Can't raise rents, roofs leaking, people not paying rent -YIKES!

General Landlording & Rental Properties
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Can't raise rents, roofs leaking, people not paying rent -YIKES!

Emily N.
NY · Member since 2016 · 15 posts · 5 votes

Hey BP friends!

I'm looking for some advice on a property in our portfolio. 

It's 150+ units in Oklahoma. Built in the 70s. Flat roofs. C+ property.

We purchased this property thinking we could reinvest all of its cash flow for the first few years into renovating apartments and bumping rents, eventually bringing it up to a B property or higher.

Instead, 13 out out of the 16 roofs are leaking beyond repair (we've already replaced 8 at ~$25k/roof), and we are seeing that even if we do renovate an apartment it sits vacant without any interest at even a small increase in price. (Yes, we did have a roof inspector look at all the roofs before closing, and yes he did say all of them were in GREAT condition!)

Residents also routinely skip out on rent and have no problem taking hits to their credit or with being sent to collections. Most applicants come in with credit scores in the 400s-500s with several evictions, criminal records, and/or money in collections from other debts.

Due to our loan terms, we can't sell this property for another 5 years without taking a crippling hit.

We are more than willing to put $ into this property, but not if it's just an endless sinkhole without any return...

Can anybody offer any tips/or suggestions for this situation we have found ourselves in? Or does anybody have any experience with this kind of market? Any help is welcome!

Thank you,

Emily

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Account Closed
Investor · Havre De Grace, MD · Member since 2017 · 71 posts · 54 votes
8y

A few thoughts:

Are managing remotely or do you have a property management company that can give you some insight to what may work in the area to improve rents? Where are the good tenants renting in the area and why do they go there? You might have a neighborhood stigma issue. 

In properties which there are many tenant problems I have heard the suggestion to get some local boots on the ground to understand exactly what the issues are that can be fixed. It sounds like this property is the go-to for folks that are bad tenants. Where are the good tenants? Why are they somewhere else? This might help you to figure out what improvements are appropriate for the property.

Maybe focus on one building at a time to get them out, make improvements (that are appropriate for the market), then get them rented at the higher price. I have used this approach by painting the exterior of the building, changing signage (including telephone number), and improving landscaping at that building only so when new folks come by they understand they are getting the "premium" building and that is why it is a little more costly than their friend that lives in the soon to be improved building. First item is moving the rental office setting the stage for all residents that there "is a new sheriff in town". Time to double down on energy on the property and review your property management plan. Sounds like a lot of work --- but doesn't it sound so exciting!?!

Good Luck!

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  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    8y

    You can't have a B or higher property in a D neighborhood. My suggestion would be to get it habitable and pray for longer term tenants. One thing is raise the screening criteria for your tenants. However, in that neighborhood it sounds like that's all you are going to get are the deadbeats. It's unfortunate you weren't able to discover these things prior to purchase.

    Even worse, those are the types of tenants who will call the local buildings department to cite you for code violations.

    4Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Well you gotta do the roofs no matter what or your really going to lose your investment into nothing . Why is it costing 25 k for a roof ? That seems outrageous . Have you had multiple contractors quote out this work ? The property sounds like it’s poorly managed . How is this managed and what can be done to improve tenant turnover .alot of it could be the condition is poor so even losers won’t rent there .
    5Reply
  • Account Closed
    Investor · Havre De Grace, MD · Member since 2017 · 71 posts · 54 votes
    8y

    A few thoughts:

    Are managing remotely or do you have a property management company that can give you some insight to what may work in the area to improve rents? Where are the good tenants renting in the area and why do they go there? You might have a neighborhood stigma issue. 

    In properties which there are many tenant problems I have heard the suggestion to get some local boots on the ground to understand exactly what the issues are that can be fixed. It sounds like this property is the go-to for folks that are bad tenants. Where are the good tenants? Why are they somewhere else? This might help you to figure out what improvements are appropriate for the property.

