First Rental - Negative Cash Flow & Questionable Property MGMT
Hi Guys,
I am an out of state investor that purchased my first duplex in Cleveland, OH last year. I'm already negative cash flow on this rental because of unexpected repairs and tenants not paying. After turning over the unit to get it rent ready - I had to replace upstairs stove, two hot water tanks, and get the furnace serviced, and a plumbing job in the basement. My upstairs tenant fell behind for 3 months - received some assistance just to catch up, but now has not paid this month. Also since I closed on my property - my downstairs tenant has paid on time until this month. This is the first month where both my tenants have not paid. In the beginning I attempted to self manage my property out of state with using boots on the ground. It didn't work out as well which is why I hired my property manager. The property manager that came in was after the tenants have been placed.
My property manager doesn't inform me when tenants pay late, when tenants call in for repairs etc. I only know when tenants pay late when I received my owner's statement. But this is received by the 15th of the month. By too much time has gone by for late notice, eviction letters etc. They let me know when they are repair issues that need to be addressed - hence the plumbing job and the furnace. Property manager quoted me 2500 for furnace replacement. My boots on the ground was able to get it serviced to get fixed for 729$. At this point I am eating the cost of supporting my rental from my W2 salary. I am in a 2 year contract with my property management company. To cancel the contract is 500$.
These are my thoughts of where I am at .. If I have to evict either upstairs tenant or both, I'm strongly considering moving into the property. My job will be 100% remote by September. I do have the capacity to move from NY to Ohio. I would have the opportunity to leverage my W2 salary for FHA loans, continue to house hack - I'm also going to continue to wholesale as well. I'd figured me being there I would have more power to turn this property around. My second thought is I could search for another property management company . Then pay to cancel the contract with my current property manager. I'm just looking get some insight on if the property manager is mismanaging the property how do I go about it lawfully. If I have to evict my tenants how would I go about that being out of state. I'm willing to answer any other questions that can provide more insight on this.
Thanks again.
Firstly, the PM needs to go. They are charging you money and not providing any service and also appear to be heftily marking up maintenance. Take this as a lesson for throughly vetting any PM you contract (a good PM cannot save a bad deal but a bad PM sure can kill a good deal).
Your boots on the ground person seems to be a valuable resource, I suggest using them to find an attorney or other appropriate professional in the area to handle the eviction process (your current PM performance leads me to believe asking them to handle the eviction is a bad idea).
While you missed out on the low down payment benefit of the house hack, I still think it is your best option here if your job offers the flexibility to move to Ohio. Live in one unit and rent out the other unit. I can assume your cost of living will go down compared to New York. Additionally, I recommend self-managing for at least a little bit, as it will allow you to get hands on with the property and develop an understanding of maintenance costs among other things (this experience will allow you to better vet PMs in the future). Use the time in Ohio to build out a team to support you as an out-of-state investor, especially if you are looking to continue to invest in Ohio. Once you feel satisfied things have stabilized, you can move out and let the team you assembled take over.
What does not kill you makes you stronger. I obviously have no insight into the actual deal or your life, so take my advice and apply your context. For example if the house is a money pit (lots of maintenance) or not set-up to cash flow, then you might be better off selling it to cut your losses.
Quote from @Gardy Saturne:
When a tenant is late on rent, the PM should have policies in place that allow them to act quickly. If both tenants failed to pay this month, what is the PM doing to correct that or get rid of them?
As for terminating PM, the penalty for termination is typically reserved for when you walk away without a valid reason. If the PM is failing to perform, you should be able to terminate without penalty.
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#2 Managing Your Property Contributor
- Property Manager
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@Gardy Saturne How well did you screen this PMC before hiring them?
What questions did you ask to confirm they could properly meet your expectations?
May be time for a new one!
In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.
It's often a case of not doing enough research, as they don't know what they don't know!
Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator.
So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.
EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!
This also leads owners to ASSUME simpler is better when it comes to management contracts.
The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!
We have a 14-page management contract that we've added our real experiences to over the years, with the intent of protecting both us AND the landlord. Beyond the Monthly Management, Placement & Maintenance fees, all other fees in our contract are IF EVENT -> THEN fees.
We don’t know any PMCs to recommend in the area mentioned, but since selecting the wrong PMC is usually more harmful than selecting a bad tenant, you might want to read our series about “How to Screen a PMC Better than a Tenant”:
We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.
EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!
P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊
Questionable property managers are often the cause of negative cash flow
Quote from @Gardy Saturne:
Hi Guys,
I am an out of state investor that purchased my first duplex in Cleveland, OH last year. I'm already negative cash flow on this rental because of unexpected repairs and tenants not paying. After turning over the unit to get it rent ready - I had to replace upstairs stove, two hot water tanks, and get the furnace serviced, and a plumbing job in the basement. My upstairs tenant fell behind for 3 months - received some assistance just to catch up, but now has not paid this month. Also since I closed on my property - my downstairs tenant has paid on time until this month. This is the first month where both my tenants have not paid. In the beginning I attempted to self manage my property out of state with using boots on the ground. It didn't work out as well which is why I hired my property manager. The property manager that came in was after the tenants have been placed.
