COVID related rental conundrum

31 Replies

I purchased a 4-plex in November of 2020. Class C property in a neighborhood that houses a lot of voucher holders and lower-income families. I inherited three tenants that were advertised as paying and up-to-date with rents. I employed a full-service property management company that has many section-8 rentals in its portfolio to help me navigate this.

Came to find that 2/3 of the inherited tenants were non-paying. The paying tenant left after a month (she was on a month-to-month lease). While receiving no rents, I rehabbed the vacant units (they needed many repairs to pass section-8 standards). Eventually, the 2 non-paying tenants left on their own accord (April/May of 2021). I then rehabbed those units. I've since had 2 new tenants move in, but one broke their lease (unlawful weapons), and the other is wanting to get out of her lease due to not feeling safe in the building (related to the aforementioned issue). 

Admittedly, I could be leaning into my PM's more than I have. Other than doing the rehabs, I've let my property managers handle everything. The fact is, in nearly 10 full months of owning this property I've been sinking money non-stop into the mortgage, insurance, property management fee's, on-site washer/dryer (leased), etc and I can't see this turning around for another 2-3 months (at the earliest).

What should I be doing TODAY to get this property turned around? 

Updated about 1 month ago

As it wasn't obvious in my original post, the main connection to COVID was my inability to evict the original tenants due to non-payment. I think the simple act of writing this out for this post clearly reflects that the issue is very clearly beyond COVID. Sorry for the miss-titling! Any help or advice is welcome.

Scott! Great question. I added a revision to my post just now. I think the main connection to COVID (and my initial angst) stemmed from the inability to evict due to non-payment through the COVID moretorium. 

Having typed out the larger narrative, it does look like my issues stem well beyond COVID. What advice do you have for me?

Another question for you (sorry about that!) what PM fees are you paying.  By the sounds of it you are not collecting any rent and you did the rehab yourself so what are they charging you for? Guessing a leasing fee on the two move-ins?

$580/month ($145/unit) + 10% on any repair orders. I am paying them to market and showing the property as well as managing what tenants / tenant issues we have had. Basically, I'm banking on tenant placements and future management.

To be fair to them, they've handled some unsavoriness that was not mentioned that I'm glad to have had the support on. I do watch their marketing efforts and get updates on showings. So I know they are not being idle with my property. They also manage another single family I have and that experience has been fantastic.

You pay them 145 a month/unit no matter if rent comes in or not?  And they make 10% on the rehabs you did or you mean maintenance after a tenant move in?  Asking these questions so others can comment on how well this PM is doing and if you need a new one or as @John Underwood suggested let them handle it.  Cuz clearly they are doing a bang up job now : ) 

Find a way to get rid of the tenants who are not paying and refuse to go for rental assistance. Every state is different on what they require. You can also go through civil court and remove them that way in most states; but lawyers usually charge more. I'd be more active with the PM. Remember, they get their money even if you do not. If you do not sit on them, they will just lay back and wait. 

I assume you know what you got yourself into when you bought in a class C area. If not, you do now. SFH are much easier in class C and D areas in my opinion. That said you are in a tough spot and I would agree with your assessment that you are at the least a few months away.

I can’t say I fully understand why you are paying your manager if rent isn’t being collected but maybe rent is being collected. Hard to tell.

What should you do today? Either one of three things.

  1. Fire your current manager and rent it yourself
  2. Fire your current manager and hire a new one
  3. Lean on your manager (to use your words) to get this turned around

Its easy to say the PM should have screened better but if someone has unlawful weapons and there are not charges and they are a good / clean tenant (for a class C) in all other respects it is unclear they should have known or not.

That said the issue here is the quality of the tenants. Could be a terrible manager or could really be a class D area and you get what you get. Really hard to tell form this vantage point but I would for sure take action with your manager. Lean on them and start researching and finding some alternatives while you put some pressure on them so if they are not up to it you can switch. Just understand in a lower class/lower income area in multi units you can’t always get great, reliable tenants. At the same time you can often get long term tenants who stay for years.

I think you need to take a step back and ask yourself if it is possible to be successful with a class c property managed by a property manager.   So before you get into the details, is the entire investment thesis valid.  

When I decided to get into remote ownership of rental property I did a lot of research.   And while there is disagreement on the profitability of class c properties, there is no disagreement on a host of the disadvantages.   

