I've only been in this business a few years, but have purchased a lot of deals. Mostly from motivated homeowners, and bank foreclosures, which I understand and expect many of those to be in bad condition. But lately I've been looking at more and more Investor owned rentals, and multis, looking for value add potential properties.
I am simply amazed at the condition of some of the properties, and of course the PM tends to get the blame. But to me the PM is basically an employee. Seriously, am I wrong here? I know tenants do not always take care of properties, many are dirty, but there's a major difference in recent tenant damage (within last 12 months) and issues you can tell have been long term damage that was never repaired over years.
I went into one where you could tell there had been a long term water leak causing the floors to be very soft where you worry about falling through them, and mold all over, I'm not talking just in the bathrooms either. Another one several sections of the ceiling were hanging down. Another property the tenants had electric space heaters and said the building had a gas leak, so the landlord told them to buy space heaters and deduct it from their rent because it may be next winter before they can fix it. Many with terrible roofs that look 30 years old, where you can see bare wood in many spots with missing shingles. Trashed parking lots, broken fences, missing awnings, broke windows... Its one thing if the inside of units have issues, to me its even worse when you can see major issues from the outside. That's just pure laziness to me.
Than after contacting you wanting to sell, they want full retail value for their property of what it will be worth once you do full rehab, and get the occupancy, and rental rates to where they should be. Am I missing something here?
because most landlords do not realize or understand that they are running a business and they treat it like a hobby. Which is why landlords are the highest sued in real estate
You aren't missing anything. There are a lot of people in this business that have no idea what they are doing. They don't know how to run the numbers and quickly get in over their head. They think that anything over the mortgage is cash flow and do not budget for maintenance and repairs, let alone vacancy, CAPEX, etc.
Just put the properties in your database and keep in touch with the "landlords". They will drive the property so far in the ground that they will eventually beg you you to just take it off their hands for next to nothing. A lot of money to be made here if you are patient.
Some landlords obviously are taking and not giving. In C/D class properties the tennat base is such that the type of landlord that is investing simply develops a negative attitude toward their tenant base and stop caring. They get burned out dealing with tenants that do not respect what they have and abuse the property and their landlord. Landlords ultimately adapt the same attitude as their tenants. It is important to understand the relationship between these types of tenants and landlords...there is no relationship. Tenants are not responsible, landlords are not responsible.
Why would a landlord maintain a property that a tenant is only going to destroy. Sad to say but tenants that choose to live in these types of units generally get what they deserve. Unfortunately it is a vicious circle that tenants and their landlords get trapped in.
We also have a belief in the industry that income properties are a passive investment. Nothing could be farther from the truth. Landlords that do not inspect regularly ultimately end up with destroyed properties out of neglect.
Also keep in mind some places are rent controlled. If you fix it and keep it tidy, the tenant will stay.... and you can't raise the rent to market. So if it stays dated and in disrepair, then they will leave after a couple years and you can rehab and rent it out at market rates. Rinse and repeat
I am under a rent control situation. There is zero incentive for landlords to do any upkeep especially with long term tenants since they are all below market. Under rent control ideally you never want any tenant to stay longer than 3 years maximum. Once you are below market you are loosing money and must control/cut expenses to stay on top. You are operating a business and inevitably something has to give.
Shorter term tenants (2 - 3 years) also make for less expensive and faster turnover than having to do a expensive renovation after a long term tenant moves out. Minor repairs, coat of paint and you are ready to go.
It is essential that when choosing tenants for a B class property that you choose the very best and it is short sighted to not realise that low credit scores are a indication of some level of irresponsibility that will likely transfer to everything about their life style.
Usually, not always, those with good scores do not live like pigs...it all translates to attitude which is what you are seeking with good tenants.....good attitudes, responsible individuals. Keep in mind that a credit score is a summery of a individuals level of financial responsibility not the entire picture. It is the Coles Notes version. If you like the summery you then read the book.
If you market to pigs, you get hogs...
One thing I've been doing that I have found really helps attract better tenants is raising my property rents a little higher then everyone else. But when I buy a property I actually do all the updates and repairs and make the properties nice. I see other landlords around me in low ball battles, practically giving their properties away, 1 month free, no deposit, etc and I raise my rents every property based on having a newly rehabbed and updated property, and I may not get as many calls, but the calls I get are the ones who want to pay a little more for a better property. I feel like if you want the cheapest tenants in town, you're going to get what you are advertising for.
