I need advice on our rental portfolio! Please help!

Jesse Kreun · 2019-02-23T17:58:13-08:00

Hi all - I need some help! My wife and I are real estate investors - we own three properties and none of them are living up to our expectations. We have been putting a ton of our own money into the properties to keep them going, but at this point there is no more money to keep them afloat, so we need answers. The only option we can see is to sell them all, but I wanted to post on here to see if there was any advice or options that we haven't thought of yet. We do not want to make an emotional decision, but we seem to be painted into a corner with our finances. Property 1: 4plex (the best performing property we have). Generally gives us a few hundred dollars per month after paying the mortgage, but we have probably about $100k in equity at this point. We could refi and get some of the cash out, but that would remove any of the cashflow we have currently, which doesn't seem to make sense. Property 2: 24 unit apartment complex. The numbers when we purchased look good, but we are still not realizing the profit we expected and the expenses seem so high each month. The managers keep telling us that we'll get to the profit soon, but month after month is doesn't materialize. I don't believe they are scamming us, but yet we continue to have to dig into our own pockets to cover part of the mortgage. If we sell, there is a little bit of equity here, but not a ton.Property 3: Hardest property we own. 11 unit apartment complex. Again - the numbers looked good when we purchased, but again- after years of owning it, it is still not performing and we rarely get any money from the property to even pay the mortgage out of, so it is ALL coming out of our pocket! We just got rid of a bad tenant and the managers say the property is stabilizing, but it could be a few months yet before we start getting paid. If we sell, there is a little bit of equity here, but not a ton.So question- would you sell one? All? Any other options that you can think of? What kind of professional can give us advice on this? We are talking to a financial planner this week, but of course they are going to be more interested in selling us on stocks, etc.Thanks, all!

Chris Sellers

Charlotte, NC · Member since 2018 · 180 posts · 144 votes

7y

Jesse,

Man, I can feel the stress in your post. I hate that you're going through this. I've been frustrated in the past with an under performing property or two, but never so much of my portfolio at once.

My go to is always to get really involved in the details when things aren't going like they should. Pour over all the revenues and expenses to find out why you're not getting enough each month. If you're in the same town, you might need to spend real time there to "manage" it to the black.

If you're not in town or don't have the experience, it might be time to partner with a pro with a track record of success. Entice the successful pro to assess your situation and recommend a course of action to right the ship. Incentivize them in a way that works for both of you (fee, partnership, whatever).

I hope you can find the answers to increase the revenue and reduce the expenses so you can keep all these properties. If you find out, however, that they just aren't the deals you thought they were and paid too much, it's best to dump them sooner than later. Better to be happy with a simpler portfolio than constantly stressed with a bunch of doors.

Good Luck,

Chris

15 Reply

Scott Mac

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

7y

Hi Jesse,

I do not think there is any "Paid Professional" type who can give you advice on how to turn your properties from hungry cash lions to cash flow cows.

There are owners and owner operators (who have a business model they work) who might be able to improve these properties if they owned them, but maybe not.

I say maybe not because part of a successful business model is knowing what to avoid, and making sure the purchase is structured to lower the risk of this happening.

You have 3 properties, and possibly 3 different sets of problems with a lot of possible variable causes.

Possibly others can weigh in on this with some help for you. I hope so.

Good Luck!

1 Reply

Anthony H.

Rental Property Investor · Denham Springs, LA · Member since 2018 · 95 posts · 44 votes

7y

Difficult to give you an advice when not understanding the situation in full. If numbers were looking great when you bought the buildings why it isn't anymore? Did you under estimate your expenses, did you pay too much or is the problem your property managers?

Blindly I would say get rid of your worst performing asset. Or you could 1031 exchange your portfolio into a mix of SFH, multi-family or something else cash flowing better.

4 Reply

Keli Coleman

Rental Property Investor · Olympia, WA · Member since 2018 · 29 posts · 20 votes

7y

Look at your expenses and look at a way to offload them. 24 units and you are paying the electric, or water, etc i would look into implementing RUBS for billing. You would need to ensure its legal in your area, but in Wa State we write it into the leases that we will be using RUBS for their water/sewer/electric costs since they arent metered separately. This has turned a property from making around 1000/mo to 1600/mo for a triplex.

What was the rent ratio when you purchased? Was it a 1% deal?

4 Reply

Keli Coleman

Rental Property Investor · Olympia, WA · Member since 2018 · 29 posts · 20 votes

7y

Also.. Shop around for a property management company. I would look at their reviews and see if you can negotiate their fees down say from 10% to 8% etc.

