Managing C Class Property Best Pratices

13 Replies

I would like to know what your best practices are for managing a C Class property?  

Also, any warning signs to look out for?

@Ben Smith

Proper Background checks

Larger deposit than 1 month rent

Start evictions quickly when they are late to train them not to pay you last

I have them deposit rent in my bank account - minimizes excuses for late rent

Train them to text you not call you to keep from getting caught up in their drama

Have a good support crew (Handyman, HVAC person etc) that you can text to go handle repairs

If they can't pay full move in money - don't rent to them

The ones that plead with you to rent to them you should run from

These are best practices just off the top of my head.

Originally posted by @Ben Smith :

I would like to know what your best practices are for managing a C Class property?  

Also, any warning signs to look out for?

 Great topic for a thread Ben.

As someone who has hundreds & hundreds of C-Class properties under management I can tell you a few things.

  • It can & is a battle. Do not believe for a second that it's easy. Can it be profitable? Absolutely, but you will fight for your money that's for sure.
  • Don't take personal checks. Only take money orders.
  • Do not place tenants in your property who already have an eviction on their record. They've been evicted once & are not afraid of the process.
  • Do not fall into the sob story trap. Rent is late because Grandma is sick. Grandma being sick is irrelevant. Rent is late is all that matters. Explain to them that anything outside of rent being late is not your concern & is out of your jurisdiction.
  • You need to enforce stict rules but at the same time need to understand that these folks aren't going to live & act like you or I would live & act. There homes will be much dirtier then you expect, they will not have the same life priorities as you or I. On top of that you need to understand that you are gonna end up eating costs that you don't think are fair, but are necessary for you to keep things moving forward. A prime example would be damages done to your unit. These people are often judgement proof. So spending time & money trying to get them to pay for said damages is a non starter.
  • Understand that proper tenant screening is a must. but it does not mean you will eliminate all bad apples. This is C-Class baby, you are going to run into problems. The landlords that freak out over them never last in this business. If you are the type to overreact to every loss this is not the asset class for you. If you can roll with the punches then it's a good long term play even though there are many hurdles along the way.

For some great reading make sure you check out the two threads below. This type of stuff won't happen every day but you need to be ready because IT WILL HAPPEN to you eventually. Be prepared.

TENANTS FROM HELL #1 Deplorable living conditions. PICS INCLUDED!

TENANTS FROM HELL #2 Tubs & Showers from hell. PICS INCLUDED!

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

I have 2 simple recommendations

1) Get a solid background check. The best predictor or future behavior is their past. My applicants pay for their application through mysmartmove.com Its ran by TransUnion and they send you a recommendation for accept/deny

2) Have an attorney write your lease. Tell them what you want and they can assist you. May cost a couple bucks but worth it in the long run

Order the Section 8 Bible by Micheal McLean.

This post has been removed.

Hi @Ben Smith - my views on this have been evolving over the past few months. But I think you're asking the wrong question. Why would you want to manage a C-Class property? The best practice is not to manage one at all.

What I mean is this- if you have a C-Class property, it should be within your power to turn it into a B-class property(at least.) Then, many of the problems attendant with C-class ownership will tend to vanish. I've begun this process with one of my most problematic properties- an 11-unit. I knew it would be a difficult investment going in, but I underestimated the level of difficulty. After several years of a high eviction rate and a low occupancy rate, I've changed my approach dramatically. First, I normally let management dictate the direction of my properties. Management was not succeeding with this building, so I am now dictating direction and being much more hands-on than usual.

