-100k a pop.

@Joe Villeneuve i will admit it has seemed a bit like Murphy’s law for the 3 years I’ve owned them putting a damper on returns. They have been in the black only bc I bought them pretty cheap and get almost 2% rule. Although not negative yet, I can totally understand why you say 100 cash flow per door per month is probably gonna bite me down the line since they will require lots of work being 60’s builds.

Originally posted by @Matt Leber:

@Joe Villeneuve i will admit it has seemed a bit like Murphy’s law for the 3 years I’ve owned them putting a damper on returns. They have been in the black only bc I bought them pretty cheap and get almost 2% rule. Although not negative yet, I can totally understand why you say 100 cash flow per door per month is probably gonna bite me down the line since they will require lots of work being 60’s builds.

 8% for vacancy is super high according to my experiences and that may be cutting into your cashflow. I figure the acerage tenant stays in a rental a minimum of 2 years and I think our average tenant stays 4 to 5 years. If we average our averages I think our vacancy rate is 1% and no more than 2%. Perhaps, you need to look for better tenants. We find our best tenants by posting ads at supermarkets.

I can't tell much from the numbers you post since I don't think you mentioned your equity and that can help to determine whether or not you can sell what you have and upgrade to one more-profitable multi-unit property. I will take a guess and say you do have enough and I would try to get the maximum number of units possible at one location. Many investors put 8% of the rent aside every month for repairs and for upgrading properties and maybe upgrading is the best thing.

Post a copy of your spreadsheet if you would like to share how you are doing your math.

Originally posted by @Matt Leber:

@Joe Villeneuve i will admit it has seemed a bit like Murphy’s law for the 3 years I’ve owned them putting a damper on returns. They have been in the black only bc I bought them pretty cheap and get almost 2% rule. Although not negative yet, I can totally understand why you say 100 cash flow per door per month is probably gonna bite me down the line since they will require lots of work being 60’s builds.

 Here's why I say 100/door is negative CF waiting to happen.

If you have a vacancy for just two months (maybe even just one) in a year (actual vacancy and time to do rehab and fill that vacancy), add up the monthly expenses for those months.  Is the total more than 1000 (10 months of 100/m CF)?  If it is, and most likely it will be, that means you were at a loss for that entire year.

Forget the % rules.  In fact, forget percentages all together...they tell you NOTHING of importance, and just cloud the issue.  Stick to the actual dollars.

@Jack Orthman sorry I had it in my post to Joe but not you. I have 68k equity in each. So i think I could potentially 1031 exchange roughly 120k into other properties after selling costs. I was considering trading back into SFH class bc that has been where I have performed really well on the other rentals. If I went that route I would probably target newer than 2000s build closer to home bc I think that would increase the quality of my portfolio and vacancy would be lower.

The sad thing about the 8% vacancy allocation being a high reserve I would normally agree, but I have every bit matched or exceeded that on these duplexes so far. I mean, I had almost 100% vacancy on a unit last year due to having a guy who used covid to stop paying for 10 months. That is the worst type of vacancy…where they don’t leave. I get that it was a little flukey and could happen anywhere but still…

Most of my SFH are still on my first round of tenants (low vacancy). The MFH are small 2/1 units and get a more transient crowd, so they turn over more often. I could turn and market them quicker if they were close to home, but they are upstate on a PM and it usually takes about 2 months to refill them.

Originally posted by @Joe Villeneuve:
Originally posted by @Matt Leber:

@Joe Villeneuve i will admit it has seemed a bit like Murphy’s law for the 3 years I’ve owned them putting a damper on returns. They have been in the black only bc I bought them pretty cheap and get almost 2% rule. Although not negative yet, I can totally understand why you say 100 cash flow per door per month is probably gonna bite me down the line since they will require lots of work being 60’s builds.

 Here's why I say 100/door is negative CF waiting to happen.

If you have a vacancy for just two months (maybe even just one) in a year (actual vacancy and time to do rehab and fill that vacancy), add up the monthly expenses for those months.  Is the total more than 1000 (10 months of 100/m CF)?  If it is, and most likely it will be, that means you were at a loss for that entire year.

Forget the % rules.  In fact, forget percentages all together...they tell you NOTHING of importance, and just cloud the issue.  Stick to the actual dollars.

 I agree about not using percents when doing calculations with the exception of the annual expense rate compared to the gross income. I made my spreadsheet charts so they show cost per unit per month vs. a percent of gross income. Otherwise, when a chart shows percents I have to convert it to cost per unit.

@Joe Villeneuve yeah years 1 and 2 we had a vacancy in each of the buildings for at least 2 months. It takes my pm about 2 months to fix them up and get a qualified tenant. Which is too slow in my opinion but that’s a whole different discussion. I could turn and fill much faster if they were local.

