I recently bought a place that is fully occupied and cashflow looks great (on paper). Expenses are 1600/mo and 4 units bring in about 2150/mo. Not bad right?
My first month into the property, only 1 of the 4 tenants paid the rent, 1 other paid a little less than the rent 8 days late, another one only paid half the rent 3 weeks late, and the other just decided to not pay a cent.
Do all tenants suck?
Don’t get me wrong, I’m fully committed to my success as a real estate entrepreneur and I know there are ALWAYS learning experiences and growing pains in any new and worthwhile venture.
I’m just looking for some wisdom.
What would you SEASONED landlords do in this type of situation. What could I have done to prevented this?
New and uneducated are 2 different things. Did you do a cash flow analysis on this? U are negative, my friend. 2150 -1600 does not equal cash flow.
do more learning. start by searching for posts here on cash flow
get Mike Rossi’s book on rentals (propertymanager’s ID) $50 reality lesson.
Have and use cash reserves to preserve your credit at the bank.
Rearging the deadbeats,
DO NOT accept partial rent. Do NOT accept late rent.
EVICT THEM NOW. (well, u may have an issue because monies were accepted.) - Mike will chime in.
Paid 8 days late? no, no, Pay 1 hour late, you’re getting an eviction notice.
CHeck your state’s tenant landlord laws, and if necessary, and likely most cost effective, consult a real estate attorney.
SCREEN your tenants. screen them like you’re mining for gold in the old west. Advertise that you do have an application fee. Have them pay it and do that background and credit check.
Unfortunately, you just showed your tenants that they can do what evvvvver they want- i.e. pay late. pay very late.
You did not elaborate if the $1,600 per month in expenses included your mortgage payment, I assume not. In that case you are probably not cash flowing depending upon your financing structure. You mention a property management company, perhaps you should look for a new property manager?
Realnew gave you good advice. You need to get educated NOW, before the tenants run over you.
First, you need to learn the terminology of the business. Operating expenses include ALL the day to day expenses that are related to operating the business. These operating expenses typically run 45% to 50% of the gross rents. After subtracting these operating expenses, you then subtract the mortgage payment (P & I) to get the cash flow.
As for your tenant problems - they were self-inflicted. 1 MINUTE after the rent is late, you should be posting the appropriate eviction notice. Do that with one tenant and the rest normally won’t test you. Tenants talk, when you allow one tenant to slide on the rent, the others know they don’t have to pay either. BIG MISTAKE. Weak landlords are eaten by the tenants for lunch.
My tenants know beyond a shadow of a doubt that if they don’t pay the rent IN FULL and ON TIME, I will immediately evict them. It will be on their court records and I will also tell every other landlord I know that they are a deadbeat. I’ll do everything I can to make it difficult for them to find another place to live. If they have a job, I will get a judgement and garnish their wages.
I also think you need a new property manager. If your property manager doesn’t even know that tenants must be evicted when they don’t pay, you’ve got a problem!!! You will find the best property manager by looking in the mirror.
Yea the 1600/mo includes the mortgage. 1600 equals all the money that leaves my pocket per month for the property.
Does it include the eviction expenses, vacancies, legal fees, damage done by the tenants, lost rent while the deadbeats are being evicted, etc.?
You don’t (unless you have a crystal ball). That is why I use 50% of the gross rents for the expenses. That is about as accurate as you can get over a period of time. Calculating cash flow without accounting for these irregular expenses is a recipe for disaster. In fact, the lack of cash flow is the number one reason new landlords fail. Number two is failing to deal properly with tenants.
It makes me wonder why I'm even paying my property manager if they are not strict with collecting payment from tenants.
I agree. You are throwing away the money you are paying your property manager. At a very minimum, they should have contacted you when the tenant didn’t pay and advised you to evict the deadbeats. However, either they don’t know better or they are lazy. Neither one is good. As I said earlier, I’d immediately fire them and manage the properties yourself (or at least find a competent manager).
Just curious, did you make mistakes when you got started that now seem incredibly stupid?
Yes, I did make some mistakes, but they were mitigated by 3 things:
I had been self-employed prior to starting my rental property business, so I was far ahead of the game in understanding operating expenses and cash flow. However, even though I was ahead, it took me about 2 years to figure out the reality of the operating expenses because that issue is not covered by ANY of the popular real estate (guru) books.
I am very competitive which helped when it came to purchasing properrty at a big discount. I paid a little too much for my first rental considering the repairs I did, but thought I had gotten a steal. About two weeks after I bought my property, I heard that another investor bought a similar house for about half what I paid. I absolutely couldn’t believe that a house could be purchased at such a HUGE discount, but I figured if he could do it - so could I. My competitive fangs came out and I was determined to do as well as he did. I have purchased the rest of my properties at BIG discounts, even though it took me about 2 years to come up with the formulas I use today. Again, although a lot of motivational nonsense was contained in the guru books I was reading, the facts were nowhere to be found.
I got lucky. I went more than a year and had more than 10 rentals before I had a single tenant leave. I was screening these tenants (which helped), but certainly not like I do today. The bottom line is that I had beginner’s luck. Of course, that didn’t last forever and about the time I started buying apartment buildings, I started having more tenant issues. Again, I got lucky here because I became friends with a very successful investor at my REIA who took me under her wing and showed me the real world of dealing with tenants. Learning these things undoubtedly has saved (made) me tens of thousands of dollars! I didn’t have to learn things the hard way because she had been there and done that and was willing to pass her wisdom on to me.