Here are my initial actions:

  1. Serve 3-day notices and collect all rent in arrears. Whomever can't pay promptly and in full will be moved out(in process.)
  2. Reduce rents for new tenants to make sure they're affordable- and to make sure that the new tenants realize they have such a good deal that they won't be able to find anything like it upon leaving.
  3. Implement more stringent screening strategies and confer with management on all new tenants. (remember- management benefits from turnover and repairs, but the owner loses, so reducing turnover by proper screening must be undertaken to be certain that management's goals are aligned with the owner's goals.)
  4. Upgrade the H-E-double-hockeysticks out of the building so nobody views it as a C-property. My initial strategies have been good paint jobs and going from carpeting to hardwood flooring(laminate, really, but it's almost as good.) I've also begun to upgrade the tenant lighting to LED to reduce their electric bills(if you do this- make sure your lighting color is 2700 K. Anything over 3000 K usually appears too industrial.)
  5. By reducing the rent rates, I've really gotten my pick of tenants. I think management had over 100 inquiries by text within the first few hours of listing the first two apartments under which I'm taking my new approach.
  6. Take a list of people who missed out because you can't rent to everybody. Then tell them that you'll email them when your next listing becomes available, and before you list it widely on the web(if you're using a broker, this may violate some rules/laws. Check your state laws about pocket listings.) This gives a feeling of exclusivity, and that's a good thing. Imagine having a waiting list for when your apartments go vacant..
  7. One challenge with this building was partial rent payments. It drove management nuts- having to visit 3 times for a single month of rent broken into three pieces, for instance. Insist on no partial rent payments, no exceptions. If they want a personal visit for rent collection, they will have the full amount. If they don't have the full amount by the date specified in the lease, they will pay a late fee(and if they don't pay the late fee, don't take the rent.) If they can't handle that, introduce them to your eviction attorney.

I've just begun to implement these strategies as of a few weeks ago. Early results look promising, but I expect to have a firm answer within a few months. I hope to go from collecting 70% of rents that were a bit too high to 90-95%(at least) of rents that are more in line, which will reduce turnover/evictions. We'll see.

By the way! If your question was really about a C-Class neighborhood, these methods won't be as effective- it's much harder to change a neighborhood than it is to change your own property. However- sprucing up your property can have a positive knock-on effect nearby- the Jones' will want to keep up, so if you make things nicer, hopefully they will too. 

Michael

@Ben Smith I agree with most of what @Michael Gansberg said. I too make my places nicer and when they are empty fix things correctly so they the property is as bullet proof as possible. I would much rather spend the money when the place is empty than to keep sending repair people after someone moves in. My lease has the notice built in so I don't have to serve a 3 day or 5 day notice. The first legal thing they will ever see is an eviction notice which only costs $40 in SC.

I don't offer lower rents, if anything I offer a little higher rents. I have made my place nicer than similar properties. So I would say by C-Class properties are much more like B-Class now. Lower rents in my experience invites lower class tenants. Higher end of market rents cuts your inquiries for a vacancy to fewer and more qualified and desirable tenants (again this is my experience). Because I do in depth screening and make my places nice I now have many long term tenants and a very low turnover rate.

@John Underwood

I agree it is going to be a financial mistake to offer lower rents. Higher rents will always attract a better crop of potential applicants to screen. More affordable will always equate to lower quality. You do not want to be swimming in the shallow end of the tenant pool.

Upgrating the quality of a property requires higher rents to attract the higher quality applicants.

Interesting perspectives, @Thomas S. and @John Underwood

On the particular property I described, it’s probably a B-/C+ building in a C/C- neighborhood(but the neighborhood is improving.) I’m working on getting the building to a solid ‘B.’ I don’t think I’d be able to attract the best tenants in the area due to the neighborhood- so I’m looking to get the best tenants I can. These tenants are interested in my ‘A’ buildings, but their paychecks are not sufficient for that kind of rent.

I’ve never tried to be below market with rental rates until now, and only with this property. For color- our average asking rent will go from $750 to $650. If that boosts occupancy substantially and reduces turnover(each turnover there costs about $3k-$4k in legal, cleaning, painting, lost rent, etc, and that’s excluding the 2 months that the deadbeat got in free rent- so it’s probably closer to $4k-$5k) then I’ll have made a very wise decision. I’ll keep you posted.

Another one I'll add with C class tenants is to have a loss mitigation plan, and put it to action as soon as things start to go south. No matter how hard you screen, most of these tenants are 1 paycheck away from being broke. Sudden changes in their lives can cause a situation they'll never recover from - ie job loss, medical bill, car totaled, etc. 

