Rental Property Investor · Cypress, CA · Member since 2013 · 103 posts · 72 votes
Hey BP, I have a 3 unit property in Logan Square, Chicago.
I have a PM management company that takes care of it, and in the past 5 years, didn't pay much attention to the numbers. As I started scrutinizing the numbers, I realize that the rent I'm getting is pretty good - 1.2% of PP. This makes me believe that I should be able to generate a nice cash flow. But I dont. I'm pretty much break even or even having a slightly negative cash flow year after year. Now, I know that the 1% rule isn't perfect, but I'm wondering if the management is ripping me off. This doesn't make sense.
A few things about the property - It IS old. 100 years +, and the taxes are rather high in Chicago. Property tax is rather high - $6000+ for $400K house. I do pay for water/trash/snow removal/landscaping and gas/electric for common area. But even given these facts, not cash-flowing seems very suspicious. What do you guys think?
It's hard to point our what is exactly racking up all these bills, but the turnover cost is huge. between commission for signing a new lease and turning over the new unit, it comes out to almost $4,000. Is this outrageous for a unit that has a rent of $1700? Can you shed some light?
I need help. The contract I signed locks me in until next March or I need to pay a fee that equals to 50% of their expected PM fees. Anybody know a very reputable PM company in the Logan square area?
Rental Property Investor · Dayton, OH · Member since 2017 · 246 posts · 225 votes
7y
I once had a property management company charge me $45 to deliver a letter to the tenant advising them that the PM would be entering the residence the following week.
That same management company also had an early termination cause in the contract.
Now, this may be local to my area, but I soon after received some wisdom from a few other investors. That was to always be leery of a property management company that has an early termination clause in their contract.
If they’re good at their job, there is no need for that clause.
I’ve switched to another PM and she has made my life extraordinarily better. It feels so good to get owner statements that are consistently rent collected minus PM fee without any other expenses.
She does not have that clause in her contract. When I asked her about it, she said, “if it isn’t a good fit, why stretch it out? If you don’t like working with me, or I don’t like working with you, why stretch it out longer than necessary?”
Completely agree....
Again, this may be specific to the area which I invest...but I hope it helps.
@Sami Davis You made some good points. I have a 5 unit mixed-use building in the Chicago area. My property taxes went from $7,000 to $10,500 for 2018 taxes. My property insurance is going up from $3000 to $12,000 under new lender requirements and 100% replacement cost rules. I need to appeal my taxes and find a new lender that will accept co-insurance to keep my insurance low.
Is anyone else dealing with new replacement cost insurance requirements?
@Ki Lee - NestEgg is a cool new tech company in Chicago helping landlords by giving them all the resources a typical property management company would provide including property maintenance and income/expense reporting. PM me for more details and I think we could definitely help you out!
Nathanael Rojas How is your Baltimore, Maryland investment holding up? Where you able to find a good PM company, I'm also looking forward to purchasing property in that area, please share.
Real Estate Broker · Atlanta, GA · Member since 2019 · 17 posts · 7 votes
7y
There is some good information here, but as others have stated, it looks like your cash flow or lack of is due more to your investment set up, than to your PM.
As a Property Manager myself, a few points:
It sounded like you are experiencing excess turn over through tenants breaking the lease early - there is a way to handle that. However, depending on how large the units are and ornate the trim work is, repaint alone when needed could be $1200-$2000, and if your PM charges a tenant acquisition fee equal to one months rent which is common in many markets, that could easily equal $4000 for a turn over. We are often able to keep turn over costs in the $500 -$1000 range and that is for larger 2500 sf + single family homes, some of which have two story great rooms.
My PM fees vary based on how many units an owner is giving me, and where the property is located etc, but are more than what you're paying but I probably include a lot more services.
I offer performance guarantees, but there is no way I would have a Management Agreement that just allowed an owner to walk - they would owe me the remainder term fees if that happened.
There is no way I would as an investor, pay tenant utilities at all - if the utilities were not separately metered, I would first determine if I could legally charge the tenants for the utilities in your area or I would not buy the property.
There are many things you can do in a lease to protect yourself and reduce your costs (and that may be an issue with your PM's lack of experience - or it could be that your state is very landlord unfriendly) but here are a few items I would have in the lease if allowed in your area:
The tenant must thoroughly clean the unit including any carpeting at move-out - we have a detailed example list of tenant cleaning responsibilities in our tenant handbook.
We only accept the most financially highly qualified tenants, and often have tenants renew leases, but if a tenant wants or needs to break their lease early, there is a multi month Early Termination fee to help us defray off market time and turnkey make-ready costs due to early termination.