    Maybe focus on one building at a time to get them out, make improvements (that are appropriate for the market), then get them rented at the higher price. I have used this approach by painting the exterior of the building, changing signage (including telephone number), and improving landscaping at that building only so when new folks come by they understand they are getting the "premium" building and that is why it is a little more costly than their friend that lives in the soon to be improved building. First item is moving the rental office setting the stage for all residents that there "is a new sheriff in town". Time to double down on energy on the property and review your property management plan. Sounds like a lot of work --- but doesn't it sound so exciting!?!

    Good Luck!

    10Reply
  • Emily N.
    OP
    NY · Member since 2016 · 15 posts · 5 votes
    8y

    Thank you all for the feedback. 

    @Ray, you're exactly on-point. We've been trying to only accept reliable residents in hopes of keeping them long-term.  As far as them calling the local building department...you're spot on on that too.

    @Dennis We have had multiple quotes from different contractors for all the roofs, and all of them are charging around the same price unfortunately. 

    @Joe Thanks for your thoughts. We are managing remotely, i.e. we have a property manager on-site who reports to us daily about what is going on. We have looked into management companies, but unfortunately our property has a higher occupancy rate than those in the area with PM companies. 

    I like your idea of getting someone local besides our PM to offer insight into what is going on there. I am out there bi-monthly, but another set of eyes can't hurt. You're right, this is a bit exciting...though I'm sure it will be even more exciting when things are turned around and expenses are lowered!

    1Reply
  • Vinay H.
    Cambridge, MA · Member since 2017 · 268 posts · 247 votes
    8y

    Congrats on having 150 units (that is big time) but unfortunately looks like big time headaches as well. I was just posting on another board to someone who had 5k savings and wanted to buy 5-12 doors that they better have good reserves to account for repairs and vacancies.

    It seems like a price sensitive market - so yes, renovating the roof is just the cost of doing business as opposed to a justification for raising rent (new roof! higher rents!) I don't think the tenants view the new roof as an amenity... Maybe raise rent but offer concession of first/half month free? That's what Avalon is doing here in MA ...

    2Reply
  • Vinay H.
    Cambridge, MA · Member since 2017 · 268 posts · 247 votes
    8y

    As for residents skipping rent and credit scores being in 400 - that goes hand in hand. YOU may have to raise the minimum credit score to 600 and evict the deadbeats ...

    1Reply
  • Emily N.
    OP
    NY · Member since 2016 · 15 posts · 5 votes
    8y

    @Vinay You're absolutely right. We can dump infinite $ into the roofs, but it doesn't justify rent increases. If someone were to try to tell me I was paying a higher rent than my neighbors because there was a new roof but the apartment is just the same as the competitors...you can bet I'd run!

    I think you have a good point though around the credit score increase. As you know, it's a catch-22 - we get more traffic when we relax our application standards and are able to fill apartments faster, but in the end it may not be worth it.

    Let that other person know that if they only have $5k in savings, they should do their due diligence and then some!

    1Reply
  • Bruce Scannell
    Rental Property Investor · Carlsbad, CA · Member since 2014 · 127 posts · 28 votes
    8y

    @Emily N. this is a very interesting topic, thanks for posting and congrats on the acquisition to start, taking that step is a major deterrent to most. Now that you’re here, it’s definitely a balancing act of making necessary changes while managing the budget, trying to keep enough of the right tenants while getting rid of those who sour the rest and keeping enough cash flow to make it all happen. 

    I’ll be following and see if there is anything I can add, but you’re in uncharted waters compared to my experience level.

    Good luck! Oh, where is your property? Maybe that will help to set the level of tenant/property expectation.

    Bruce

    0Reply
  • Britta Hild
    Investor · Toronto, Ontario · Member since 2016 · 2 posts · 1 vote
    8y

    Sorry to hear you are having so many issues. 

