How to Manage Low Income Multi-Family

Looking at pro formas for different classes of income-producing real estate, the one that typically generates the highest returns is low-income multi-family. On the other hand, many owners find these properties can rapidly turn into money pits that are rife with potential liabilities. The key to maximizing the yield of these properties, and getting those double digit returns that look so good on paper, is intensive management.

If you are managing the property yourself you need to have exceptional attention to detail, a lot of patience, and be prepared to roll up your sleeves for some hard work. If you are using a professional property manager then you need to make sure that they are working hard on your behalf, and have the capacity and experience to protect your investment.  

First of all let’s define low income. In the Las Vegas Real Estate market this would be units in the $450-$600 per month range for two-bedroom, two-bath, and $300-$500 for a one-bedroom.

Qualifying the Tenant
The reality of this end of the market is that there are no tenants with good credit, and any tenant you have is one missed pay check away from defaulting on their rental obligation. There are two things that you can do to maximize your chances of a paying tenant: have at least two bread winners on the lease, and assess the stability of their employment. Individuals that have had the same employer for more than six months are more likely to remain employed, whereas cash-based, self-employed are the riskiest prospects. Families that are tied to school districts are also good long-term renters.

Finally, those tenants on government assistance, or pensions, have a steady and predictable source of income. Tenants on low amounts of monthly social security can be more likely to pay rent on time, every time, than those in employment.

Move-in Conditions
Move-in specials of $99 - $200 are commonplace at this end of the market. Despite this one of the golden rules to adhere to is to never let a tenant move-in without paying the equivalent of at least one month’s rent in advance. If you have to compete with a move-in special of $99 on a $500 rental, just explain to the tenant that you will apportion the $401 to the next month’s rent or deposit. If a tenant cannot produce the equivalent of one month’s rent at move-in it is a strong indicator that they will never be able to.

The Move-In Special Merry-go-round
In Las Vegas multi-family there are move-in deals for tenants of $350 up front (taken either as deposit or rent), and the first month’s rent free. Landlords have been pushed into offering these sorts of terms because they are surrounded by competing properties with the same deals. This has created an incentive for tenants to break their leases and continually move around a neighborhood taking up move-in specials, building up delinquencies, and then moving on so they never pay a full month’s rent. More with any other asset class the information you can get from the prospect’s past landlords can be very valuable in helping you make a decision. Don’t sign up a tenant that is on the move-in special merry-go-round.  

Refurbishment Budgets
The broken windows theory states that monitoring and maintaining urban environments in a well-ordered condition may stop further vandalism as well as an escalation into more serious crime, so it is in your best interest to deliver decent standards of accommodation. Put another way, if you are a slumlord you will attract tenants that give you the same level of respect that you have shown them.

You need to find the level of refurbishment that will secure the highest achievable rents without exceeding the costs that these types of property warrant. For example, if you have a carpet with cigarette burns and stains your instinct may be to replace it, but given the high level of turnover in these units that policy could soon kill your yield as you could be replacing carpet multiple times a year. A carpet that has been professional cleaned can come up to a sufficient standard even with a few cigarette burns. It is an unfortunate truth that most of tenants in these properties will “ruin” a carpet within a month. Your job is to keep the carpets in rentable condition, not the same standards that you have in your own home. That may seem like a harsh rule, but if you don’t abide by it then you will be leaving money on the table.

Some other items that do not reduce the maximum achievable rent, but preserve your profit are:

• - Use refurbished appliances. You should not be paying any more than $150 for refurbished stoves, fridges and washers. Make sure they come with a six month warranty
• - Use light colored paints to that you do not need multiple coats when repainting
• - Tile is more expensive that carpet to install, but can save you money in the long run
• - Paint old cabinets and put new handles on them, rather than replacing
  

Time is Your Enemy
Here is a scenario for a vacant unit: it takes you one month to refurbish it, you spend the equivalent of one month’s rent on materials and labor, it takes one month to secure a tenant, you give the tenant one month’s free rent, and you pay a broker one month’s leasing fee for securing the tenant. The tenant leaves after six months. In those six month’s you have made precisely one month’s rent, which might just about cover that unit’s allocation of taxes, insurance and house meter.

If you want a low-income multi-family to generate money, you need to be extremely quick. Have it marketed while you are doing the refurbishment. No unit turnaround should take more than a week and try never to allow any unit to sit vacant for more than a month.

