Reflections on the 2nd year as a multifamily owner

[Ken P.]

How quickly time flies. Seemingly just a few months ago I posted an article with thoughts on the first year as the owner of a small block of 18 apartments we bought a little over 2 years ago (see link below if you’re interested), and now another year+ has gone by.

https://www.biggerpockets.com/forums/223/topics/149725-reflections-on-the-first-year-as-a-mf-owner?page=1#p1542150

In short, the 2nd year has gone *much* smoother than the first year. 2015 started out with a bang, as we had 3 units turn over in the first 3 1/2 months, all un-renovated units that needed to be completely updated, but since then we've had only one turnover and no lost rent. In fact, we only lost 2 months of rent out of 240 rent-months for the year for a lost rent rate of less than 1%, and this in a C class area. Late rent payments have dropped to 5%, and the late fees mean we are effectively at 100% of possible rent collections. We raised rent after the redo turnovers, and moved our lowest paying legacy tenants up closer to market rates (still below market because they are in un-renovated units), so in total our rent collections are up 21% from the previous landlord’s.

For those without the time or inclination to read the above posting, here is a brief history of our ownership. We bought 18 1 bedroom apartments at a condo complex from a tired landlord, someone who had a number of apartments and apartment buildings and simply didn’t have the systems and policies in place to be able to effectively manage so many units. When we took over, all the units were occupied, but we soon discovered that occupancy rate and positive cash flow are not necessarily related. After the first month we found out that timely rent payment was a problem for at least a third of the residents, payment was viewed as entirely optional by several, and we had at least 2 residents with serious drug problems. We were forced to quickly learn the ins and outs of the local court, evicting 5 residents, and starting the process in several other cases, prompting the tenants to leave.

Key lessons gleaned during the first year were:

1)To attract good tenants, you need to have attractive properties. The very first turnover provided that lesson, when we tried to put lipstick on a very tired unit (new appliances only) and leased to the first people that came along that would sign a lease. No sooner had they moved in than my phone began to ring with complaints from the neighbors, and communicating the problems and expected proper behavior to the new tenants was difficult because they barely spoke English. After that, we began completely renovating the units whenever there was a vacancy, and found that our now very attractive apartments had a line of people interested in renting, allowing us to select well-qualified tenants who were a good fit for the community.

2)Nothing is more important to maintaining your sanity as a MF landlord than selecting good tenants! Basically, we no longer receive phone calls from residents about the latest drama in their building, because there is no longer drama. The resident that complained because her neighbor’s pot smoking in the basement was causing smoke to get sucked into her apartment now doesn’t have a pot-smoking neighbor. Excuses about late rent have fallen dramatically as credit scores have risen (the previous landlord didn’t do credit reports or background checks)

Now more on the second year of ownership.  In the renovated units we've continued to land great new tenants that pay on time and respect the property, and existing tenants have been renewing their leases. Drama is way down, and I haven't had to go to court for an eviction in over a year. IMHO one of the biggest complements a tenant can pay a landlord is when a good tenant asks you if you have available units for a friend or family member. We now get those inquiries on a regular basis.

Not everything was roses in 2015 though. In a blow to our operation, our handyman, who had been instrumental in renovating units and handling tenant work orders, who had a lifetime of experience in the type of work we needed, was diagnosed with cancer in the spring and passed away a few months later. I was able to find a replacement, but the young man, while responsible and a pleasure to work with, doesn't have the experience and the same quality touch yet. Our other contractors (plumber, HVAC, painter, floor refinisher, etc.) continue to provide good service, and are what make running 22 apartments while working a full time engineering job at a major company possible. We remember them with gift certificates at Christmas to thank them for always being there for us.

We also remembered our tenants at Christmas with greeting cards and mugs, one of the small touches we’re trying to set our company apart from other landlords our residents may have experienced. We’ve been picking up those LED shop lights from Costco and plugging them into motion sensor sockets we’ve added above the laundry pairs in the basements, so tenants don’t have to flail in the dark for a pull chain while carrying a load of laundry. We put up door wreaths for the holidays, and sent newsletters several times during the year. After a close call with a failed furnace, we’ve purchased 10-year CO detectors for each unit even though they are not required by code. Most importantly, when our residents have a problem with something in their units, I get our contractors or handyman in ASAP to address the problem, or stop by myself if it is very minor.

