Bad apartment buildings buy. Now negative in cash flow

40 Replies

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.

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

There already is a PM.  They are 1200 a month.  The evicted ones are the ones who were the hold overs from the previous owners.  Two new tenants from last year just moved out and didn't renew their lease.  The tenants destroyed their apts more than their 2 month sec. deposit.  Tenants do not pay for hallway elect., trash and water.  Those are the utilities we pay for.  

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.

25 bucks a month is about standard for an exterminator in CT within an apt. build.  I would like to unload it but my current realtor, which specialize in multi-families, isn't doing very well. I could use a rec. for a realtor in New Haven County, CT which work with commercial multi-families.

 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!

The tenants were on time at first, but then slowly fell behind.  The PM is a decent sized company with three offices in CT.  I saw the bank statements from the original owner, so I do not think that was the issue.  He sent over 12 months of bank statements from Chase front to back hundreds of pages.  Over the last two years, we had to redo the roofs of each building, some of the siding, installed new lights.  The biggest issue is the turn overs.  Since the tenants leave their crap in their units, it's costing 1200 - 3k in turn overs to throw their crap out, repaint the place and bring it back to rentable condition.  I can send my guys to fix it, but CT dump fees are high (500 - 1000 per load), so I am not sure if that is why they are so high in terms of the turn over.  We only use them on these two buildings in Ansonia, we handle the ones in Hartford ourselves, and a different company handles Bridgeport.  They do nickel and dime us and they add additional fees on to the work they do from contractors; as stated in the operation agreement.  They charged us 88.94 to change a florescent lightbulb in the hallway on June 2nd.  There reviews on yelp and Google are stellar, so I just do not know if it is them or the two buildings.  They are located a few blocks away from each other, in not the greatest areas, but we've had a lot of issues.  I re-read the contract the other day, and they have first right of refusal to repair units to CT standards.  If I cancel the contract, I have to give them 60 days times management fees.  In addition, since the rents are between 500 - 650 a month, even though we agreed on a 5% management fee, since it's under 85.00 a month per unit, they charge us 85.00.  If you read the contract, it doesn't say 85.00 per unit, it just says 85.00 per month.  I've called other places to manage the building, but since it's in a run down part of the city, they were not interested in taking over the management.  There are about 30 units total, and over 100 people living in the buildings.  They have about 14 people as employees, so they handle the calls better than me and my few guys could.  Plus, we're not local, so that makes a big difference.  

If I was able to get rid of them, I would, as I have 28 other units, and they are running fine with no issues and profitable.  Would you believe, they allowed 6 tenants to go 5 months with just paying part of their rent.  Since they are slow payers, we didn't notice this we did an internal audit.  They claimed that they were under the impression to give the tenants as much time as possible to pay the units.  I ordered them to evict all of them immediately.  All in all, they were past due 12k.  The owner apologized, but they still received their monthly fee regardless if we received rent from them.  They turned the units over and filled them within six weeks.  Either myself or my partner now sit on them twice a month to get updates on past due tenants.  They also charge 150 to serve the eviction to the tenants.  1k to actually evict them, which includes court costs and sheriff fees.  They charge $145.75 to rekey the locks within the apts as well.  It takes around 6 weeks to evict a tenant.

Since they refuse to give me original bills from the contractor they use, I really have no idea on what it costs to turn over the unit.  In my other units 400 - 800 per unit.  We do take 2 months security deposit, where as since these were the previous owners' tenants, he took one month or no security deposit.

I know I may sound a bit naive on this building, but again, all my other buildings are running fine in two other major cities in CT.  Since they are 3 and 4 families, I do not know if that's why it's cheaper, but these large buildings are just a headache.  We just pay them their turn over fees as we fear if we send our guys to do it, they will cancel the agreement and we'd be up the river w/o a paddle in terms of management.  If it wasn't for the turnover fees and the new lease fees (1 month's rent, but the new people they bring in hardly stay for more than a year), and eviction fees, the buildings would be profitable. It seems as they grow, the fees have increased.  They opened and additional office in Nov. 17, and hired more staff.  That's great that they are growing, but if I showed you the fees they charge for simple things, it's just crazy.  