Your Best Tenants Are Your Best Friends
In light of the profit pressures noted above it should be clear that you should do everything you can to keep good tenants happy. It is far cheaper to spend money keep a current tenant’s unit in good repair than it is to refurbish and market a vacant unit. You might not be obligated to provide an annual carpet cleaning, but if that will help secure a lease extension you would be foolish not to.

Speak the Language
Many of your tenants will speak only Spanish. Make sure you have the resources to market to the Spanish-speaking community and manage their needs on a day-to-day basis.

Rent Collection
Collecting rent from low-income multi-family can be like pulling teeth that have been cemented in with super glue, or getting blood out of a stone that is encased in steel. You get the picture – it can be hard. There are some things that you can do to make it easier.

The first step is to have a disciplined regime of rent collection. Send an invoice at least two weeks in advance of the due date, contact the tenant on the due date, and serve a pay-or-quit notice the day that the rent is late – serve this notice WITHOUT FAIL. Charge the tenant for the pay-or-quit notice. After two months of this the tenant will soon understand the benefit of paying on time. The only time that a notice should be deferred is if a tenant arranges ahead of time for a delayed payment.

Handle Evictions Swiftly
If a tenant fails to pay following a pay-or-quit notice then eviction should follow immediately. Make sure that you are familiar with all the ins and outs of the eviction process as some tenants know how to play the game, and you have to know how to stop the tenant winning it.

Pest Control
A monthly program of pest control around the exterior of the property and inside each unit is recommended, especially in the summer months. It only takes one tenant with poor hygiene standards to lead to a cockroach infestation which can quickly spread.

Another pest that you need to be on top of is the bed bug. Usually it is the tenants who bring bed bugs into a unit, so technically they should be responsible for the cost of treatment. However, the reality is that tenants will just leave the property if you don’t remedy the problem. It is also in your interests to respond very quickly because bed bugs spread rapidly through buildings – left untreated I have seen bed bugs consume one third of a 22 unit complex in two months. Finally, if you are quick then spray treatment will contain the problem, but the longer you leave it the more likely you are to have to use expensive heat treatment.

Laundry Income
If your tenants do not have individual washers and dryers then an on-site laundry service will be not only a benefit to your tenants, but also a source of income for you. There are three ways to approach this:

1. Use an external company which does everything from installation to maintenance and collecting the money
2. Use an external company that leases you the machines and maintains them, but you collect the money
3. Buy and maintain the machines yourself

My recommendation is to go for the first and monitor the company’s performance to ensure they are keeping all machines operational at all times. It might be tempting to go into the laundry business, but remember it is not your area of expertise. After all you are not handling the other services such as pest control and AC maintenance.

Home Warranty Companies
A lot of people assume that home warranties are only available for single family homes and condos, but you can secure them for multi-family. If you have an older building then a home warranty can be seen as an investment rather than protection since it is inevitable that old AC units and water heaters will have ongoing maintenance issues and eventually break. The owner of a 1970s 4-plex is much more likely to get a financial benefit from a home warranty program than the owner of a single family home built after 2000.  

Effective Use of an On-Site Manager
For any complexes over 10 units an on-site property manager can help ensure maintenance issues are responded to quickly, and rent is collected in a timely fashion. The scope of the roll will determine the level of salary from a rent subsidy, through to free rent and a monthly salary.

Maintenance
Keeping the property well maintained will help retain tenants and mitigate larger expenses when equipment breaks. Some tips include:

- Cleaning carpets prevents the dirt inside them from wearing out the fiber. If your tenant extends their lease for a year it is good practice to clean the carpet.  
- Keeping fridge coils clean will reduce the stress on the fridge motor. Ensuring freezers are defrosted once they accumulate a layer of ice reduces the energy consumption.
- Provide air filters to tenants every 90 days as this will avoid the dust build up that damages the systems and leads to large repair bills

Lead Based Paint
Lead based paint was banned in 1978, but many of the low income properties were built before that time so you need to be compliant with the 1996 Lead-Based Paint Disclosure Regulation. This requires that you disclose to potential tenants all known information about the presence of lead-based paint and/or lead-based paint hazards in the property. You need to provide a disclosure statement and an information pamphlet such as, "Protect Your Family From Lead In Your Home."  

These are just some of the things that you need to consider when managing low-income multi-family. If you found this article useful, then you may also want to take a look at my thoughts on the best way to buy Class C multi-family.