When to Throw in the Towel?

Question

I purchased 2 turnkey properties through Memphis Invest (now REI Nation) in 2019.  Everything was going well with both until about a year ago.  For one home, the tenant went bankrupt in mid-2020 and stopped paying rent entirely.  This dragged on for many months until the tenant voluntarily left in early 2021.  Of course, none of that is the fault of REI Nation, given the unique circumstances of 2020.  And that kind of thing happens from time to time.

Soon after, REI Nation placed in a new tenant to a 2-year lease.  But now, only 4 months into a 2-year lease, the tenant has not paid their rent for August, made promises of payment, and have failed to follow through to this point.  So just 4 months after one nightmare scenario ended, another one seems to be beginning.  At this point, I don't know what the cause is.  REI Nation is the gold standard, so I would like to think its not some flaw in the tenant screening process (and the other property is performing very well, and I have nothing but positive things to say about REI Nation).  But regardless of the cause, I'm starting to question whether this is something I should continue with.

I'm only 34, so there is a long time to dig out of the hole. But on the other hand, I have the option of simply selling the property and taking advantage of the great price appreciation that occurred over the past year (I bought for $156,900, and the estimates on Zillow, Trulia, Redfin, etc. say the value is getting close to $200k, though I take those with a grain of salt). What would you do in this scenario?

James Wise · Answer

Couple thoughts.

• Non payment happens. End of story. There isn't any investor who's going to buy rentals and never deal with this stuff. If that's not something you want to deal with that's understandable but it's part of this business. So if it causes you to want to exit the business then I'd say exiting the business is the right move for you.
• When considering your exit price you have to take into account your situation. The price you see on Zillow is likely the price of a vacant move in ready home. This ain't what you've got my man. You've got a tenant occupied house. Worse still, you've got a tenant occupied house with a non paying tenant. So if you were to exit right now with your current situation it's likely you'd have to sell it for less than what you paid for it. If you want to maximize your exit you'll want to remove the dead beat first.

David Katz · Answer

Just wanted to give a quick update here.  It ended up being a fluke coincidence that was sorted out in a positive way.   Glad I didn't make any hasty, rash decisions.  As always, REI Nation was great with communication, kept me fully in the loop, took my concerns seriously, and made sure that everything in their control was taken care of.

Lynnette E. · Answer

Ask REI Nation to consider putting in a Section 8 renter next.  Then the government will be paying at least part of the rent.

Don't throw in the towel, just know that you are loosing the rent, but not the house.  Real Estate has 2 parts--the equity of the property and the income.  So you are killing it on one end.  You just need to get the other end together, and Section 8 may be your best bet in that area.

And...only do  1 year leases unless the renter is excellent in all ways -- income, references, stability, cleanliness, etc.!

Travis Frenchak · Answer

I don’t even do one year leases much less a two year. Especially the way things are right now.

Matt M. · Answer

@David Katz

Why in the world, at this time with covid, would a PM offer a 2 year lease?

Account Closed · Answer

In the best ownership time in history and the best rents with rents going up quickly, if you aren't happy with your investment now, when will you be?

Things will go south at some point and it may go south in a very hard way. Are you really in it for the long run when the losses mount up?

Chris Clothier · Answer

I can answer that one Matt.  We only offer a 2-year lease unless there is some extraordinary circumstance and in that instance we are going to ask for a slightly higher rental amount for a shorter term.  On 98% of those leases there is a bump between year one and year two and in the final six months of the lease we will begin discussions on a lease extension.  Out of our 7,000 property portfolio, less than 13% of our homes will experience a vacancy in 2021. Assuming the data holds steady through the 4th quarter as it has for three straight years, this will be the third year where less than 15% of the properties we manage will experience a vacancy.  With that type of performance, only 1 out of every 10 investors will experience a vacancy in their portfolio in 2021.  So, the average length of occupancy is just over 6 years on one of properties right now with nearly every property experiencing a rise in rental rate, even modest rises, year over year.  Lastly, because of this consistency, we have successfully collected over 97% of billed rent since April 2020 when Covid started.  Good properties coupled with really good customer service for the resident can absolutely lead to longer occupancy periods for the owner with fewer headaches.  Great customer service for the owners can lower their headaches as well.  Thats why we only offer 2-year leases.

Dean Harris · Answer

@David Katz

It might be the product you are buying. I never suggest for investors to buy a Turnkey product and I own a portfolio of rentals (37) and I dont buy Turnkey. The exit strategy is limited and often times the property rents for more initially due to the recent renovations but then you have a hard time getting the same rent later. This isn't in every case but Turnkey investing gives all the "meat" to the property source. The person selling you those Turnkey properties might not own any rentals themselves and that makes it really hard for them to have that "Investor to Investor" conversation with you later when this type thing comes up.

Location of your property is also something to consider. Lots of Turnkey providers are going into areas they would never have sold in because the inventory is running low for them in the more desirable areas. So, the tenant base in that area might be the problem. I have a free zip code break down from my weekly podcast that I can share with you if that would help you.

My suggestion would be to learn more about the vetting process your property manager uses. They should be able to share that with you. Then, take a look at your property source and see if they own over 20 rentals. That will give them the experience to share the market with you. Then ask them where their properties are located and how/strategy they bought them. You will find out who is just "selling" you something versus helping you build generational wealth and self sustaining business.

Best of luck and I am happy to answer any questions based on my own investing experiences in Memphis.

David Katz · Answer

Thanks for all the input.  I think I just really needed a gut check to stop me from being hasty.  I'm in this for the long-run, but sometimes its hard not to knee-jerk react to short-term issues, especially when they arise in quick succession.  Something like this was bound to happen, even twice.  You just would never expect it to happen twice immediately at the beginning.  But I think I just need to remain calm and keep my focus on the long-term.

And to the extent it wasn't clear from the above, none of this is REI Nation's fault.  It was just a streak of bad luck.  And if anything, its a comfort having them in my corner when facing something like this.

Andrew Coulter · Answer

@David Katz thanks for posting. As someone that is very actively looking into exactly what you are doing, it is good to hear real life examples, good and bad. I would be curious how your talk with REI nation goes. I agree regardless of who’s fault that is a lot of missed rent very early in your journey. Hopefully this is a fluke and things will begin to turnaround for you.

When to Throw in the Towel?

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