    Was the current property manager already in place when you purchased or did you bring on someone new? It sounds like some of the issues at least may stem from property management. Can you recruit someone and offer them bonus payments or something tied to performance and longevity of tenants? 

    Are there any other tenant niches that you can identify that could be a (possibly temporary) fit for the property while you work to turn it around? While it would be a more work, maybe you can try to attract shorter term retreat groups, church trips, temporary workers etc?? Groups that are on a tighter budget but won't squat and break things?? 

    I have found from previous experience that change begets change. When some of the deadbeat tenants sense that change is coming, they often tend to move on since they know that their previous modus operandi won't work anymore. It is definitely labor intensive to try and turn around something like this but it sounds like you have to take some potentially drastic action. 

    What is your competition in the area and are they doing anything different?

    All the best, I hope you find some solutions to make changes!

    1Reply
  • Account Closed
    Investor · Havre De Grace, MD · Member since 2017 · 71 posts · 54 votes
    8y

    @Emily N.

    Emily, not sure where you sourced your capital, but is the 5 year hit negotiable for restructure? Is the loan assignable where the new owner would be on the hook? 

    Another aspect is that it may be time to review the performance of your on-site manager. Not saying that a difficult conversation is in order, but rather understanding their daily workload and activities. Do they spend 80% of their time "putting out fires" that could be handled with better policy and procedure (that they can help develop) or do they work crazy hard when you are there then watch reruns of Property Boss when you aren't around. I have a weird gut feeling reading about how tenants are leaving abruptly and the property manager can't find a solution to mitigate your loss.  

    Also, I forgot to mention the "Birds of a Feather Flock Together" Promotion. If you have any tenants that are stars, reward them (based on something objective like number of months rent is paid on time) with a promotion. Let them know that you are looking for reliable tenants just like them and then make sure whatever you offer them is structured so that they only make out if the tenant is actually as good as them or better. Maybe a monthly credit for the first 6 months instead of a $200 up front fee. 

    5Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    Emily, is the property located somewhere in OKC? Which part? Some good suggestions above. I'd look into connecting with other large multi owners and seeing what contractors they've used for their roofing needs. $25k per roof does sound extremely high. 

    0Reply
  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    8y

    @Vinay H., her property may not be in a neighborhood that can demand a 600 credit score. People with a 600 score are going to want to live in B/+ areas and will be willing to pay for the appropriate amenities.

    0Reply
  • Roshan K.Pro Member
    Oklahoma City, OK · Member since 2017 · 258 posts · 215 votes
    8y
    where in Oklahoma is the property located?
    0Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    8y

    I would "steer into the skid"   Rather than pushing it up market towards B, which is of course best, I would consider if that boat has indeed sailed.   Work with what you have.

    Consider section 8.   It has the big plus of providing reliable rents regardless of tenet and a waiting list of tenets.   Also, there are property managers who specialize, nationally, on section 8.   There was a podcast not that long ago that featured one such agency.   With 150 units, you can leverage your size to work with the local agency.   It also has built in rent raises.   

    You fix the roofs (unavoidable), hire a section 8 manager, and provide basic affordable class C housing for 150 families subsidized by the government.   Then in 5 years, you can decide if you want to sell this and try again to move upmarket with a much richer set of life experiences and abilities.  

    Good Luck

    8Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    8y

    Perhaps if you can afford to, renovate 1 building inside and out including common areas and see what the market will bear for rent on updated units.

    If you just renovate the odd unit here and there (and not common areas), then prospective tenants might feel like they are paying too much for a so-so neighborhood, but if you renovate a whole building then most of what they see looks new and fresh. At least then you would have a better idea of what the market is on B class units and whether it makes sense to do the rest of them.

