Advice needed - Management Company is a bust or a go?

[Richard Yoo]

Hello fellow Landlords,

I am owner of a 14 unit apartment building in Baltimore. When I took it on 2 years ago it had only 2 paying tenants, and required a lot of repairs to the building and each unit.

I live a 4 hour drive away from the apartment building, and so can visit it only once a month or so. As such, I have over the past year hired a Property Manager. During my time with this Property Manager we have gone from 2 tenants to 10 units leasing.

The problem is that 6/10 are facing eviction. And 3/10 are behind by a month or more.

The turnover for evictions seems to be 3 months to evict, 2 to turn around and lease. I have offered those facing eviction the following deal: 6 month payment plan for balance, rent reduced by $100 for 1 year. Most have taken the offer, their delivery on rent has yet to be determined.

My question for you all is:

1: How is this situation? Is this normal? Am I faltering?

2: According to my spreadsheets, if the units are all renting (about 1000-1200 for 1 bed and 2bed) I should be netting almost $100,000 (after all taxes, fees, management, etc). I am so far no where near this. I attribute my loss to date to the large amount of repairs the building has so far needed. HVAC being the most expensive repair, but also that given that I am a 4 hour drive away I have to depend on my manager and his fleet of repair workers to do even small jobs.

3: Can you help me evaluate my property manager, and consider if I should find another management company?

Benefits of my current management company are:

+ He is also a general contractor, which seems to reduce cost and increase speed of repairs when turning around or upgrading an apartment.

+ He lives in the same city as the building and is well integrated in the local rental market

+ He manages the court proceedings regarding evictions

+ His 8% management fee is competitive.

Negatives after 15 months are:

-Payments to my account are often 2-5 months late. They attribute this to slow paying tenants, as well as the high amount of repairs needed.

-Communication is inconsistent, sometimes takes several weeks to have a maintenance issue addressed

-Should I stay with this apartment manager? If not, how best to find an alternative? 

Any suggestions on how to get this project finally making the money it should would be much much appreciated.

Thank you all!

[Drew Sygit]

@Richard Yoo what Class if your property - A, B, C or D?

How about the Neighborhood?

Many investors naively expect Class A results from Class C or D properties/Neighborhoods:(

Key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.
Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.