Advice on multifamily vacancy

[Matthew C.]

We bought our first rental property, a duplex in Portsmouth, VA, in what we assessed was a C neighborhood in March 2023. It is also a long distance rental property. There currently appears to be a flow of investors still buying and renovating properties in this area, which seems encouraging. We bought it for 189k and the units were renting for $850 and $950. Both units were filled at the time of purchase, but both had to be evicted a few months later due to failure to pay rent. We had planned on eventually redoing the kitchens and floors in both units once we turned over new tenants, but the evictions accelerated that process. We did major renovations and repairs on both units for about 40k total and were able to get rents up to $1250. The property could likely sell for close to what we put in, about $230k, based on other properties in the area in similar condition. We then had about 6 months in one unit until that tenant had to be evicted. The other unit went about 4 months until they had to be evicted. We were able to fill one unit again, but the other has been vacant since mid September (over 3 months). We have had full occupancy for only 3 out of 20 months of ownership. Some of those vacant months though were due to the renovations. Our property manager has said Portsmouth is a difficult area and we are going through a slow time now. Our manager's credit score requirement is 550, but even that has been hard to satisfy. Our manager has tried outsourcing filling the unit to a realtor agent with agent incentives but that has not produced any results in the last month. I asked our manager about reducing the rent but he said we are asking a fair amount and we are getting lots of interest but a lot of cancellations, no shows, or people who don't follow through with applying or don't meet minimum credit score. We were offering $300 off first month and just recently increased the incentive to 50% off first month. I suggested waiving the entire first month but our manager suggested we wait to see what happens with 50% off first. I do believe we have a good property manager and the photos and description of the listing are well done, so not sure what else to do at this point. I am reluctant to sell because all we need to do is fill the 2nd unit and we will be cash flowing about $800 a month. We told our manager we are open to Section 8, but have not had any interest there yet either. The activity of investors still buying and renovating properties in this area seems encouraging, but I am not sure how much luck others are having finding tenants. This is an area heavy in house hacker investors so they still have to find at least one tenant for a duplex. Lesson learned is to pay more to get into a nicer area (B neighborhood) with more reliable tenants to avoid the vacancy risks, but again, if we can just get the 2nd unit filled we will finally have stable cash flow. Any advice as to how to get the unit rented is much appreciated.

[Matthew Paul]

This is the worst time of year to find a tenant .  And when you said the management company takes a 550 credit score , all I see in your future are evictions .   We have a 650 minimum , but prefer 700 

[Matthew C.]

Thank you for the feedback. Our manager originally had a limit of 600 to 650, but had no prospects. What do you suggest when there are little to no tenants in this area of town that meet this criteria?

[Alecia Loveless]

@Matthew C. I wouldn’t lower your credit score requirement or you’re going to end up needing to evict again and having turnover expenses.

The problem appears to be the overall location. Even with the renovated units it does not appear that there are enough prospective tenants to make this worth your while.

Is this a highly populated area, are there lots of jobs, are people moving to the area or is the population declining?

In the areas I’m in appropriately priced units rent very quickly to qualified renters. This is regardless of whether the unit has been renovated or not.

If the problem persists you might consider selling and looking for a better area.

[Patti Robertson]

Hampton Roads landlord & PM here. This is a tough time of year to find a tenant, especially in a low income neighborhood where military doesn’t want to rent. Essentially the only people who CHOOSE to move in the winter months are getting evicted from other people’s houses. I would say you have a screening issue of your first batch of tenants had to be evicted. Rather than use credit score as a criteria, I reject for consumer accounts in collections and unpaid civil judgments. The judgments have to be looked up manually, because screening software only looks for unlawful detainers and the Virginia court records don’t feed consistently accurate to the other programs. I rely on SEC 8 for these neighborhoods in the winter months. They will be your most reliable tenant. I also think $1250 is too high for a 2 bed/1 bath in PTown. Feel free to send me the address if you want specific feedback on the location. 

[Joshua Christensen]

@Matthew C. this is definitely a dilema and I'm sorry to hear you're having these challenges.  the good news is that you're in the middle of a "masters" level education at this point.

@Patti Robertson had some great points.  Winter is tough in a lot of areas.  