3 Reply

Caleb Heimsoth

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

7y

@Jesse K. Are these local to you? If not, where are they? Can you post numbers like, total rents , what you paid for it, expenses (break these down by line item) and so forth. Would make it a lot easier to understand what’s going on

3 Reply

Laura Kayes

Property Manager · San Antonio, TX · Member since 2018 · 75 posts · 70 votes

7y

Hi @Jesse Kreun

Before you sell, take a hard look at the financials. Get records from all of your PM companies and see where the cost is going. You’d be amazed at how much expenses and PM fees you don’t even know you’re paying until you actually look. If the financials look reasonable to you after reviewing everything, then think about selling... but definitely look over all of it first. There may be something being missed here.

0 Reply

Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

7y

You have two choices, roll up your sleeves and pull in the details real close, or quit. Know these properties better then anyone else. Know the cost of everything.

Most PMs are bad. They think they know what they are doing, and they don’t. Your likely losing 20%-30% of your income to their management, leasing, and other fees such as renewal fees.

It’s likely they are renting just under market or below for easy money. Are they screening tenants, what’s the rules on that? Do they really look at credit score, income, jobs, etc.

I bet turnover is killing you. That’s a sign your tenants are bad, and likely your PM as well. Do they give the deposit back to the tenant, then inform you there are needed repairs? Yup!

If your willing to manage these yourself if needed, repair them yourselves, then pull it close and fix the problems in the business, otherwise sell!

11 Reply

John Teachout

Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes

7y

I agree that if you sell, treat the wound that's bleeding most severely first. On apartments, if they're not profitable, it's going to be hard to get a decent price. Best bet may be to try to improve their performance. Find out what's wrong and then fix it.

2 Reply

Evan Hooks

Rental Property Investor · Spotsylvania, VA · Member since 2018 · 21 posts · 20 votes

7y

Trust but verify. That goes for pm’s, contractors and tenants. If I were you I would take a deep dive on the financials of each property -separately. There are too many people in the food chain that can screw you.

I would 1) Have the pm let you know when repairs are needed. Then you high tail it over there and put your eyeballs on the situation. Is the contractors price reasonable? 2) get the last couple months financials for each property. Get all bank statements. Get all invoices for everything. Make sure there is an invoice for every charge. Even if you were told a price verbally, this is a business. Get the invoice. 3) for each property type call around to 2-3 other properties as if you are a renter. Ask a bunch of questions - rent? Who pays utilities? How much are late fees? Etc. then see if your rates are in line. 4) are your rents being paid on time? Are late fees being collected? 5) are your turnover rates normal for the area?

A few tweaks here and there could get that cash flow to where you want it. Of course this is assuming you bought at a good price and what you’re looking for is reasonable in that market.

Best of luck to you!

4 Reply

Karen F.

Investor · San Diego, CA · Member since 2015 · 435 posts · 421 votes

7y

Wow. I feel for you. Do you live anywhere near these properties? If you don't I would say sell them. You've gotten into three bad deals, all of them. Maybe this business is not for you.

It's very difficult to find a good property management company. This is why our rule is that everything we buy needs to be 20 minutes from the house, and we manage everything ourselves. I cannot imagine letting a property management company run our business for us. I'm sure we wouldn't make a penny! Property management companies take fees, but have no incentive to keep costs low. If a tenant says something is broken, PM can call in a repair person who charges a high fee, maybe isn't even competent, and since the PM is not the one paying for it, they don't care. In fact, they may be getting something from the repair person they called in, as a kickback! And you're out all that money, and none the wiser.

If you don't want to sell, and you don't want to manage the properties yourself, you need to get better property management in place. Is there a local forum on BP for the area where your properties are located? They might be able to help you find better property management. Is there a real estate investors club in the areas where the properties are located, that you could go to? We have these in our area, and my husband learns a lot from going to the meetings and speaking with other local real estate investors.

If you cannot educate yourself on "how to make your properties produce" (and really, there's no way to do this unless someone who has skin in the game is located nearby), then you have to sell them, at least the ones that are losing money. And think, even the one that is producing, is the rate of return good on the 100K equity you have in the place? Could you get more return on that money elsewhere? Do you expect rapid appreciation in the near future?

If you are tapped out on trying to make these properties run, and it's not working, you really don't have much choice in the matter.

2 Reply

Karen F.

Investor · San Diego, CA · Member since 2015 · 435 posts · 421 votes

7y

I just looked at your past posts. I see you are in Washington State, and that at least one of these properties is in Ohio. I want to cry when I see that you have taken lots of classes and read lots of books (at what cost?), that have persuaded you to buy apartment complexes far away from you, that aren't making you money. Your opening post should be required reading for anyone who's thinking about buying rental real estate. The first rule of real estate for poor shnooks like us is, buy within 20 minutes of where you live, so that you can keep a close eye on everything yourself.