Are you suggesting I look at trading into something that's likely to be more stable vacancy wise (SFH)? I feel like if I go multifamily again in my area I'm probably going to run into the same transient crowd if I'm still buying properties that are at a price I can cash flow. Places that are small and always have tenants wanting to upgrade out to something bigger and better. On the other hand, I think I can go the SFH route and get a higher quality product that I can hold for 30+ years, better tenant pool, and folks that want to stay longer so vacancy lower.

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Originally posted by @Jack Orthman:
Originally posted by @Joe Villeneuve:
Originally posted by @Matt Leber:

@Joe Villeneuve i will admit it has seemed a bit like Murphy’s law for the 3 years I’ve owned them putting a damper on returns. They have been in the black only bc I bought them pretty cheap and get almost 2% rule. Although not negative yet, I can totally understand why you say 100 cash flow per door per month is probably gonna bite me down the line since they will require lots of work being 60’s builds.

 Here's why I say 100/door is negative CF waiting to happen.

If you have a vacancy for just two months (maybe even just one) in a year (actual vacancy and time to do rehab and fill that vacancy), add up the monthly expenses for those months.  Is the total more than 1000 (10 months of 100/m CF)?  If it is, and most likely it will be, that means you were at a loss for that entire year.

Forget the % rules.  In fact, forget percentages all together...they tell you NOTHING of importance, and just cloud the issue.  Stick to the actual dollars.

 I agree about not using percents when doing calculations with the exception of the annual expense rate compared to the gross income. I made my spreadsheet charts so they show cost per unit per month vs. a percent of gross income. Otherwise, when a chart shows percents I have to convert it to cost per unit.

 OK.  What does the Annual exp rate compared to gross income tell you?

Originally posted by @Matt Leber:

@Joe Villeneuve yeah years 1 and 2 we had a vacancy in each of the buildings for at least 2 months. It takes my pm about 2 months to fix them up and get a qualified tenant. Which is too slow in my opinion but that’s a whole different discussion. I could turn and fill much faster if they were local.

Are you suggesting I look at trading into something that's likely to be more stable vacancy wise (SFH)? I feel like if I go multifamily again in my area I'm probably going to run into the same transient crowd if I'm still buying properties that are at a price I can cash flow. Places that are small and always have tenants wanting to upgrade out to something bigger and better. On the other hand, I think I can go the SFH route and get a higher quality product that I can hold for 30+ years, better tenant pool, and folks that want to stay longer so vacancy lower.

 Dump the losing properties...no matter what they are.  Find markets where you have high enough CF to recover all your cost (DP) in cash within a 3 - 3 year period.  Sell the property after free equity (from appreciation) equals paid equity (DP) then split and roll the now all cash from equity into new properties where your equity is now at full value instead of reduced value.  When your equity increases through appreciation it does so on a one to one basis...as in, every dollar increase in PV increases your equity that same dollar.  When you bought the property, your equity was worth 5 times its face value since your DP was only 20% of the PV.  As your equity increases this way, it dilutes the actual value of your equity.  When you sell the property, your equity goes back to that original 5 to 1 value...and your cash flow should double too.

Don't get wrapped up in thinking your property is your asset.  It isn't.  Your cash is, which comes in 2 forms:  1 - Cash Flow (liquid) and 2 - Equity (solid).  Your Equity has value, but no use, until you convert it to cash...by selling the property.  The property is nothing more than the temporary location of your assets, until they move to better pastures.

Originally posted by @Matt Leber:

Hello BP. I have been thinking about how I can improve my rental property portfolio consisting of 8 unit streams. I have been tracking returns on my properties with a spreadsheet I created for myself, and I have identified that 4 of the 8 units I own have been consistently underperforming the rest of the portfolio for 3 years now. I am tracking my returns based on cash flow numbers only (for conservatism reasons - I look at appreciation as icing on the cake).

A little background:

The underperforming units are all part of a small multifamily compound in a lower income neighborhood that I purchased in 2018 that looked great “on paper” but after tracking their performance for a few years, experienced less than expected returns due to one issue or another that has cropped up (more capex up front, tenant that I couldn’t evict for 10 months through covid, multiple vacancies causing turnover costs). They are older units (1960) so I will likely see other capex items sooner rather than later if I kept them for 30+ years. They have very little appreciation potential, which I don’t mind if cash flowing well. These properties have strengths of being very low mortgage cost, room to grow rents over time (they are almost 2% rule), and in a affordable rental class that seems to have a major shortage in today’s world. They still make enough cash flow to allow me to hold them if I choose.

