How to turn a great property into a disaster property

Question

In 2014 we looked at buying a 70 unit apartment building in north GA. It was our first "out of area" property in almost 5 years. (We had sworn never to do an "out of area" property again after failing miserably in St. Louis), but the returns looked AMAZING. So we decided to go for it.

The property was operated by a mom and pop operator, who had taken great care of the property, but had allowed most of the residents to pay minimal rent. Analyzing the numbers, rents were almost 20% below market!

Most of the buildings had seen upgrades in the last 2 years, with new roofs, new siding etc. The units were also being upgraded (albeit at a very slow pace).

So, as you can imagine I was super excited to find a deal where we could not only improve management, but also increase rents and not have to spend a ton of money to on CAPEX and repositioning.

Well, that's what I thought anyway. Until we bought the property and installed a "friend" of ours to manage the property.

What looked like an amazing deal soon turned out to be a complete mess. Residents started leaving the property, expenses started to climb, and rents were not increasing. They were falling!

YIKES!!!!!! Our amazing property was turning into a disaster.

When I investigated what was happening at the property I quickly noticed that the property manager never spent more than a couple of hours there each week(!!). I also saw that she was busy hiring her family members to do work at the property (Trust me when I say that friends and family DO NOT match with running a great business/property).

Having learned from previous experience I knew that I had to take action. I sent the property manager a letter outlining exactly what was not working, and what I expected of her. I also included a timeline that outlined by when certain things had to be resolved.

Part of me was hoping it would all be resolved. The deadlines passed and no work was being done (literally!).

I ended up firing the manager and bringing on someone new. This time though I made sure to have the following in place:

1 A Clear business plan outlining everything from rent increases, to property improvements and how to manage our residents and keeping them happy. The business plan helps you paint a clear picture of what you want to achieve, and communicates this to the people on your team so they know too!

2. A budget (you won’t believe how many people operate their properties without a proper budget! even BIG management companies). I spent a week working with the new manager on our budget, and made sure that she had plenty of say in how it turned out. That way I have a document showing what she is promising me in terms of performance, and that I can hold her accountable for.

I hate micromanagement (don't you?). It kills people’s engagement and motivation if you constantly question their decisions, and tell them what to do (and you end up spending more time managing the people, than the results).

The best way to manage people is to hold them accountable for doing what they say they will do. Monitor the bottom line, and have the property manager tell you what actions they will take to meet or exceed budget. Then follow up and make sure it happens. (I use a calendar and put in everything there with reminders). I also offer to brainstorm new ideas if they are stuck.

If you see the property consistently underperform it is time to dig deeper. Is the property manager really doing what they say they will do? If they are taking action, is it sufficient to have the property perform per the budget? If the answers are not adding up, it is time to make changes.

3. Weekly property review meetings. We go through all the most important numbers (collections, net leases, renewals and service requests). I look at What is working/What is not working, and ask for the property manager's input on what we can do better to make sure we keep on meeting or exceeding our budget numbers. (People LOVE when their ideas/suggestions are implemented and they can see the results from their ideas!!)

4. Quarterly (monthly) visits to the property. I am sorry, but you cannot successfully manage properties from your office. YOU HAVE TO BE THERE! Walk units, talk to residents, and drive the area. There is nothing that will ever substitute property visits. This goes from smaller properties managed in-house to larger properties managed by 3rd party management companies.

5. Celebration Plan!  If you have a record month celebrate, if you exceed occupancy celebrate, if you get more than projected renewals celebrate, if you collect all the rents celebrate. AND pay people for their contribution.

6. Poor Performance Emergency Plan! Don't wait. It will not turn around! My gut check is always to ask if I trust this person. If I don’t, I make changes immediately. It is to the best for all parties.

After making the changes the new manager has helped us increase the value of the property by over 40%. That is 40% in just 12 months. That’s the difference a great manager and a great system can do for your property.

Did I miss anything? What do you do to prevent a great property from being a terrible property? Let me know if the comments field.

C

Joel Owens · Answer

Some people just don't know what they are getting into.

I get calls from people with a 4 million inheritance that simply have never owned any real estate. In their minds they think something is a can't lose proposition but then after we talk their eyes are opened to the reality of a particular asset class.

Those C to D areas you have to go in with the mindset that you might lose it all. If you do not you are kidding yourself in those areas. I have some friends that are amazingly talented owning and running C type properties but they are local to the product. It is still a challenge for them to keep everything performing.

I focus on higher quality A to B area's these days. Neglected product in a NICE area you can turn around and do well. In a marginal to bad area it just gets trashed again. Those tenants tend to have plenty of life issues many with GED or not graduating high school. They have legacy issues and until they break those chains and turn their lives around they will continue to have high drama lives and live hard in those units. Those tenants tend to work multiple jobs and scratch and claw just to get by. With no savings any little blip of reduced hours and loss of income and they are toast. This creates higher turnover in the units from the instability of the core tenant base available in that quality of area and market.