We drew the line on them purchasing supplies.  When we bought the building, we need 6 new boilers over the first year.  We pay around 350 for a boiler.  Do you know what they charge? 1200 for a 40 gallon boiler!  To come out and diagnose a faulty appliance, $200.00.  When we've been told an appliance is not working correctly, we just replace it for 300 - 350 as it's not worth having them diagnose it.  Anywhere else we have an appliance diagnosed, at most 50 bucks, however, it's usually no cost if we use their service to repair.  Not here.  Again, we feel we're being nickel and dimed to death.  This wasn't the case when we first started with them.

We're more than willing to keep the buildings, as we've put so much money and time into making sure the buildings are in good condition and the tenants have a good place to live, but I cannot find a decent property manager in New Haven County to take it over.  Thus, we're trying to sell the unit.

Sometimes, I feel they are doing this so we cancel the contract, pay them the two months' fee on 30 units and go our merry way.  There was an emergency call Saturday for no hot water on an old boiler.  They told us Monday that a new boiler was needed ASAP.  Yet, they have both my, my partner's and our main supply technician's e-mail and cell phone.

Again, if anyone knows of a good property management company in New Haven CT, I am open to it.  If not, I need a recommendation for a good commercial realtor in New Haven County CT so we can 1031 out of these buildings and just stick to Bridgeport and Hartford areas where we run the buildings ourselves or have a good team running them.  We already asked the Bridgeport team to take over Ansonia.  They do not work in that area.

I just ran the numbers again.  Technically, we're positive 825 per month if there are no repairs and no turn overs.  CT limits us to 2 months security deposit, but the turn-overs always cost more.  It's the turn-overs that kill us.

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.

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?

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

I should clarify, it's 825 profitability a month due to the approx. 7 vacancies we now have.  Should the vacancies be filled, it would be approx. 3400.00.

If we could find another PM in New Have County, I would.  We paid 30k a unit, so we didn't over pay.  The PM was initially very good.  When they started to grow, the quality and nickel and diming started.  

We already have to approve anything over 250, but the little things add up.  I think one of the issues are the quality of residents.  Since it's a depressed area, the type of tenant is limited even though the building is very nice, just the area around it is a bit gritty.  

We have final approval on the tenant, however, like I said, with them charging a month's rent to find a new tenant, then the turn over when the tenant leaves after a year, that's where we lose.  We're not approving anyone with bad credit, collection accounts or prior evictions. We use the same formula with all the buildings we own.  Only these two have issues.


We have a team that we used our own company for extermination instead of the one they recommended.  The one they recommended wanted $100 a month per unit to spray.  If you can believe that, we should had known then that they were padding the bill.  We have no problem some one making a bit more, like 10% - 20% on to of the fees from the provider, but that was crazy.

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

@Mike A. , 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...

Originally posted by @Joseph M. :

@Mike Adams , 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...

Not sure anyone would want to rent a house in this part of town.  It's in the "C" area of town. 

I called a few other PMs, and some are actually higher costs then they are.  None of them give actual bills from contractors, so there is no way to know what the real price of the service is.  I'd rather see a real invoice and they put 15% or what they charge as a service fee.  They had to rekey a lock yesterday which cost us another $145.75.  Do you know how much it costs to rekey a lock in our Bridgeport apts?  $15.00.  It seems their pricing is in line with all others.  If we have 90% + occupancy, then we're clearing approx $3k a month after all expenses.  It's the turnovers which are killing us.  The nickel and diming do not help either.  We have no problem with a company making a profit off of a service, but there's no transparency.  

Do property managers usually give transparency?  I am also concerned that if we do switch, it will not be a smooth one, and if they are worse, then we're really up stream with no paddle.  We hate to sell the apt buildings as we really brought them back from being in crappy condition, but the quality of tenants is filth.  We even took on a few section 8 tenants.  We have a 12 unit in the east end of Bridgeport.  Real bad area.  If a turn over is 650, we'd be surprised.

I also checked narpm.org, they are listed there as well.

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 !

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?

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!

@Mike A. ,

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

Originally posted by @Randy E. :

@Mike A. ,

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 

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.