Opening the Kimono: My Out-of-State REI Experience

Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes

Back in November (2014) I closed on my first REI property. A 'turnkey' duplex in Chicago. I went with a well-known turnkey provider and posted initial updates in this thread:

http://www.biggerpockets.com/forums/92/topics/1260...

There was a lot of interest and I had several BP folks approach me with questions and my experience with them, so I am dedicating this thread to my journey. Categorized under 'Success Stories' because I'm optimistic like that :)

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Joe Chin

Investor · Laguna Beach, CA · Member since 2014 · 30 posts · 20 votes

10y

Before I post my experience with Elite, I want to say that I've worked with a total of 4 operators. 3 turnkey and 1 broker/rehab/PM company in multiple states. So I have a good benchmark for level of service and product provided. I will only speak of Elite in this thread as I don't want to hijack Mike's thread. PM me if you're interested in the other companies.

My experience has pretty much mirrored Mike's experience so far. I have a 2 unit flat for a little over a year now. Both are rented to section 8 tenants. One tenant does not pay anything, the other one pays maybe 15%, the rest is covered by CHA. Rent has been received in a timely fashion, though it's hard to tell whether the tenant portion is consistently late as it seems like Elite posts the rent as being received on a set date even though I see late notices marked in the accounting software.

I had the same issue as OP in that there was no water meter installed. So the yearly bill came out to over $1600 which is definitely on the high side.

I will spell out the good first. Gut rehab (new electrical, plumbing, etc) and material is to a high rental standard - granite countertops, etc. No issues with getting rent so far.

Here's a few concening things that have cropped up recently. I received a notice in the mail regarding building violations with the condition of the porch and also deteriorating window sill/area?? and some other thing I can't recall. This was cited in Sept of last year - and I only heard about it about a week ago through the mail from the city of Chicago. There was a court hearing where Elite attended for resolution. I raised concern over this as I've had the property for less than a year and there were these issues. They said they would fix it at their cost as they were small things.

I recently was charged $902 for washer/dryer install that included a rodout/cleaning of catch basin. Ive been in conversation with PM over this as 1) I wasn't notified of this charge to get my approval, 2) why this process cost so much.

On these occasions, I've only found out through other means. PM never contacted me directly. One was the mailer and the other was seeing the charge in the accounting software. Communicating issues to me is poor at best. Though Alex and team is responsive once I do contact them. I should also mention that I've dealt with 3 different customer reps now in over a year. I think 2 are no longer there and one was promoted to manage the finance dept.

One thing I should mention about the purchase process. When I first bought the prop I had also reserved a few other props of Elite for purchasing when they were rehabbed. The timeline I was given was about 3-6 months out for completion. It's been over a year now and the reserved props have yet to be ready. According to Alex the delays have been due to the city requiring the pulling of permits for ever little thing or something to that effect. Now that might not be his fault, but it doesn't look good to have to continue pushing out a ready date for a client especially when the delay has been close to a year now. Due to the opportunity cost I told Alex that I will only purchase one more from him for the time being as there are other investments available to me. Interestingly he has never communicated to me with an updated ETA on these reserved props unless I specifically contacted him in regards.

Finally, my expectation is for the tenants to be in place by the time of closing. This is not the case. One unit was occupied at closing only. Another words I did not get rent for about another month after closing for Elite to find a tenant and go through the arduous CHA process. A true turnkey provider should have tenants in place or at least cover the rent until the time a tenant is placed. This has been my experience at other outfits. Full rent from day 1.

I've tried to be as objective as possible in my posting here. Hopefully this will help others in their decision making process.