Our tenants are responsible for both Pest/insect control and exterior landscape upkeep - though in an inner city townhouse/triplex set up tenant responsible landscape may not be feasible. We only address termite or vermin issues that may occur in our single family properties.
Repairs can eat into an owners profit and older buildings not retrofitted with modern systems can be a drain. However, it is important that on all other repairs, the "cause for the repair" be determined so if the tenant is at fault, either by directly causing the issue, or by allowing more damage to occur by failing to timely report the issue, they can be charged as the responsible party. I am an experienced ICC Building Inspector and sometimes have to make a trip to the property to determine repair causes when its not clear or tenant photos won't do, but that extra trip and skill set has saved my owners thousands over the years.
Just a few points - but take a good look at your leases - there may be significant "bucket holes" in your cash flow depending on how they are drafted.
Finally, Steve Rozenberg from TX made some excellent points in his reply about running investments like a business and the 5 ways you can be making financial progress even if cash flow is not falling directly into your pockets each month (but I would want that to be the case) - if at least several of these 5 facets are not true for you, you may want to think about selling - but I would first improve things so your property performance looks better to diligent buyers.
Investor · Clinton, OH · Member since 2014 · 8 posts · 2 votes
7y
are you counting your mortgage in the 62%. Typically, I've seen folks budget for the 50% as the NOI, meaning Income - Expenses (excluding the mortgage). If you are at 62% including the mortgage you should be doing very well. IF you add another 10% for repairs/supplies, you are at 72% which I would see as pretty normal.
What kind of reports do you get from the PM? You should be able to identify the 'leakage'. Many of the good PM's will run monthly cash flow reports or give you access to their Property Management software. Run the reports over a full year so you can see all the nickel/dime items add up. Do you have an agreement with PM as to how repairs are handled? Do they have a $$ limit when they have to contact you to get approval?
I'm just guessing but I think if you see the big picture, you'll find 3 areas of leakage if you are having turnover. Commissions, repairs, and vacancy. It's the nature of having a PM, as the gentleman above said, it's a low margin business and they need to collect extra fees in commissions and maintenance upcharges to stay afloat.
Investor · Tallmadge, OH · Member since 2014 · 81 posts · 32 votes
7y
@Matthew Paul, i have a minor issue with your statement. If a PM was actually “charging for their time” the management fee would not be a % of the rent. Nobody makes $271 for 5-10 minutes of monthly work verifying rent payments and generating a P&L... (that’s $1626/hr)
And posting an eviction IS part of managing a property.
Assessing repairs, obtaining 3 quotes, and authorizing contracts for said repair is outside that scope and subject to additional billing. As is additional billing for sending late fee statements and fines.
I’m just glad nobody at this property generates trash, since it’s missing from his operating costs!
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
7y
I'm late to the thread so this has probably been said already, but-- you're blaming missing cash flow on the PM because the property hits one of the 'rules' so in 'should' cash flow? That's not at all how those rules work, and why they are so dangerous in making actual property assessments. My guess is your missing cash flow is just because the numbers don't work on the property in general (keyword- actual numbers). Did you ever run those or did you just go off the rule?
Rental Property Investor · Seattle, WA · Member since 2018 · 230 posts · 77 votes
7y
@Ali Boone is correct.
Now just an fyi... I am not trying to rip into PM companies ( although i do enjoy trolling @jameswise from time to time on his YouTube channel).
Chicago ( or any other landlord unfriendly state) falls out of the 1% rule even as a rule of thumb. In places with high taxes and drowning in corruption the only rule that will ensure you staying afloat ( afloat.... Not making millions) is the 50%+ NOI...
That said - make your laundromat as paid service. Hire a different PM company cuz if what you are saying is true.... They are ripping you off ( or what is known as .... Skimming off the top) . Now any big PM will yell at me saying they got their own expenses, blah blah blah... The truth of the matter is this.... MFRs will always have more expenses, they will always have high turnover and they will always have more headache than sfrs ( especially in blue states and /or C- areas). PM companies know that... Thats why they charge fees for vacancies for turnovers, for screening... And god knows what else... So its not like they scamming you.... They're a simple warning to any real estate investor to " read the small letters" before you buy a property. Know what you're getting yourself into ( like paying $170 bucks for landscaping lol thats just a ripoff). Ok James..am ready lay it on me lol ( btw from many PM companies that i know James @HW is actually pretty good and probably more transparent than 90% of the rest on the market when it comes to fees and overall expense. The only thing that bugs me is when James says that a furnace in Cleveland apparently can live up to 40 years ( what kind of black magic is this?!?)).