I bought and sold properties with tenants in place.
Unless delivered vacant, we verify the payment records of tenants as to paying on time, with rent receipts issued, cancelled checks etc.
It’s common here for landlords selling properties with deadbeat tenants to advertise the nice rent roll, and not mention not able to collect on it.
I looked at commercial investing, shopping strips with stores, and given nice rent roll numbers only to find stores vacant, and sellers trying to tell me that the tenants are only renovating, and paying rent in the meantime.
When closing on properties with tenants in place, we get an estoppel letter from tenants certifying conditions of the lease, deposits paid, and if their up to date on the rent. Of course they can lie about it, but it’ll give you grounds to get after the seller for misrepresentation.
I learned years ago property managers are useless. A busy PM may have hundreds of deadbeats to deal with, and I doubt he’ll have time to pay any special attention to yours.
I good freind of mine bought a 32 unit apartment building at a big discount from a doctor who had a PM and building manager. The reason was deadbeat tenants. He fired the PM, buildling manager, moved in himself, and was soon making good money. Years later, he sold it at a big profit, to the same doctor who sold him the place.
This friend mentioned above, is from Cuba, spoke Spanish, and specialized in renting to undocumented tenants. I asked him if it’s risky. He said he told every one of them that he’ll call immigation if the rent is late, that INS worked faster than eviction courts. The same illegals used to laugh at the PM when threatened with evictions as it’ll take forever. would always be on time with him.
Thanks for your replies and advice. I read your book last night Mike, it’s an eye opener. I wish all the other books and seminars out there told it like it is.
I now understand the mindset of deadbeats. I also understand how the so called “cash flow calculation” method I’ve been taught is extremely optimistic, even though it was supposed to be able to evaluate a “worst case” scenario.
Thanks for sharing your experiences. They give a newbie like me hope! And thanks Frank for your insight.
this is not an uncommon situation when taking over a new rental property. people will get away with as much as they can. slack property management whether its do-it yourself or hired will resultin this situation. I always figure 6-12 months of this kind of hassle to “clean-up” a property and get it running the way I want it. some cases are better or worse; a lot of time the self-mamaged properties are the worst to deal with.
as for property management, its no different than any other service provider. There are good ones out there, but also plenty of losers that are not worth their fees. Before I hire a PM I spend a good amoutn of time talking to them about their management philsophy, reviewing their leases/contracts, discussing how quickly do they evict, their procedure for handling certain things etc. AlsoI never sign more than 12 month agreement in the beginning (usually ask for 6 months). I’ve had some folks balk at that, but I always make the arguement that if they are good, they have nothing to worry about. As for the “saving money” aspect, it is all a matter of prespective. I have a full-time job that pays far above what I pay in PM fees per year. In fact I have susbtantial consulting business that I run on the side in my “free” time that also generated well excess of those PM fees. Simply put, I can use my time more efficeny using GOOD property management (I have 4 different co.). That’s not to say it a free lunch, hands off situation, but I spend my time managing the business rather than paying phone tag with non-paying tenants (for example). Everybody siutation is different so do what works best for your situation.
thanks for your insight aak5454. I’ve definitely learned on this one. I’m talking to another management co. and I will surely ask them the questions you’ve outlined.
I’m committed to getting this situation straightened out. And I thank you all for your advice!
This is really uncanny as we closed on a 4-plex 2 weeks ago and inherited much the same situation as you have. Its coming up to the 1st of the month and I expect to have to come down hard on tenants.
The fact is tenants don’t suck. Some just act more like children needing a strict parent than others. They’ll push boundaries (read this as last day rent is due) to the limits unless they know the pain of over stepping the boundaries. Its up to you to demonstrate that pain. In the absence of pain, they won’t make your priorities their priorities.
The fact is that tenants will get away with whatever the previous property manager let them get away with. If you are strict on collecting rents on the 1st, it develops habits with the tenants. If the previous manager wasn’t strict, then you’ll have to pull some teeth to get the tenants to behave.
The fact is that you have to come down really hard on those that aren’t paying on time. Here’s what I would do… Evict one for non-payment of rent immediately. Then the others will get the message. If you don’t do this, they’ll think you are weak and you are going to be dealing with this every month until they leave or you go insane.
Also don’t get emotional about this at all. Just as important as studying the MLS listing and specs on the property you bought is to be able to recite the residential tenancy statutes in your area. You’ll spend a bit of time in court evicting tenants up front, which can be a really hard way to ‘go around the block’ with this, but once you have been through the process a couple of times, you’ll know the rules and you won’t fear evicting any tenants if they don’t play by the same rules.
And I’d advise you to be your own property manager if you can. If you think you have problems now, at least you can do something about it. If you sign up some sweet talking PM company who then don’t do squat to rent your places when they are vacant, don’t communicate to the tenants and don’t really offer anyone any service, you’ll have a worse situation on your hands than what you have inherited. It will get better - trust me. Just give it time, and a heavy hand.