Bad apartment buildings buy. Now negative in cash flow

Account Closed · 2018-06-12T18:18:38-07:00

Hey all, A friend recommended me to BP so I am hoping some people can assist with my delima. I've been buying props for a few years in Hartford and Bridgeport with good success. They are only 2 - 4 units, and very little issues. Two years ago I wanted to grow faster so I purchased two apt buildings in Ansonia, and it's been hell ever since. The mort./tax are 4600 a month. The insurance is about 600 a month. The PM is 1200 a month. Utilities are 300 a month (main ones). Water is about 400 a qtr. Exterminator is 350 a month (two buildings). Cash flow when originally received was fantastic. During closing, four tenants moved out. Over the last two years, six tenants had to be evicted. They trash the place, so the turn overs are a fortune. I have no idea on how to get out of this. I have one offer from a buyer who owns apt buildings in the valley (Ansonia, Derby, Shelton, etc), but he only wants to assume the commercial morts. and pay me 250k over the the price. My morts. not assumable and no one else is interested as the area is depressed. Income from my other buildings are covering the 500 month overruns. I have a locked 6.6% commercial morts. for 10 years, but if I leave prior to 2019, there is a pre-payment penalty of 5%. I've dumped about 150k into the buildings to bring them current and upgraded. I reached out to other brokers in the Naugatuck Valley, but it seems not many are interested in the Ansonia-Derby-Shelton area.We've been in questionable areas before, but it took 2 years just to get rid of the crappy tenants.Looking for advice and counsel.

Account Closed

Canton, OH · Member since 2018 · 118 posts · 63 votes

8y

I am not here to judge, but it sounds like someone needs to do a better job at prescreening people? I know you have high expenses, but do you think hiring a property manager to turn this thing around would be worth it?

Other ideas:

Price around on your insurance companies. Is it necessary to exterminate every month? Perhaps the frequency could be cut down to save funds? That seems like a lot! Most landlords I know only cover bug extermination for the first 30 days, after that it is the tenant's responsibility. Eliminating that expense alone takes a huge chunk out of that $500 overage.

If you want to get out of it, you could always sandwich lease option it to the guy, but he will have to come up with a balloon payment in 5 years, or whatever period you set for a buy out. Tell him you can't finance it forever. This way it stays in your name, but you could put it in a property trust and add his name to protect everyone's interest. (I have never done this myself, just heard about it). You can charge him what the property would be worth in five years, plus charge him an option fee for providing this lease option to him that is non refundable if he backs out. It can at least get you to 2019 and past the prepayment penalty?

Water and trash would be the only utilities/costs I would pay. What all utilities are you paying, and why? If they aren't metered, try considering a flat fee for those, and estimate an average of the whole year.

I don't know if this helps any, but I hope it does. :-)

Lisa

0 Reply

Jonathan Holmes

Investor · Warren, OH · Member since 2015 · 168 posts · 188 votes

8y

Definitely need to look into the exterminator bill I can’t imagine what is so wrong with the property that would require a monthly exterminator visit. It sounds like you need to get those empty units filled. You may need to get a bit more hands out with this thing for a while. If you’re using the same PM that the previous owners were I would look for a new one. They should be inspecting the units to prevent them from getting destroyed. First decide whether you want to buckle down and get through this rough patch, set up appropriate systems to handle screening, placing tenants and dig yourself out of this hole. Otherwise you can cut and run. If you don’t believe you can make this place perform then it’s time to cut your losses.

0 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

8y

You're paying $1,200 a month and it still takes two years to evict the bad tenants? You're paying $1,200 a month and still getting tenants that trash the place beyond two month's rent?

There are a lot of details missing but the biggest problem seems to be your property manager. You said it was operating well when you bought it, even though it had some bad tenants that needed to be removed. Either the seller cooked the books or your Property Manager is running it into the ground. I recommend you look for one experienced in turning around problem properties.

You can start by going to www.narpm.org and search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start.

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their different staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 5% management fee but the extra fees can add up to be more than the other company that charges 10% with no add-on fees. Fees should be clearly stated, easy to understand, and justifiable. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate!

4. Review their lease agreement and addendums. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance or problem tenants. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that it is enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact they are complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

I hope this basic guide helps. If you have specific questions about property management, I'll be happy to help!

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5 Reply

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

8y

Originally posted by @Jonathan Holmes:

Definitely need to look into the exterminator bill I can’t imagine what is so wrong with the property that would require a monthly exterminator visit.

... They should be inspecting the units to prevent them from getting destroyed. ...

In these lower income rentals, the monthly exterminator visits are used to allow somebody from the landlord's team to accompany the exterminator into each and every rental unit; ostensibly, this is an opportunity for that person to perform an inspection on the conditions in each unit.

There are two problems here.