Example. I purchased a 2 Bedroom house in a neighborhood where the rents are normally $400-550 for 2 bedrooms. Mine rents for $625 and I didn't have any problem getting it occupied with great tenants who have never been late one time.
I've always used this same approach though in previous businesses, if you provide better value and service, you can charge a premium.
I understand, and from reading your post it sounds like we have very similar model! It's eye opening and very sad to see the living conditions. IMO it's hardest when you meet the people, and see what they call home. I'll never forget we saw a house where the floor was literately caving in, and the fridge was held up by a 2x4, yes, a block of wood. For the landlords that want full price for neglected homes, I say good luck, it won't be me! I like grabbing those at 20-40% off MLS, and normally they are desperate and take it!
As far as the renters go, just remember the laws of supply and demand. In low income areas, where people are making minimum wage and struggling, they'll take a bad house, because it's better than nothing. If someone has felonies, or evictions galore, no landlord with a nice place will rent to them-- so their options quickly go down and the only place to get a home is with a slumlord. It's a vicious cycle, if you're interested in understanding it more, the book "Eviction" does a really great job understanding the psychology and mindset of what goes on!
@Linda D., I was going to check out that book, but couldn't find it. Do you mean "Evicted: Poverty and Profit in the American City"?
Yup! It's a great book and really shows you both sides of the story! Highly recommend it!
@Jeff Filali these landlords are serving a different portion of the market than you are. Let's draw an analogy to cars. You can buy a car for $2000 but it probably is old, has dents, needs brakes and struts, has oil leaks, etc. It is not worth it for the seller to fix all the problems, so they sell it cheap to people who can't afford more. Down the street, there is another seller that has $5000 cars. They have gone through the cars and fixed the leaks, breaks, etc. They put a little money in and the cars sell for more.
Rental properties are like any business. There are customers at many different price points.
If every landlord was like you (and me), there would be no $400-550 for 2 bedroom apartments for rent, leaving no housing option for lower income people. This is gentrification on some level.
@Jeff Filali They don't think PM is worth it and "can do it all themselves". I've talked to a lot of landlords like that as well.
@Jeff Filali I love this discussion, thank you for bringing it up. It kills me to see what landlords get away with. I fully understand that they are people who don't know or don't care how to take care of their home. There are also tenants who completely take advantage of landlords, I understand that too. My biggest complaint is how the landlords treat the outside of their properties because it kills the value of the neighborhood as a whole. I've seen rentals that look like they should be condemned but are being rented for $650 a month for a 2 bedroom apartment. The house is basically falling down around them and they do nothing, it's just a cash cow. I know it's a business and the goal is to make money but I think they have an obligation to maintain their properties. If you want the tenant to mow the yard then you better provide a lawn mower and teach them how to use it if they don't know how. Instead of letting the grass around all your rentals grow to 4 feet high maybe higher someone. There are about ten people in my community that own hundreds of rentals and about 5 of those are Realtors as well, which makes it even worse. Their answer has always been, these people are bottom feeders and why would I waste my time and money taking care of it when they will just destroy it. They don't comply with city ordinances and when you ask a member of city council when they might get around to enforcing that, they always say after the next election. The more units they purchase, more neighborhoods start to crumble and it ultimately affects everyone in the community. They like their properties to be dumps because it keeps their tax values low. I believe there should be minimum standards for landlords, maybe there are but because the tenants are"bottom feeder" no one cares. They are that part of our society that people like to throw away and label them as having no value . Then we all sit back and wonder how we have 5 generations of families living on welfare, food stamps with no thoughts of ever getting beyond it. I'm not trying to offend any landlords on here I'm just using my own area as an example of how bad it is. I want to own a couple rentals in the next 5 years and I hope I don't turn into what I see around me.
@Linda D. I'm going to buy that book right now!!
I don't quite understand it either. If you were to simply maintain your properties, you would save yourself a whole lot of time AND money later down the line when things begin to fall apart due to normal wear and tear.