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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
The property I purchased is a completely rehabbed duplex built in the early 1900s. The purchase price was $165,000. Unit 1 is a 2/1 and Unit 2 is a 3/1. Closing costs were roughly $5000. 25% down and the rest financed at 4.625% (30 yr fixed).
Unit 1 was occupied within a week of closing. Unit 2 was tenanted within 4 weeks.
Details:
Unit 1 - Section 8 - $161 (tenant portion) - $915 (85% subsidized)
Unit 2 - Section 8 - $1001 (100% subsidized)
------------------------------------------------------------
$2077 Gross Monthly Rent
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Costs Breakdown:
- Mortgage Payment: $872 /mo, which includes: Property Taxes: $168 /mo (est); Insurance: $67 /mo; Principal + Interest
- Management Fee (8%): $166 /mo
- Landscaping: $80 /mo
- Utilities: ??? - not sure yet as I haven't received a statement yet
1 Reply
Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
11y
So how has it been so far?
Podcast Guest on Show #132
Second City Real Estate4.821 Reviews
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Hi @Brie Schmidt ,
Hmm...if we go old school and base my experience with this turnkey provider, I'd say a "solid B". The two main complaints I have is the length it took to close on the deal (which they are working on) and communication. We signed a purchase contract back in late July 2014 with an anticipated close in 2 months.
The property management team does seem responsive to my emails and calls, which is very positive, but there have a been a couple instances where my emails are unanswered.
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
So far I've received the rents from November (Unit 1 partial month) and December (Unit 1 full, Unit 2 partial month). January rents from Section were received.
Unit 1, which has a $161 tenant portion rent, just got assessed a $25 late fee :( ... still waiting to see the $161+$25 show up. Reading previous posts on Section 8 tenants, these smaller 'tenant responsible' rents are some of the toughest to collect.
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
11y
Glad to hear it is going good so far. It seems like these section 8ers portion might be optional sort of speak. I have seen many evictions based on that smaller portion and I am not sure it is worth enforcement considering the down side of the whole vacancy and unoccupied property in section 8 land. IDK enough about the section 8 process and regs but I would not be looking to evict over $50 if that is what it comes too. This is what I have seen in the past and it seems like LLs would be better off just discounting in most cases.
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Joe Chin
Investor · Laguna Beach, CA · Member since 2014 · 30 posts · 20 votes
11y
Losing out on $116 a month represents 10% of your rent for that unit. I am not sure a good strategy is to write this off every month. This puts a dent in your returns for sure.
If this is the expectation with section 8 tenants, then you need to lower projections upfront.
Would like to hear other's experiences with this type of tenant base and how to mitigate these types of risk.
Michael, thanks for sharing your experience.
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Thanks for your insights fellas @Joe Chin @Matt R. .
I just checked my account and the tenant has paid their portion on January 3rd. Rent is considered late after the 5th of each month. My assumption is that the amount was not entered into the PM software in time and the late fee was assessed automatically. I'll check on this with the PM folks shortly.
From other Section 8 landlords, it seems like late payments are common, but still paid (both what's due and the fee). Section 8 folks have limited income obviously, and the vast majority do not want to lose their subsidy. Maybe they just need a few extra days to tap into their off-shore accounts ;)
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Jerry Padilla
Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
11y
@Michael L.
We have section 8 tenants too. In NYS we can threaten and possible cause them to lose their section 8 for failing to pay their rent on time. It is a risk you take though if they lose it and you get no income then. We have had previous tenants lose their section 8 after moving and failing to pay their last couple months portion of rent prior to moving out.
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Deeb Dweik
Elburn, IL · Member since 2014 · 5 posts · 0 votes
11y
Glad its going well. Keep us posted.
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
A small gift for me today. My insurance guys called me and asked about the occupancy status of the duplex. Since both units are occupied, so my premium is dropping about $60/yr.
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Received my second rent check this past week. Nothing major to report. Got a repair bill for one of the units ($38 in labor and $26 for parts) to fix a door and vent.
Hopefully this doesn't become a recurring thing, but we'll see.
1 Reply
Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Damn...one of my tenants is delinquent on their portion of the rent.
I just saw that they were served a collections letter by management. I'd hate to see someone get evicted, but I'm glad the PM is on top of it and going about this professionally. If it were me, I'd be too much of a softy and give more slack to my tenants. :/
1 Reply
Larry Fried
Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
11y
@Michael L.
Did the tenant come through with payment?
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
@Larry Fried ,
They did thankfully. I emailed the PM to get some clarification on what happened, but my guess is that the payment input was delayed because the late fee was reversed. I'll post an updated once I hear back from the PM. This is the second time this has happened.
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Larry Fried
Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
11y
@Michael L. I am glad to hear it.
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Quick update: Paying taxes to IL is a pain. For non-residents and first time filers with the state, no e-file :(
Next year should be better as they will accept e-file. Hate that state tax...
Anyone else out there doing their own taxes?
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Steve B.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
11y
unless this investment was located in Japan I feel deceived by the title of the post
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
Originally posted by @Steve B.:

unless this investment was located in Japan I feel deceived by the title of the post
sorry you feel that way...lol
TOP DEFINITION
open the kimono
A 1990's phrase that means that everyone should share data. There should be no secrets between those in the meeting. As in a Japanese wife showing her husband her naked body by opening her silk robe or kimono.
If we’re going to make any progress with this new standard, we’re going to make sure everyone agrees to open the kimono and not withhold any information.

http://www.urbandictionary.com/define.php?term=ope...
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
11y
I'm glad to hear you have only had minor hiccups, keep us updated please!
Podcast Guest on Show #132
Second City Real Estate4.821 Reviews
Website View Page
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Alisa O.
Investor · Buffalo, NY · Member since 2014 · 83 posts · 46 votes
11y
@Michael L

How is it going? Did the PM company access a penalty when they were not supposed? Did the tenants pay on time?
0 Reply
Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
It's been about 5 months now and I have no major qualms.
One of the tenants seems to be habitually late with their payment portion, which seems to happen with a few other investors I've spoke to. The rent is eventually collected, which is all I care about. At a certain point the PM is supposed to ask the tenant to have their Section portion increased if they cannot make the payments (for income issues).
Also the provider/PM has their new site up which looks nice:
http://www.eliteinvest.com/faq/property-management...
Their FAQ is pretty spot on from what I've heard/seen.
1 Reply
Jin Hwang
Tacoma, WA · Member since 2015 · 6 posts · 0 votes
11y
Michael any update?
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Tony Han
Torrance, CA · Member since 2015 · 54 posts · 8 votes
11y
1. @Michael L. Thanks for sharing your experience. I'm considering investing out of state and reading your experience is helpful. Please continue to provide updates.
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Michael L.
OP
Investor · East Bay, CA · Member since 2014 · 156 posts · 48 votes
11y
@Jin Hwang
@Tony Han
thanks for the reminder to update! Recent months have been uneventful for the most part. In June, there were some maintenance items that came up (tub leak, stove repair) that cost roughly $90 in parts and $75 in labor. Per the warranty, labor should be covered for 12 months and parts for 6 months. I emailed the PM to have them reverse the labor charges since I should be still under the labor warranty period. They responded quickly that they would, but I haven't seen the charges reversed yet. I'll have to email them again later today, because there were some more labor charges this month that came up as well.
This probably has been mentioned before, but PM's response to owners could use some improvement, but they seem to be responding fine with tenants.
This month, there was a $100 pest control expense and one of the my tenants hasn't paid her portion yet (she has been late most months).
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