Its important to recognize when a tenant pays late if they are just a little short or if one of these "big surprises" occurred. If the later, immediately investigate what their plan is to get back on track, most of the time its something vague and uncertain, which means you need to flip into get-them-out-asap mode and not waste any time believing their empty promises. With A and B tenants, many will have something to fall back on when their is a slight bump in the road, but with C class that's rare, meaning once rent is missed, its not going to get caught up.

Matthew Olszak, Real Estate Agent in IL (#471019601)
847-447-6824

in my experience  no human being on the planet will change this tenant class or  behavior or life situation.

that all said I think the investor needs to income average.. its not if your going to have an issue that is guaranteed.

you need enough doors so that you can implement @James Wise   strategies.. 

So if your CRITERIA and love that on BP  when folks get on here and say  " I am looking at properties that meet MY criteria" which is simply a double digit cash on cash return.. and 90% of the time that is going to put you in C class in most markets.

so you cant just buy one or two.. you will have an eviction over time then your criteria gets blown right out of the water.. you then blame your PM as you think its their fault LOL... see that a ton .  Granted not all PM's are created equal but none have a perfect record.

so if your criteria puts you in C class then you need to scale and scale quickly so that when your dealing with a eviction trash out 5k turn over your not wiped out.  you have 9 other units to support this one.

if your Criteria and goal is to only own one or two rentals then your far better to buy that 4 or 5% return or NO return the Strong B and A's bring you regardless of where.. your chance of C class issues goes away most of the time.

I look back on my experience i had 12 A class new constructions that i owned for about 15 years.. I had one nightmare and probably 8 or more I never touched the house.. or turnover was just cleaning.


with the 350 C class's we owned its a business it was constant we constantly had 5 to 10 evictions going and 10% of the portfolio was always turning.. its a tough business and its a business its not passive investing by any stretch.

Originally posted by @Jay Hinrichs :

in my experience  no human being on the planet will change this tenant class or  behavior or life situation.

that all said I think the investor needs to income average.. its not if your going to have an issue that is guaranteed.

you need enough doors so that you can implement @James Wise  strategies.. 

So if your CRITERIA and love that on BP  when folks get on here and say  " I am looking at properties that meet MY criteria" which is simply a double digit cash on cash return.. and 90% of the time that is going to put you in C class in most markets.

so you cant just buy one or two.. you will have an eviction over time then your criteria gets blown right out of the water.. you then blame your PM as you think its their fault LOL... see that a ton .  Granted not all PM's are created equal but none have a perfect record.

so if your criteria puts you in C class then you need to scale and scale quickly so that when your dealing with a eviction trash out 5k turn over your not wiped out.  you have 9 other units to support this one.

if your Criteria and goal is to only own one or two rentals then your far better to buy that 4 or 5% return or NO return the Strong B and A's bring you regardless of where.. your chance of C class issues goes away most of the time.

I look back on my experience i had 12 A class new constructions that i owned for about 15 years.. I had one nightmare and probably 8 or more I never touched the house.. or turnover was just cleaning.


with the 350 C class's we owned its a business it was constant we constantly had 5 to 10 evictions going and 10% of the portfolio was always turning.. its a tough business and its a business its not passive investing by any stretch.

 Well stated Jay.

On BP we have too many investors ranting about how horrible their PM is. When people dig deeper in the thread we often find out that the house was cheaper than a KIA. C'mon bro the house is cheaper than a KIA who do you think is living in it, A college grad with a 750 fico!?!? 

The PM doesn't really pick the tenants. The NEIGHBORHOOD & ASSET are the main factors in picking the tenants. All the PM can do is mitigate the risk of the neighborhood as much as possible using proven policies, procedures & experience.

I also find it humorous when an investor who owns the ghettoist portfolio one can imagine will call me up & ask me if we will waive eviction fees for them if there is a certain amount of them...Lol no man, honestly I should charge you more every time for the added hassle. They are usually pretty confused by this response.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

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