In my opinion it simply comes down to laziness. People want the money from their investment, but they don't want the job of managing it. This is oftentimes why they pay property managers, but have no idea what the prices for various repairs are, or what they are even being charged. This is also why many people cap out at one or two properties.
Due diligence with your own investments, systematizing it, and treating it like a business will help you scale much more efficiently
What came first bottom feeder welfare tenants or slum landlords. The tenants would still exist without the landlords but though landlords would not exist without the tenants.
It's a business with built in standards. I believe it is the tenant base that has created the situation and for the most part would have no place to live otherwise. Those that look down their noses at these landloards should spend a year in their shoes.
@Thomas S. even in lower income housing, you should still take care of major repair needs. It's still your asset setting there. I look at it this way, if I had a hundred dollar bill that got ripped into two pieces, I would tape it together and fix it, maintaining the value of my asset. I wouldn't just say oh well, it's just going to tear again and let half disappear making it worthless.
Maybe I am just a contrarian in my thinking. Most small towns i have rentals in, I am viewed as the landlord that has the "nicest" properties in town(No granite here as they love the tile counters and the $3 backsplash) However, in upscale areas I would consider having the worst properties at the bottom dollar price
In some cases, "slum lords" don't like to spend money on repairs.
In other cases, property management is simply inept.
The last duplex I bought... water was getting into the basement whenever it rained. I spent $23 to repair an ill-functioning downspout and maybe $6 for three 10-lb. bags of mortar - I did the mortar work myself. No more leaks.
And it's not isolated - I had the same issue with a 4-unit - I bought a few bags of mortar and did the work myself. It took maybe 90 minutes at the 4-unit and maybe two hours at the duplex.
Prior to me buying, both had awful property managers. One was a "legitimate PM company" (the 4-unit) and the other (the duplex PM) was a friend of the owner.
When the former tenants of my duplex complained the PM would promise to do the repairs - it never happened.
Of the 4-unit, it was half vacant when I bought it and noone ever went in the basement. Now all tenants go down there to use the coin-op washer and dryer.
I expect my tenants to follow the rules and respect the property - and I realize they're more likely to do this if I take pride in the property and keep it in good repair.
God Bless them. These are the properties that have the potential to provide us our biggest profit.
In my area I have found that the landlords who don't care are the ones who have little or no mortgage and have owned for over 10 years. They do not pride themselves on managing their properties. By that I mean the very real work of enhancing the value of a property through management, something I believe all on this site are aware of. All seem to be incapable of dealing with their tenants as they should. They do not view the property as the business it should be, but rather as an annuity.
I am on my neighboring landlord's cases when things are awry, and I am equally on their tenants. They dislike me and their tenants hate me, but my tenants and the town like it. I will always say to them- when are you just going to sell me this building so you don't have to put up with this! ;) But as we know- some cling to the idea that people will pay the "repositioned" price.
Typically the poor maintained properties are also the ones with rent rates that are from 10 plus years ago. The two properties that I bought that where rentals previously had rent rates 40% less than what I got after fixing them up (put less than 5k of materials in each). Seems they cant justify repairs due to low profit.
My realtor just called yesterday letting me know of a property for sale a block from me. They rent the whole 3 bedroom house for less than what a complex charges 5 blocks away charges for a 1 bedroom.
A lot of them are just out-of-town owners who haven't even seen the place in years, happy to get the rent each month and not really aware of the condition until a major issue arises where they have to pay attention. It's probably worth your while to e-mail them some current pics of the damage as they will likely be surprised it's not in perfect shape, especially if they've relied on tenants to keep the place up and don't use a PM. Even with a PM, they don't inspect like an owner would, but many accidental landlords don't know that so think the home is being cared for like they would if they still lived there.
I work in underwriting for large, legitimate businesses.
you know how many are run lousy? the vast majority. It's not that landlords don't take good care of their stuff, it's the same in tons of small business. Money is EASY to make even if you're not great at running a business, you just have to try a little bit.
a landlord gets a house, doesn't sink much effort into it and it's still profitable, why bother trying harder. For most it's not a career, just a small retirement portfolio.
Landlords of this type are hobby landlords , as Alexander point out, or specialised and highly professional. For the hobby landlord the income is not important and they know nothing about operating as a business. For the professional the properties are a cash cow, very high positive income. There is no reason to throw money away on repairs.
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