Problem number one is too much being paid out. Thirty units that leave around $825 positive cash flow when all is going well. That indicates that the owner has overpaid at purchase (what's done is done, no changing this), and/or expenses are a whole lot higher than the owner expected them to be. Managing expenses more tightly could help. If units are being trashed, those monthly inspections at the side of the exterminator are not being conducted as they should be; if they were, you would have early indications of units that are having issues with their living conditions.

Problem number two is pretty much a management problem. Tenants are being allowed to fall behind by too much. Some of the charges in the PM agreement are going to nickel and dime the owner to death. And there are two components to managing in this scenario, the property manager managing the property and tenants, and the property owner managing the property manager. It's not working and both need to accept their share of the blame and identify what changes can be put into place to stem the bleeding.

2 Reply

Amy Beth

Rental Property Investor · Edison, NJ · Member since 2016 · 753 posts · 565 votes

8y

Perhaps you can cut back the exterminator to every two months instead of monthly to save money. Also if you can’t fire the PM, which seems to be the case, can you monitor them much more closely and require that you give final approval of all tenants prior to lease signing? It seems like with better tenants you would be saving a lot of money with turnover and apartment repairs. They probably could care less whom is accepted since the make more money with turnovers. Also perhaps require approval from you for all repairs over a certain price point that you are comfortable with?

0 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

Whenever you find yourself in a deep hole you need to drop the shovel and stop digging Your property management is obviously and grotesquely incompetent In every facet of their business You must immediately Make the bleeding stop You must stop allowing people to steam roll over you and get their hand out of your back pocket Today is the day to lay the law down and seize control of your investment from these incompetent grifters . This foolishness has gone on too long . Your PM is s parasite sucking life blood off his host -Exterminate the property manager already

3 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

How hard have you looked ? There’s gotta be a property manager out there that could handle this in the area . It sounds like A chimpanzee from the local zoo would be better at this point

2 Reply

Joseph M.

Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes

8y

@Account Closed , this may or not work for you ..but what about renting out the vacant units on Airbnb to bring in cash flow ? You'd have to furnish the units of course but you could bring in a lot more daily if you can keep occupancy high.

Others are renting in your area....looks like the area isn't too far from Yale University? Would have to check with local rules of course.

https://www.airbnb.com/s/Ansonia--CT/homes?refinem...

0 Reply

Ivan BarrattBusiness Member

Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes

8y

@Account Closed I was there early in my career too. All I can really say is keep grinding man! Best of luck!

1 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

Can’t you manage these yourself or know someone who you could employ that you trust with some experience in this ? Your losing a fortune every month !

1 Reply

Amy Beth

Rental Property Investor · Edison, NJ · Member since 2016 · 753 posts · 565 votes

8y

Do you know why so many tenants leave after a year? Is it a transient population or is there something about the building or the apartments that makes tenants leave after a year on a regular basis? Although it is a C area people still need a place to live so curious about the reason that so many people leave after just a year. Perhaps there is some kind of improvements which would make the building more appealing and for tenants to stay past a year?

2 Reply

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

8y

If you are putting the bulk of the blame here on turnovers, then you have to figure out a better tenant retention approach than the one you are currently using. Sounds like you could offer the twelfth month free for a one year renewal, and still come out ahead!

1 Reply

Randy E.

Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes

8y

@Account Closed,

You've received a lot of great advice from people who are more experienced at MF properties than I am. Admitting I own/manage SFHs and a couple of multi-unit office/storefronts, I offer the following advice with that understand upfront.

To me, it's obvious the Property Management is the biggest problem.

If it were me, this is what I'd do. It's understood that the distance is too far for you to be a hands-on owner who visits a few times a week, and maybe even once-a-week visits would be difficult. Personally, I would identify a trusted friend/associate who is more or less capable, if a little inexperienced at property management. Offer him the opportunity to live in one of the units rent free for six months and monitor the situation.

You already have vacant units, so it's not like you would be losing money. Be adamant with the PM that you will not accept being charged a "management" fee for this person. Refer to him has your employee who will be your on-site middleman between you and the PM. There has to be someone you know who could do this. An old friend from school, a cousin or nephew, somebody.

Secondly, I'd do whatever I could to visit the properties at least once a week. Once every two weeks at least. Again, the PM company needs more management. If you can't replace them right now, you need to be on-site more often, right now. A "C" property shouldn't be this hard to rent and manage, unless it's really a "D" property.

Third, immediately reduce the extermination to once every two months at the most. If the extermination company balks and says they don't do visits every two months, keep the monthly visits but divide them among the two locations. Have the exterminators visit one site in June, August, October, and the other site in July, September, and November. I can't imagine the units require monthly service ... unless they are D- properties.