  • - They are "high touch" even with section 8 vouchers
  • - The wear and tear on the properties is high
  • - The vacancy and turnover is high compared to class A/B
  • - Unless the neighborhood gentrifies, the capital appreciation is generally less than A/B
  • - Tenet quality is highly variable regardless of vetting

Obviously these disadvantages are offset by higher cash flow and guaranteed rent when using section 8.  

I looked at these pros and cons and specifically choose to buy class B properties knowing I was giving up cash flow.   I dont think that it is possible to be consistently profitable with class c properties that are not directly managed.  That is just my opinion, but I think it is supported by evidence.  Even with that the first 12 months of turnover, renovations, etc put me deeply in the red the first year, which I had anticipated and planned for.  

So this is a really longwinded way of asking if you think it is even possible to be profitable when the property is stable.   Does Revenue minus $580 (PM) minus taxes/insurance minus 15% for maintenance/capital minus mortgage a positive number?   If not, sell and be done because your can't even get there in theory.  

@Dennis Meints it looks to me like you just need to get this property stabilized. That can take some time. The only risk I see is if the neighborhood has problems you can't overcome. It is concerning that one tenant wants to break lease due to feeling unsafe. Have you looked at ways to improve safety. Cameras, fences, security lights, better locks on the main door, etc? With the trouble tenant leaving, try to encourage her to stay. Maybe you can offer her an upgrade or reassure her with security updates.

I am not sure firing the PM is the best move. People jump to that as the first action, but even a good PM needs time to fill a four unit property with good tenants. 

It is a little concerning that it is nearing winter and you don't have the property filled. I had a C- class building years ago. Even after updating units and finding better tenants, it was still a struggle. I eventually just sold the property. There is a point where you need to acknowledge that an investment is more trouble than it is worth. I don't have enough information to say you are at that point, but accept that reality if it comes to it.

Originally posted by @Dennis Meints:

I inherited three tenants that were advertised as paying and up-to-date with rents. [...]

Came to find that 2/3 of the inherited tenants were non-paying.

"Advertised as paying"??? Did you just take the word of the seller or did you check their ledger and confirm with bank records?

Sometimes it's just a series of unfortunate events - and then things get better.

Would recommend though, that you have a VERY deep conversation with your PMC about their screening process for Class C applicants. Here's what we do:

1) Get full credit report to review for evictions and convictions, also major collection/chargeoff that could turn into garnishment and negatively affect their ability to pay rent
2) Verification of Rent is most important! Check with last two landlords or minimum of last 2 years. If current or previous landlords are PMC, request rent ledger. Otherwise, check public records for who the owner of their rentals are/were, and use this info to try to trip up the inevitable "fake landlords" and make sure you're speaking with the actual landlord.
3) Most Class C tenants live paycheck-to-paycheck, to you have to verify job stability to have any hope of income stability. Get a recent YTD paystub and last yea'rs W-2, along with list of employers for last 2 years with start & end dates. Look for job gaps over 30 days.
4) GET A BANK STATEMENT! Most employers now do auto deposits for payroll. You should be able to correlate income off paystub with deposits into bank. Check bank entries for any unemployment deposits (applicants sometimes fake paystubs) or unusual deposits/expenses.
5) Do this with Section 8 applicants also! Will weed out many of the losers that just trash properties and move on.

Sunk cost comes to mind. Move into one unit and arm the property with security to keep out drug dealers, homeless, teens looking for a place to party, and gangs. Send me photographs I can give you a plan for cameras, steel security doors, and indestructible flooring. This costs money. Bad eggs or family members couch sleeping who are bad eggs must go immediately.                             Is property manager strong enough, kind enough, communicates enough? PM needs to answer phone at night, and visit property once a week, they need to carry naloxone. Understand exactly what your tenants experience and make it better. Do you know the names of the police officers in the precinct and bring a meals to those in your local fire station? Whatever it costs to turn this around to a safe place is necessary or you will never get a handle on your constant outflow of money. If you are weak of heart and think about it longer the bleeding continues. Happy to give free advice, if you want to save the building, OR sell immediately.  

Originally posted by @Tabitha Brickhouse :

@Joe Splitrock PM has had 10 months.  What is the suggested timeframe to give them

 There is no firm answer to that question. Time frame is determined by location, property and challenges faced. I would give a PM one month in my market, but I have rented to two families moving from Minnesota over the last year. In case you have not read the news, Minnesota has had some challenges the last couple years. 