The only reason that we got into this business is that my husband can fix almost anything himself., and likes to design and do renovations - himself, with maybe a young guy assistant or two. He is like a carpenter/electrician/plumber/HVAC guy/social worker all rolled into one. We search for properties together, negotiate deals together, I screen tenants over the phone, he shows, we discuss how to manage problems together, he fixes. Yes, we use licensed tradespeople appropriately when we need to, but they're all people who we found through word of mouth and who don't charge a lot. I spend many hours researching real estate online, but I really enjoy doing that. I also work in healthcare, and earned the money to buy the properties. We've been doing it now for about 9 years or so, started small, slowly adding to our portfolio, buying for cash. We've turned about half a million into a portfolio worth about 2 million over the 9 yrs, because there's been some increase in value, and it earns us a pretty good living, too, enough to live on. We NEVER took a single class, and the only book I ever read was Landlording, because I heard the sample lease in it was good, although I did eventually read Rich Dad Poor Dad just cause it was a good "Ragged Dick" sort of story. Both books were taken out of the library, not even purchased!

You need to sell these far away properties. You will never "turn them around" because the property management company is the only one who is ever going to make money on these. If you don't have handyman skills, stay out of this business. If you do, or could do the management yourself, sell all these and buy something very close to home.

Also, if you're in healthcare, consider combining real estate with what you already know, healthcare. Maybe you should look into buying a white elephant near you, and turning it into the lowest possible level group home or "rest home", the kind that is not regulated, where you house people who are on SSI. These are homes for people who don't require true nursing care, they just need a little supervision. This might be your niche, that you can do better than most because you know the healthcare side of things.

23 Reply

Dennis M.

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

7y

@Karen F.

There is much wisdom in this post worthy of reading twice . I would tend to agree .

2 Reply

Mark Fries

Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes

7y

@Karen F. @Dennis M.

Wow...best replies I have read in a longtime...2000% accurate...this guy has unfortunately jumped on the BRRRR multifamily long distance bandwagon....and the wheels are falling off....I fear we will see MANY of these posts in the coming 12 months as people start seeing the numbers really dont work as those webinars so easily declared....

10 Reply

Rich Nordstrom

Galva, IL · Member since 2017 · 37 posts · 26 votes

7y

@Mark Fries Agreed mark if I had to hire management and on top of that everything else hired out I would be upside down as well... I’ve always been impressed with the folks who can buy a property in another state and make it all work My hats off to the ones that successfully pull that off.

2 Reply

Mark Fries

Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes

7y

@Rich Nordstrom

I agree rich... It might work for these multimillionaire syndicators buying 300 unit apartment complexes but for the general population and common folk...it RARELY, IF EVER works......

3 Reply

Andrew Flora

Rental Property Investor · North Vernon, IN · Member since 2018 · 136 posts · 192 votes

7y

Step 1. Fly to the area and meet several property managers and get prior recommendations. Find one that can get the job done.

Step 2. Fire and replace your current property manager.

Step 3. Over the next 6 months stabilize the properties, increase revenues, and decrease expenses.

Step 4. Sell property 2 and property 3, and 1031 into something in your local market. Even if its just some simple single family homes you can manage yourself.

Take the next 5 years to hone in your landlording and business methods and pay off debt. When you are more experienced then look to expand. But never make the same mistakes twice and learn from your losses.

4 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

7y

@Jesse Kreun

Well, 39 units and in the red on all of them. The fourplex is performing, presumably as expected, but not splendidly. The larger apartment complex is underperforming because expenses are high. The smaller property is not performing as well as it ought to.

But your property managers are certain the apartment complexes will do better in the future! Onward to glory!

Here's the thing I always start with...do your property managers know, either in general or specific terms, how much you paid for the property? Of course they know what the rent roll is. Of course they can calculate the taxes. How difficult is it for them to calculate the minimum rate of return that you would be minimally satisfied with and keep expenses just as close to that number as possible in order to maximize their take from the property, month after month after month? How much can they take and still keep their fish (you) on the hook?

Property management with that mindset becomes an exercise in bleeding the owner carefully, siphoning off as much as the profit potential of the property as the manager can possibly get away with. This is what I would worry about if I were you.

So sit down. Start adding up the numbers. What is the 3-month ROI average of the properties under management? Has it changed much, three months after three months? What's the 6-month ROI average? If it's stayed remarkably steady at the same underperforming number, you might be in a situation such as the one I am describing, and you can expect that the properties will be "stabilizing" up until the moment you sell them and the PM can no longer bleed you.

Here's another thing to think about: a property manager has only two avenues to increasing his income. The first is to get more properties under management. This takes a lot of work and is uncertain. Quality work is often not rewarded, because many of the PM's investor-owners are such amateurs they can't tell quality work from lousy work. Can you realistically expect a PM to adopt this business model, year after year, with bills to pay and kids to send off to college? The second option is for the PM to maximize their take per owner. This takes much less work, is much more certain, and the bills get paid/kids get to go off to college. Is keeping perfectly honest faith with you more important to the PM than doing right by his kids?