My property manager doesn't inform me when tenants pay late, when tenants call in for repairs etc. I only know when tenants pay late when I received my owner's statement. But this is received by the 15th of the month. By too much time has gone by for late notice, eviction letters etc. They let me know when they are repair issues that need to be addressed - hence the plumbing job and the furnace. Property manager quoted me 2500 for furnace replacement. My boots on the ground was able to get it serviced to get fixed for 729$. At this point I am eating the cost of supporting my rental from my W2 salary. I am in a 2 year contract with my property management company. To cancel the contract is 500$.
These are my thoughts of where I am at .. If I have to evict either upstairs tenant or both, I'm strongly considering moving into the property. My job will be 100% remote by September. I do have the capacity to move from NY to Ohio. I would have the opportunity to leverage my W2 salary for FHA loans, continue to house hack - I'm also going to continue to wholesale as well. I'd figured me being there I would have more power to turn this property around. My second thought is I could search for another property management company . Then pay to cancel the contract with my current property manager. I'm just looking get some insight on if the property manager is mismanaging the property how do I go about it lawfully. If I have to evict my tenants how would I go about that being out of state. I'm willing to answer any other questions that can provide more insight on this.
Thanks again.
Hi Gardy,
I am assuming you have already voiced all of these concerns to the PM and asked for them to work on this or change? I think it is important to voice those expectations. I am sorry it has been so hard but you are sure learning a lot. I am a huge pro's and con's list kinda guy, I would write out the pro's and con's for all the options. If you are present you sure could grow your team and help work out any issues easier while you are present. I have been doing that. I act as if I am not here so that if I am ever out of state my systems and team will already be in place.
Talk to your property manager. I am reading a couple of things. You just purchased it recently with inherited tenants. Both water heaters had to be replaced. They were likely already close to or at the end of their useful life. This should’ve been noted in your inspection and you should’ve expected this to come up as an expense. Same might apply to the AC unit, the stove and the other items. Your boots on the ground serviced the AC unit. The contractor your PM may have said the AC unit is beyond its useful life and needs to be replaced thus the replacement quote. Hopefully your temp fix lasts or it may quit again in 2 weeks and you’ll pay your boots on the ground another $729 to make the unit run another 2 weeks. It sounds like you purchased a property that requires a bit of an upfront investment and more things will likely require attention in the immediate future (hopefully you took that into account when negotiating the purchase price).
As for your PM, it depends on what is in your contract plus the expectations you set upfront. You hired them to manage so they are managing per their procedures. I don’t turn around and tell my clients when my phone rings with a complaint or a maintenance issue. I act, take the needed steps to address the issue and then yes report monthly. If you are expecting them to call you every time something comes up you are attempting to micro manage them.
They may have started the eviction process as well. Or maybe there is something else going on. The tenants were inherited so it may take time to get that on the right track. How long ago have your hired your PM. If it’s been a month since you decided to stop self managing that is not enough time for them.
What I am reading overall is that you purchased a property in a condition that requires some money upfront and inherited unstable tenants (did you look at their ledgers during your due diligence- were they paying on time before). The whole thing needs some love, attention, money, and time to stabilize before it runs smoothly.
Hi Everyone,
Thank you so much for the advice. I honestly could've did a better job doing my due diligence. The property management group was listed as recommendations in here and on facebook as well. I should've ask more on how they handle certain procedures. My boots on the ground wanted to get involved in the deal but they didn't have the capital needed. My downstairs tenant has paid on time since I inherited them. I had the property management since JAN 1st. I can honestly say I was a bit more laid back than I should've been. But now I learned from my mistake. I'm strongly considering the move to ohio to house hack. MY PM did mention they can handle eviction. After reading everyone's advice it does seem best to find an attorney to give me the best insight. Even though this is my first rental property I will not let it discourage me from continuing to build my rental portfolio. I'll keep this thread updated.
I sincerely appreciate everyone response.
Quote from @Drew Sygit:
@Gardy Saturne How well did you screen this PMC before hiring them?
What questions did you ask to confirm they could properly meet your expectations?
May be time for a new one!
In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.
It's often a case of not doing enough research, as they don't know what they don't know!
Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator.
So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.
EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!
This also leads owners to ASSUME simpler is better when it comes to management contracts.
The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!
We have a 14-page management contract that we've added our real experiences to over the years, with the intent of protecting both us AND the landlord. Beyond the Monthly Management, Placement & Maintenance fees, all other fees in our contract are IF EVENT -> THEN fees.
We don’t know any PMCs to recommend in the area mentioned, but since selecting the wrong PMC is usually more harmful than selecting a bad tenant, you might want to read our series about “How to Screen a PMC Better than a Tenant”:
We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.
EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!
P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊
Thanks for this resource. Definitely will check it out.
@Gardy Saturne Dump the PM and find a new one. Moving into your rental and house hacking/self managing it might sound like a good idea, but that is definitely not setting your rental business up for success in the future. Imagine if every property you buy required you to move into it so it makes money. You're not an investor at that point; you just gave yourself another job. And if both tenants aren't paying rent, its doubtful the property is in an area in which you would enjoy living (just a guess). Learn from this mistake, we all make them, and create better systems so the next one you buy won't have the same issues. Good luck!