There are a couple of other things I would do, but those three would be my first moves. Actually, my first move would be to review the contract with the PM company to verify when is the earliest date I could fire them without penalty. You said you've had the properties for a while now. Maybe that deadline is near?

Good luck

0 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

Originally posted by @Randy E.:

@Account Closed,

You've received a lot of great advice from people who are more experienced at MF properties than I am. Admitting I own/manage SFHs and a couple of multi-unit office/storefronts, I offer the following advice with that understand upfront.

To me, it's obvious the Property Management is the biggest problem.

If it were me, this is what I'd do. It's understood that the distance is too far for you to be a hands-on owner who visits a few times a week, and maybe even once-a-week visits would be difficult. Personally, I would identify a trusted friend/associate who is more or less capable, if a little inexperienced at property management. Offer him the opportunity to live in one of the units rent free for six months and monitor the situation.

You already have vacant units, so it's not like you would be losing money. Be adamant with the PM that you will not accept being charged a "management" fee for this person. Refer to him has your employee who will be your on-site middleman between you and the PM. There has to be someone you know who could do this. An old friend from school, a cousin or nephew, somebody.

Secondly, I'd do whatever I could to visit the properties at least once a week. Once every two weeks at least. Again, the PM company needs more management. If you can't replace them right now, you need to be on-site more often, right now. A "C" property shouldn't be this hard to rent and manage, unless it's really a "D" property.

Third, immediately reduce the extermination to once every two months at the most. If the extermination company balks and says they don't do visits every two months, keep the monthly visits but divide them among the two locations. Have the exterminators visit one site in June, August, October, and the other site in July, September, and November. I can't imagine the units require monthly service ... unless they are D- properties.

There are a couple of other things I would do, but those three would be my first moves. Actually, my first move would be to review the contract with the PM company to verify when is the earliest date I could fire them without penalty. You said you've had the properties for a while now. Maybe that deadline is near?

Good luck

Thats a great idea ! Find someone you can somewhat trust who will look after the property ( a live in manager ) based on the benefit that he can stay in one the units for free . Maybe even provide a small monthly payment on top of that or offer a free utility if need be . Somebody who is not a push over someone handy and can watch daily on what’s going on with tenants and report directly to you each week or as needed . I’d still visit as frequently as you can to be sure everything is going smoothly . It will take probably half a year to get the property stabilized

1 Reply

Mitch Rubin

Rental Property Investor · Columbus, OH · Member since 2015 · 3 posts · 0 votes

8y

In regards to your search for a new PM company I would also consider reaching out to companies that specialize in affordable housing. Many of these groups manage both affordable and market rate however have a great deal of experience screening tenants and conducting routine unit inspections which it sounds like is a major issue with your existing company. These PM companies most likely will not show up on your standard Google / YELP search as they typically do not market themselves. Call the local housing authority as well as the State Housing Authority and ask for suggestions. Hopefully that leads you in the right direction as the current company is making a bad situation worse. You need to get out of that relationship.

0 Reply

Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

8y

Mike A. Your property manager is awful. You need to switch. I don’t have nearly as many units as you do. But I use two different PMs. One provides invoices to everything. Which you should require. The other doesn’t but they always give me a quote before hand, and it’s always that price. So far for most of their pricing with what I’ve seen on BP and my other rentals seems pretty fair.

0 Reply

Elliot Vann

Passaic, NJ · Member since 2017 · 65 posts · 42 votes

8y

Wow! Best of luck! I would offer my experience on the property management side but sounds like switching pm would do just fine. As far as termination fees, file suit for the terrible job they’ve done and either they will back off from the termination fees or they won’t and you’ll make back more on the lawsuit. First, check the fees and Jon description in the contract but I can’t imagine they are keeping up with their side of the bargain based on your description. Good luck!

0 Reply

Elliot Vann

Passaic, NJ · Member since 2017 · 65 posts · 42 votes

8y

I can tell you from my pm experience no one answers quicker than to a court order! Opens up lines of communication real quickly.

0 Reply

Elliot Vann

Passaic, NJ · Member since 2017 · 65 posts · 42 votes

8y

I totally understand that. It could be a letter from a lawyer is enough. It is much less hassle but sometimes equally as effective.

1 Reply

Amy Beth

Rental Property Investor · Edison, NJ · Member since 2016 · 753 posts · 565 votes

8y

Perhaps you can also post on their fb page to get a response? Companies tend to respond quickly to social media posts when they monitor their pages.

0 Reply

Craig Bellot

Property Manager · CT · Member since 2014 · 687 posts · 329 votes

8y

Location may have been the issue here. Not enough demand to keep this size of a property at a profitable occupancy rate.

Bridgeport, or closer to NYC may have been a better choice in location.

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Bad apartment buildings buy. Now negative in cash flow

Bad apartment buildings buy. Now negative in cash flow

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