If someone has 10 million and they throw 1 million at a C to D property. If it does well they could make 500k upside but if not they could lose 500k of the million they put in or more. With 9 million left with multiple higher quality assets owned and great areas throwing off cash flow with rent growth and cap compression they could be fine and regain that lost 500k in no time.

If someone has 2 million net worth and dumping 1 million into this asset class they are really asking for problems.

Jay Hinrichs · Answer

@Christian Brodin not sure what class this was  IE ABCDE..

however 2 friends of mine in Portland both decided ( against my advice) to buy deals that were to good to pass up.. One in Memphis the other in Oklahoma city.

The memphis was C trending to D... they lost 500k and felt they were lucky numerous managers all of them stealing from them.. flying there once a month.. crime through the roof etc etc

The other bought a 330 unit in Oklahoma city.. she sold her prime 75 unit in ORegon that was a 6 cap to get this great 8 to 10 cap... well it almost broke her... theiving managers collusion with contractors.. She has to move and live there for almost 4 years the time it took to turn the place around she ran it herself..  finally sold last year .. bought a nice little 20 unit in PDX and a Condo in Maui  !!!

these were classic cases of chasing yield into unfamiliar territory and tenant demographics..

I am glad you turned yours around ... Others on the West coast should take a good long time for due diligence and be wary that turning low end apartments around is a pretty tough job..  At least from what I have seen.. there is a reason they are in the condition they are in.

Christian Brodin · Answer

William. Here are my two cents on how to "find" great people!

I know you had asked about where I found my best property manager, and while I will let you know in just a little bit I wanted to use the opportunity to talk about that it is a myth that we ‘find' great people.

Why do I say it is a myth? Because in my experience most people (99%) are committed to doing a great job, and come to work that way. So why do so many end up with so many “poor performers” or “bad team members"?

You get what you tolerate!

It might sound like a cliche, but it really is what makes the biggest difference in creating a great property management team. If you tolerate poor performance either from yourself or from your team members that is exactly what you will get. Unfortunately we as a society have come to fear holding ourselves and others responsible to a higher standard. Then we sit quietly and tolerate that things are not working, or not working as well as we would like them to.

In my opinion it is when we do not treat people as high performers, and do not hold them and ourselves accountable for doing our 100% best, we fail as leaders. Just think about it. Most great sports men and women weren’t born great (ok, maybe 1% have the right DNA). Most of them rose to excellence because they had great coaches and leaders that expected the best from them, and held them accountable to a higher standard!

So It is a myth that we “find" great people.  Great people show up when we treat them as great people. That goes for ourselves too!

Now to answer your question. How did we find our rock star property manager? It was actually very simple.

She was an introduction from a seller we were working with. It was his wife!

In conclusion: Great people are everywhere. Once you start treating them as such you will see.

Hold people accountable for being great, and they will either rise to the occasion, or they will let you know that they can’t do it.

I hope I answered your question.

Jay Hinrichs · Answer

@Christian Brodin  I hear ya on the cheap Memphis Multi's I don't think I have seen a city with more boarded up fairly new 40 to 100 unit complex's  and you just know some west coast group is going to make yet another run at them... sink a bunch of money into them only to have them basically be cannibalized by the tenant base there... Its rough man.

I know one investment group in Indy that does pretty good in this asset class.. but they basically run it like military outfit... Armed security 24/ 7  etc etc.. Us West coast softee's we just don't know what we don't know first timed out.. and its an expensive lesson.

Elizabeth Colegrove · Answer

I have found that I do best operating in A and B areas and than I hold my tenants feet to the fire. I truly agree with everything everyone has said. There is no such thing as great tenants out of the gate. It is how you train them and you expectations. In my experience if you let people get away with murder they will. If you have reasonable laid out expectation and hold their feet to the fire, they will perform.

Christian Brodin · Answer

Totally. See people as giants and hold them accountable for being their best (including ourselves). It is amazing what happens with performance!

C

Joe Fairless · Answer

@Christian Brodinlove your conclusion insight. It's basically the Pygmalian Effect which is something I certainly believe in.

Christian Brodin · Answer

Joel, Its all about your strategy and how committed your are to making it succeed. It will take blood, sweat and tears, but some people do this very successfully. Personally I am moving away from C assets and locations.

Christian Brodin · Answer

Hi William. Absolutely. Ill make sure that my next post includes how we found and hired Lisa. She is awesome!

William Allen · Answer

@Christian Brodin

Great story in the end and I'm glad you turned it around.

How did you find the second manager you used? I would be interested in hearing the story of the search and hiring if you're willing to share. I think a lot of us could benefit from that.

How to turn a great property into a disaster property

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