8 Reply

Frank Wong

Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes

7y

Sell them all. Stop the bleeding and reevaluate afterward. Investing in properties is supposed to complement your income not drain it. At least you know if you sell the negative cash flow will stop. The only issue I see about keeping it is your ability to turn them around. With the units far away from you and lack of experience that is very hard.

What is concerning is that they are multi-units which require 30% down and the for the most part, in the beginning, the numbers should have worked or it should never have been purchased. I am curious to learn the whole story. When were they purchased? How much? What kind of neighborhood? What happened to put you here? I know these are tough to answer and you may not want to. It will do 2 things. 1 some very smart people on this post can advise you once they can diagnose the problem. 2 it would be a good lesson for other investors.

The lessons here that I see for investors is not the fact that the properties are out of state. People invest out of state all the time and works but I think its the level of scale. 39 units for a new investor is a lot. The 2nd thing I see is about cash flow. I always see people say I am playing for appreciation and I don't care about cash flow. Are you sure? Have you been in a situation when you go negative every month and watch your money leave your checking account? It's painful.

Thanks for sharing Jesse. I know this is very tough and I feel for you.

7 Reply

Steve Mason

Rental Property Investor · Nashville, TN · Member since 2017 · 38 posts · 15 votes

7y

I feel your pain. My first gut instinct tells me, sell the one with the most equity, roll the cash into the biggest potential winner, which looks to me like the 24 units, to lower the payment and get to some cash flow. Hope that makes sense. All the best,

0 Reply

Kaenan Whitman

Specialist · Sonora, CA · Member since 2017 · 22 posts · 7 votes

7y

@Jesse K.

Is the income or expenses what’s not meeting expectations or both. Are you experiencing a lot of tenant turnover? If it is then you need to re-evaluate your rental process from tenant applications to screening to leases. A great book on this is Brandon Turner book - the book on managing rental properties. If you don’t manage the properties it will give you a good idea as to what to look for in a property manager.

If your just not getting the income you need take a look at surrounding properties and see what if any upgrades you could make to get better tenants and or higher rent.

0 Reply

Christian Beyer

Rental Property Investor · Phoenixville, PA · Member since 2015 · 119 posts · 61 votes

7y

@Jesse K.

Sorry to hear things aren’t working out the way you expected.

You mentioned a few times that in the beginning when you ran the numbers on the properties that things looked good. Maybe the first step is to take a look at the numbers you ran and try to close the gap between where you are and what you estimated. Either your revenues aren’t where they should be, or your costs aren’t where they should be. Digging in to find those out should help.

If you go back and realize that your estimates were off or you were too optimistic about costs or revenues, then maybe it is time to get out and let these properties become someone else’s heartache.

Wish you the best!

0 Reply

Brian Ploszay

Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes

7y

Properties can be turned around, but sometimes if you walk into a situation that drains your money, then time to sell. I'd probably get rid of the 11 unit. This will give you some breathing room to focus on the other properties.

0 Reply

Caleb Heimsoth

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

7y

@Jesse K. As I surmised these don’t appear to be close to you. I’m guessing these are low income apartments as well? What’s your average rent per door? Is it less then 600? If so

It’s probably C class at best probably lower. What part of Ohio? You’re probably in Cleveland, Akron, Toledo or Columbus. Toledo and Akron can have some rough low rent stuff. Granted they all do, but those two areas tend to be lower.

I own low rent stuff, so I understand how it works, but there are two pain differences (I’m assuming) between what I do and what you’re doing. 1. I don’t use debt on low income rentals and 2. It’s local to where I live. I can drive by whenever I want.

I wish you luck. Depending how long you’ve owned this stuff, I wouldn’t immediately sell but you probably need a new PM. I am guessing your PM is overcharging you for stuff. That’s okay for a bit as you learn but eventually

You have to cut ties if it continues. Trust me I’ve been there. I’ve been overcharged before. But I kept it long enough and sold for a profit, that it still worked out. And that was on a much smaller scale

2 Reply

Caleb Heimsoth

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

7y

@Jesse K. I’ll leave you with a brief story I heard

From a former landlord of mine (I was a tenant of theirs). They were a young couple (mid 30s) who I’m about 4 years had accumulated about 80 rental units in suburbs and small towns around Milwaukee WI. (Popular market for OOS on BP).

One of these propeties was a 40 unit low income (section 8) apartment complex. The husband was a full time investor at this point (wife worked In commercial lending). He told me they averaged 6-8 apartment turnovers per month at this complex. And he did most the work himself. I cannot imagine owning something like that long distance, you’d never make any money. So please keep that in mind.

1 Reply

I need advice on our rental portfolio! Please help!

I need advice on our rental portfolio! Please help!

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