As I read your post, the reoccurring theme that came up was a screening problem.  Lowering your standards invites expensive evictions and repairs.  That's not the answer.  

Section 8 provides consistent pay and the tenants have to uphold the standard put forth by SECTION 8 to maintain their voucher.  In our area, the housing authority does annual inspections to (mostly making sure the landlord is keeping up the units) review the tenant and the landlord.  It provides an opportunity to see what's happening in the units.

You still have the ability to evict for lease violations, but your less likely to face non-payment issues.  Most of these folks don't want to lose their voucher.

Additional issue, when rent is too high, it slows down leasing.  When rent is too low it speeds up the leasing.   You cannot change the area or the demographics of the area, so you have to pull the levers that community "needs" / "wants".  Spending on expensive upgrades is not the answer to improve your tenant base in this type of area.

Keep the homes habitable, clean, and safe.  Don't spend a lot on improvements as they tend to get damaged with every tenant.  

Have you heard of Exchangers?  They are a national organization that promotes all kinds of creative real estate deals.  You may see if you have one in your area that you could trade your property into something nicer.  Sounds crazy, but these things do happen.  

Happy New Year!

[Drew Sygit]

@Matthew C. several thoughts:

1) Appears you have a Class C or D property.
-- Thus, you can expect to get Class C or D tenants, which have a 15-25% probability of defaulting on their lease payments.

2) If your PMC is lowering FICO to 550, what are they doing to improve their screening in other areas?
-- We focus on verifying 2-year work history and verifying rent payments with last 2 landlords (unless in same property for 5+ years).

3) MoveIn Specials: be careful with offering "free rent" as will just attract tenants with no cash.
-- Try free TV or something else worth 25-50% of one month of rent.
-- Or, what we do is offer the free rent AFTER & ONLY if they pay their first 3 months of rent on time to earn it.

4) Lower the rent 5% every 2-4 weeks until activity picks up.

5) Understand this is the worst time of year to find tenants.
-- Starts picking back up end of February when this tenant pool starts getting their income tax refunds and aren't broke anymore.

6) Section 8: where is the property being advertised? GoSection8.com?
-- How many and which websites is it on overall?
---- Google your property address to find out!

[Matthew C.]

Thank you for all of the insights. Agree, we do not want to lower our credit requirements. We will pursue the Section 8 route more aggressively if we still can’t fill the unit by February. Agree that we should not be spending a lot on renovations or repairs, but almost everything needed replacements/updates after we turned over the original tenants. Our manager also helped and encouraged us to limit our repairs/spending based on the area we are in and the type of property.

[Matthew C.]

Thanks for all of that feedback! Our manager looks at employment, rental history. No prior evictions, no felonies. Also looks into specific reasons for the lower FICO score if we are willing to make an exception. We are listed on many sites - Zillow, Trulia, HotPads, Apartments.com, Realtor.com, ForRentUniversity.com, Redfin, Rent.com, showmetherent.com. At the bottom of our listing on showmetherent.com there is a link for section 8 application. That was the only place I could find us regarding section 8. I’ll talk to my manager about this. Thank you again!

[Matthew Drouin]

@Matthew C. sounds like you bought in a low demand neighborhood.  But I can see your dilemma, it looks ( at face value) that the area is starting to gentrify.  And you don’t want to sell after going through all that trouble and miss opportunity.

Here’s my take.  Check with some of the people that commented here about the specific location.  “Is this really in the path of progress?”  Urban areas can definitely be tough to gauge from a google maps search because environments are street by street, block by block.  One area can show great signs but literally cross the railroad tracks and it’s a different world.

Be aware of these types of physical delineation.

If you are getting no demand from qualified applicants then I would say it’s not in a margin of a gentrifying neighborhood.  Qualified applicants that get priced out of rapidly improving neighborhoods will move into these areas but it seems like they aren’t biting.

High quality, lower income applicants aren’t stupid and they won’t settle.

If you think this area is a losing proposition, I would think about selling and not banking on hope.

In regard to vacancy, I don’t consider any area that has average occupancy (economic and physical) below 95%

You might pay more for a better area but time will treat you right and you’ll make a ton of money in equity over the long term.

[Matthew C.]

@Matthew Drouin, thank you for the advice. We will probably give it a few more months and then reassess.