Many investors tend to shy away from investing in condo communities, but so far my experience has been positive. The community is a mix of 2 & 3 bedroom townhouses and 52 of the one-bedroom apartments that we target, and the Board has been very appreciative of our ownership and management of our apartments. The 1 bedroom units are too cheap to be able to obtain a mortgage on, so there are few options for the existing owner occupants to dispose of their units, which means that our offers to purchase via land contract with 20% down and 4 – 6 year payment of the balance have been well received. In the fall we purchased a package of 3 more units at the complex from an investor, bringing the total to 22 units (we'd also bought a unit last December). When I was initially approached about buying the 3 units, during our first year of ownership, I was buried with work from renovations and tenant problems, and couldn't imagine taking on more. But with a stabilized situation, and 2 of the 3 new units already completely renovated, by insurance after a fire several years ago, we decided to seize the opportunity. We bought them on land contract, with 20% down and the balance over 6 years. The single unit we added in Dec 14 was also LC with 20% down, balance payable over 4 years (one year down, only three to go!).

The condo community suffered during the recession, but is now financially stable. Paradoxically it actually has a very strong balance sheet *because of* the recession, because the HOA was able to purchase 3 townhouses out of foreclosure during the recession for very little, renting them out, and could sell them whenever needed for community capital improvements. When another townhouse went into foreclosure last January, I lobbied the Board to purchase it and allow me to lead renovation and flipping it. The older members of the Board objected, but my plan prevailed, and after we sold it for the most a townhouse had sold for in years and were able to pocket ~$25k in tax-free profits for the HOA (HOAs are non-profits), even the Board members who had objected congratulated me and said it had been the right decision to buy and flip the property. The high sale price provides a high comp for other owner sales of their townhouses, and will keep landlords from buying any of the townhouses, as they do not cash flow at the new higher price levels.

Cash flow on our 22 apartments continues to be elusive, only about $500/mo total, but that is by plan. In addition to renovating the 3 units that turned over at the beginning of 2015, with renovation costs of ~$3000 each, we've installed new windows in a number of units, new central and through-the-wall A/C, some more new appliances, and we've completed kitchen floor replacements in all apartments. Our plan remains the same - to renovate the remaining 8 un-renovated units as they turn over, replace the remaining third of the refrigerators and stoves, continue down the triage list replacing windows, and replace HVAC systems with new as they fail. Common areas such as the hallways (carpeting) and basements (cleanliness and lighting) are the responsibility of the HOA, but also need attention, and as a member of the Board of Directors I can help make sure they get that. I was able to get security lighting installed behind all our buildings a few months back, and have agreement from the Board to pursue a security camera system. The city replaced one of the two main streets in the complex a few years ago, and we are lobbying for the other one to be replaced, as it has one of the highest densities of residents to street length in the city.

While substantial cash flow isn't due to kick in for another 2 to 3 years, equity buildup is accruing just through loan payback, to say nothing of any increase in equity through a much higher NOI driving the property valuation upward. Principal payment on short term (LCs and HELOC) and long term debt is over $3000/mo, and increasing monthly due to the short LC and HELOC terms. ROI exclusive of any appreciation is around 40% from CoC and principal repayment.

With the benefit of hindsight, what would I do differently in the past 2 years? The mistakes that stick out are primarily from the 1st year, especially renting a so-so unit to so-so tenants. Any problems I continue to have with late rent payments come from marginal-credit tenants that I should have avoided in the first place. Also, when we had evictions in the 1st year I should have always used the 30 day notice type of eviction (they have to leave no matter what) versus the "you pay you stay" eviction, which allowed a tenant to jerk me around.

Going forward, we have been approached by several more owner-occupants at the complex about purchasing their apartments, which we may do depending on the terms we can reach. However, I would be lying if I said managing 22 apartments plus our SFRs is a trivial task while working 50 hours a week, helping the kids with their homework and activities, having dates with my wife, being active in our church and neighborhood, etc., etc. I have begun hiring out some of the paperwork tasks, such as mailing monthly invoices, but at our small scale there is only so much that can be outsourced short of hiring a property management company. We need to decide if we are content to remain where we are at, managing up to 30 properties on our own, or whether taking our business to the next level is the better long-term plan. If we were to buy a larger apartment building in the metro area, professional property management is assumed as part of the business equation, and having a management company in place would allow us to transfer day-to-day management of our existing properties. We’ve started keeping our eyes open for value-add larger apartment complexes, and are fortunate to know and be able to learn from other local investors like Josh Stirling who are knocking it out of the park with apartment buildings.

If you've made it this far, thanks for reading, and good luck with your own MF investing!