So my questions are for experienced investors who do this sort of purge analysis on their rentals, how long do you typically give underperforming properties a chance to meet potential? Is my 3 year “leash” too short sighted if I decided to cut bait and 1031 exchange into something else newer build in a better neighborhood?

I see both pros and cons to keeping the properties in my portfolio, and I always envisioned keeping everything for 30 plus years, but I am now wondering if I should tweak my expectations. Thanks for your opinions and advice!

 The 10 months loss related to covid restrictions sounds like a bit of an anomaly and if lumped in with the overall performance assessment of these, would seem to really impact your results.  Does that seem likely to repeat again?  I wouldn't think it too likely.  The second thing that stands out to me is the 'multiple turnovers' in just three years and then taking 2 months to fill each time.  Why so many, even with a transient multi tenant base, still sounds like a lot.  In that type of neighborhood, there are still folks that would like to settle in for the long haul if it's a decent unit and fair affordable price point. Two months to fill is too long. Does your PM get paid when it's vacant, and get a fee each time it's filled?

Lastly, 2018, is your loan rate high? A cash out refi could recapture all your down payment and expenses and perhaps not even add much to your monthly if your rate is much higher

@Alex Forest we bought them from another mom and pop LL going retirement mode. He was collecting rents in person and giving the original tenants breaks…so when we took over and put it on a PM with firm rules basically all the original tenants skipped out (2 were evictions which stayed until the sheriff came). That was year 1, which we sort of expected. Year 2 came flukey covid 10 month free guy (eviction 3), and toward the end of the year one of the good paying tenants decided to move their family into a bigger place. Year 3 we have had the same tenants all year and all paying (finally!) but we got hurt by a re-pipe needed in one of the units. So the performance has been creeping up but it just has me wondering if I’ll ever truly outpace the capex that I know is coming with cast iron pipes and old electrical, etc.

The Pm taking 2 months is definitely too long. I have been trying to light a fire under their butts for this issue. They only get paid for collected rents so not getting paid while vacant in turnover. They do however get 75% of first month when they get a new tenant. They take about 2-3 weeks to fix up after tenant moves out. Then marketing starts and this neighborhood gets a lot of lower income folks who don’t qualify due to credit, past criminal history, etc. or they only submit partial paperwork. So finding the qualified tenant is taking 6 weeks bogged down by the number of disqualifications. If these units were closer to home I could turn them easily within the month.

Good point on the refi potential. Being 2018 they are my highest rates, but my fear is that if I pull out money and increase loan amount (even with lower rate) I will thin out the cash flow which is already thinner than I would like. And the loans are so small that getting a lower rate doesn't save me much, pulling cash out won't net me much either. I've done the math on some refi scenarios within the last year and none of it seemed worth it relative the refi costs. At that time I decided to refi the SFH rental in my portfolio that had the best combo of loan size, high rate instead.

Originally posted by @Joe Villeneuve:
Originally posted by @Jack Orthman:
Originally posted by @Joe Villeneuve:
Originally posted by @Matt Leber:

@Joe Villeneuve i will admit it has seemed a bit like Murphy’s law for the 3 years I’ve owned them putting a damper on returns. They have been in the black only bc I bought them pretty cheap and get almost 2% rule. Although not negative yet, I can totally understand why you say 100 cash flow per door per month is probably gonna bite me down the line since they will require lots of work being 60’s builds.

 Here's why I say 100/door is negative CF waiting to happen.

If you have a vacancy for just two months (maybe even just one) in a year (actual vacancy and time to do rehab and fill that vacancy), add up the monthly expenses for those months.  Is the total more than 1000 (10 months of 100/m CF)?  If it is, and most likely it will be, that means you were at a loss for that entire year.

Forget the % rules.  In fact, forget percentages all together...they tell you NOTHING of importance, and just cloud the issue.  Stick to the actual dollars.

 I agree about not using percents when doing calculations with the exception of the annual expense rate compared to the gross income. I made my spreadsheet charts so they show cost per unit per month vs. a percent of gross income. Otherwise, when a chart shows percents I have to convert it to cost per unit.

 OK.  What does the Annual exp rate compared to gross income tell you?

The rule-of-thumb for multi-unit properties (not sure about homes) is the annual expense rate should not exceed 50% of the gross income and this expense rate does not include the mortgage payments. Most investors say their actual expense rate is closer to 50%, but for investors who do their own repairs and are on top of their game easily get their expense rate to a little less than 30% meaning much higher returns on their investment. 

So, when you are looking for multi-unit properties to purchase and the marketing package indicates the annual expense rate is less than 50% you need to challenge that number because the sellers innocently or purposely deflate the numbers and you should always change the rate and base the price you would pay for the property at 50% because there are many factors that change the expense rate i.e. the sellers were cheap and did not maintain the properties properly, deferred too much maintenance, or they personally did the repairs and you may not have that ability.