    1Reply
  • Jessica Jay-Maleski
    Real Estate Agent · Scottsdale, AZ · Member since 2016 · 114 posts · 42 votes
    8y
    I agree wholeheartedly with Johns suggestion for considering tenants using government programs. There is an abundance of paperwork at the start, but things run very smoothly after the initial set-up and the rents come in timely (and usually direct-deposit!). Tenant accountability is high as they don't want to lose their funding, and they tend to stay long-term. Plus, if they vacate, there is typically a waiting list, thus reducing your vacancies!
    2Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    8y

    Can you share a written copy of your PM companies late policy? Is the policy implemented as written on a routine basis? I  ask because on a much smaller scale I am successfully dealing with low income/low credit score tenants and I belieive that my success is in large part due to my late policy.

    0Reply
  • Charlie Vess
    Investor · Colleyville, TX · Member since 2015 · 41 posts · 18 votes
    8y

    Emily - with everything that you’ve stated  I have to ask, when is the last time that you and/or your investor group visited (unannounced) the property?  If so, have you driven the area and spoken to the manager(s) at other properties?  Having determined the highest occupancy, what are their numbers for comparison?  Would you hire that manager and build in incentives?  I agree that Section 8 would be a viable alternative. But it does take a special manager to work those tenants.  Something else to proffer dependent on the location would be AirBnB. With all the horse shows and conventions at the Fair Ground, the vendors are always looking for a place to stay for an extended period. 

    0Reply
  • Dick Stevens
    Rental Property Investor · Haverhill, MA · Member since 2017 · 290 posts · 185 votes
    8y

    Very curious to know what your landlording experience was prior to this acquisition.

    One issue you’re going to run into with the large buildings is that it’s difficult to attract higher caliber tenants when the buildings are currently full of losers.

    3Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    8y

    if you had it to do over again would you still have bought the property?

    Sounds like you need to invest a minimum of $300k to possibly $600k to bring all apts to a B

    If it was me and I was determined to keep it I would get rid of all the tenents fix all of it and start again

    BUT only if the neighborhood can support the rents needed to make it cash flow positive.  

    If not I would sell it and be done with it

    Also would consider suing the building inspector. 

    Seems hard to understand how 16 roofs could be so bad and not see it 

    1Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    Re-brand, throw a BBQ.... then announce that each quarter (or whatever) you'll have another (something) for all tenants in good standing. Offer raffle tickets for all that leave reviews on sites.... and some kind of bonus for referrals...

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    @John Nachtigall  while a good idea not all areas have enough vouchers to go around.

    also if tenant base is that suspect then you will have competition for those section 8 vouchers and those folks know it.

    Emily,   I would like to refer you to a very good friend of mine.

    she did what it sounds like you did.. she had a fabulous 60 unit in the Portland market and her broker talked her into selling it at a 4 cap.. and 1031 into this great 8 cap 300 unit in OKC>. Well it just about broke her and she ended up living there for about 4 or 5 years and self managing.. but she rescued what was for sure going to be a flame out.. and as soon as she could she sold and came back to PDX bought a 18 unit and condo in Maui and put OKC in the rear view mirror.. I can tell you   your no way in a rarity .. so many get caught up in high mid west or deep south cap rates only to not understand the tenant base..  

    but if you want to hit me off line I will see if she will engage with you.. all the other posts are nice.. but my friend lived it.  or in other words been there done that in exactly your same situation.  she may have insight for U to help  short of prayer.. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    7Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Super curious about your experience in real estate invention prior to these OKC purchases?
    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Investing not invention
    0Reply
  • Rhett TullisBusiness Member
    Property Manager · Oklahoma City, OK · Member since 2013 · 1k+ posts · 617 votes
    8y

    @Emily N. sorry to hear you are finding that multi family is not the dream everyone seems to think it is.  there are touch situations as well.  we manage several multi family complexes in and around the okc area.  not sure i have a magic spell to solve your issues but would sure be happy to meet up if you are every in town or just chat by phone if there is any input i can offer that is helpful be happy to do anything i can.  

    [email protected]405-283-6522
    Integrity Oklahoma
    WebsiteView Page
    0Reply
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