He purchased a distressed property in East St. Paul in November (no worse month to attempt leasing). My uncle lived in that area for 30+ years, so I know it well. My uncle was stabbed once and robbed multiple times. Calling it a C neighborhood may be generous. 

So let's track the time line. They buy a 4-plex in November 2020. There is one vacant unit, two unpaying tenants and the third moves out in December. Property manager takes over a 4 plex with no paying tenants in December in Minnesota. Have you ever been to Minnesota in December or January? Nobody is moving between snow and sub zero weather. He also says the units needed rehab, so the property was likely run down. Finally the two non paying tenants leave, which the PM couldn't control either way due to eviction bans. This brings us to Spring and it sounds like the property was being rehabbed. It is unclear how many units were available to rent and when, but fair to say all four were not available during prime renting season (May-July). Regardless, the PM was able to place tenants in two of four units. Then some incident involving a weapon comes up and one tenant is asked to leave. The other tenant feels unsafe - understandably and not under control of the PM.

At this point, I would sit down with the PM and ask them for a plan. Maybe talk to other PM and see what they suggest. Also consider the reality that location presents challenges. There is a reason the previous owner only had one paying tenant and was ready to sell. People think they will buy a property, rehab, put a new PM in place and all the old problems disappear. It is not always that simple in rough neighborhoods. 

Sounds like a bad neighborhood. You get the tenants that want to live in an area like that. So you may be limited in quality and quantity of potential tenants.

That said.

Market the crap out of it. Facebook ads, mls etc. Make sure your manager does a great job on the background checks and income varificaion/sect8 paperwork. We use Rhino insurance to cover loss if tenants vacate early or cause damage.

Originally posted by @Greg M. :
Originally posted by @Dennis Meints:

I inherited three tenants that were advertised as paying and up-to-date with rents. [...]

Came to find that 2/3 of the inherited tenants were non-paying.

"Advertised as paying"??? Did you just take the word of the seller or did you check their ledger and confirm with bank records?

They advertised as paying and had the documentation to prove they were "up to date" on rents. The red flags I didn't see: all were on month-to-month leases and the two that ended up being non-paying were essentially brand new to the building when I purchased. I think they had only been there for one or two months at the point I purchased.

Originally posted by @Joe Splitrock :
Originally posted by @Tabitha Brickhouse:

@Joe Splitrock PM has had 10 months.  What is the suggested timeframe to give them

 There is no firm answer to that question. Time frame is determined by location, property and challenges faced. I would give a PM one month in my market, but I have rented to two families moving from Minnesota over the last year. In case you have not read the news, Minnesota has had some challenges the last couple years. 

He purchased a distressed property in East St. Paul in November (no worse month to attempt leasing). My uncle lived in that area for 30+ years, so I know it well. My uncle was stabbed once and robbed multiple times. Calling it a C neighborhood may be generous. 

So let's track the time line. They buy a 4-plex in November 2020. There is one vacant unit, two unpaying tenants and the third moves out in December. Property manager takes over a 4 plex with no paying tenants in December in Minnesota. Have you ever been to Minnesota in December or January? Nobody is moving between snow and sub zero weather. He also says the units needed rehab, so the property was likely run down. Finally the two non paying tenants leave, which the PM couldn't control either way due to eviction bans. This brings us to Spring and it sounds like the property was being rehabbed. It is unclear how many units were available to rent and when, but fair to say all four were not available during prime renting season (May-July). Regardless, the PM was able to place tenants in two of four units. Then some incident involving a weapon comes up and one tenant is asked to leave. The other tenant feels unsafe - understandably and not under control of the PM.

At this point, I would sit down with the PM and ask them for a plan. Maybe talk to other PM and see what they suggest. Also consider the reality that location presents challenges. There is a reason the previous owner only had one paying tenant and was ready to sell. People think they will buy a property, rehab, put a new PM in place and all the old problems disappear. It is not always that simple in rough neighborhoods. 

Nailed it. PM's have a very challenging property to get turned around. You laid out the issues very accurately. Thanks for the insights!

However, I will say the East Side of Saint Paul isn't what it was when your uncle lived here. Pockets of it may still be, but on the whole, it's a rising area with many new businesses, restaurants, and even new housing (not my units tho..). In all my interactions with the neighbors to my 4-plex, there is a definite pride of neighborhood and community there. Many have thanked me for my efforts in stabilizing this property as I've heard it's been an issue for over a decade. 

Thanks for giving me some insights on how to help my PM's!