Originally posted by @Joe Villeneuve :
Originally posted by @Matt Leber:

@Joe Villeneuve yeah years 1 and 2 we had a vacancy in each of the buildings for at least 2 months. It takes my pm about 2 months to fix them up and get a qualified tenant. Which is too slow in my opinion but that’s a whole different discussion. I could turn and fill much faster if they were local.

Are you suggesting I look at trading into something that's likely to be more stable vacancy wise (SFH)? I feel like if I go multifamily again in my area I'm probably going to run into the same transient crowd if I'm still buying properties that are at a price I can cash flow. Places that are small and always have tenants wanting to upgrade out to something bigger and better. On the other hand, I think I can go the SFH route and get a higher quality product that I can hold for 30+ years, better tenant pool, and folks that want to stay longer so vacancy lower.

 Dump the losing properties...no matter what they are.  Find markets where you have high enough CF to recover all your cost (DP) in cash within a 3 - 3 year period.  Sell the property after free equity (from appreciation) equals paid equity (DP) then split and roll the now all cash from equity into new properties where your equity is now at full value instead of reduced value.  When your equity increases through appreciation it does so on a one to one basis...as in, every dollar increase in PV increases your equity that same dollar.  When you bought the property, your equity was worth 5 times its face value since your DP was only 20% of the PV.  As your equity increases this way, it dilutes the actual value of your equity.  When you sell the property, your equity goes back to that original 5 to 1 value...and your cash flow should double too.

Don't get wrapped up in thinking your property is your asset.  It isn't.  Your cash is, which comes in 2 forms:  1 - Cash Flow (liquid) and 2 - Equity (solid).  Your Equity has value, but no use, until you convert it to cash...by selling the property.  The property is nothing more than the temporary location of your assets, until they move to better pastures.

One of the most important factors many investors don't take into consideration is the paydown on the mortgage and this calculation often makes a huge difference when calculating your ROI's.

Yesterday, I was working on my software program and was calculating the numbers for a 30-unit apartment building for $7.5 million with 30% down and the monthly principal payment for the loan is $9,000. I ran into this strange scenario where I would earn more profit in 10 years by getting a mortgage vs. paying cash for the property as shown in the two charts below. I haven't had the energy to dig deep into this matter because I am burned out, but my math has always been fairly accurate and these results are the reason I spend no less than 4 to 5 hours every day creating these charts and comparing the numbers for hundreds of properties.

@Jack Orthman just looked at this calculation and I’m sitting at 48% for 2021. But, 2021 has been the best year of the 3.

Hey Matt, it sounds like you have already answered your own question. 

This is a great time to off-load the properties for top dollar. Interest rates are low, banks are throwing money at real estate investors and the sales comps are solid for duplexes. I would talk to your CPA and run the numbers to ensure a 1031 exchange is worth it. In my experience, a 1031 forces you to pay up for a deal just to avoid taxes. This does not mean you should not seek a 1031, but you may find that paying the taxes and waiting/hunting for a better deal makes sense. 

With the amount of equity you are proposing, I would trade up to a 5 unit or higher deal. They are rarely on the market, but you could drive for dollars and network to find a tired "Mom & Pop" landlord who is ready to retire. 

The good news is you learned a valuable lesson. While C or D deals look great on paper, other factors need to be considered before pursuing low-income-style properties. My motto is nice properties in nice neighborhoods attract nice residents. Plus, the lower-income neighborhoods rarely appreciate as much as the moderate to middle-income neighborhoods unless they experience major gentrification. When you see Starbucks show up or a bunch of hipsters with beards (Brandon Turner types) driving Toyota Priuses, then you are better off keeping the properties. 

I'm just wondering if you were to buy closer to home, could you avoid hiring a property manager and run them yourself? Or if all your units are in the same area, would your property management fee drop? Most managers drop the fee after 5, then 10 units. If they are nicer properties, it's easier to find a decent property manager as well. 

Just some thoughts. 

i think you need to immediately go buy this  book (What every investor needs to know about cash flow etc...)

You have no idea how your units are performing as you dont have solid financials. people will tell you to sell, and that 8might* be the right answer, but you dont know until you get some spreadsheets showing your actual cash flow, IRR, etc etc etc.

also for some investors building a bigger portfolio is not the end game - so remember that there are different ways of looking at what you might consider based on your end goals....  For example I have no desire to build my portfolio - its fine where it is as I  as I dont need to get bigger......  so look at the situation with what  YOUR goal is, not the goal of somebody on BP and try to find at least 2 options that might get you where you want to go.