Columbus OH 40-unit turnaround: opinions needed

[Jonathan West]

Hello BiggerPockets community.  Thanks in advance for your time.

I’m looking for some expert advice as my wife and I navigate the turnaround of a 20-duplex (40 door) Class C Columbus neighborhood. We’ve been struggling with occupancy and the expense of getting units turned: we bought the property at 83% occupancy (7 vacants, none rent-ready) but now, five months later, we’re currently sitting at 72% occupancy (11 vacant or being evicted; 8 not rent-ready) with only four units turned and with tenants placed.  Note that we have a property management company managing this and are out-of-state investors.

Here’s where we need some outside advice. Your opinions on our experiences for the following would be super-helpful:

1. The units were badly abused by prior management, but the property management company is spending around $8k per door in getting units rent-ready. This roughly breaks down to $2k for painting, $2k for purchase of Allure flooring, $2k for install of Allure flooring, and $2k for everything else (fixing holes in walls, rehabbing bathrooms, etc).

2. Units are only getting rent-ready 1-2x per month. This feels slow to us, but we expect is a function of a) the growth trajectory of the property manager’s business; b) the materiality of the unit rehabs

3. Only four new tenants have been found in the five months we’ve owned the property. This has sped up, with two being placed in December, but the pre-December lull alarms us given how hot Columbus is

4. We’re at a crossroads. The (quite material) reserve fund we’d set aside to support this property’s turnaround is nearly exhausted. Do we slow down unit turns to let this self-fund or do we plow ahead and sink another $50k or $100k or $200k into our operating budget to turn units and risk leaving them vacant? (Note: the turned units are bringing in an extra $100/month in rent, which is +$12k in value at a 10-cap. The challenge, of course, is that the units need to be filled and the value is tied up in equity and not cash in our pockets).

To be clear, the property managers have done a fantastic job with the other aspects of property management: maintenance requests (and there have been a lot) have been responded to promptly, data is readily available, we’re able to jump on the phones often. But this is our first RE experience so we’d love the outside perspective on some of these more troubling aspects.

[Marc C.]

How involved are you in managing the PM? Does your PM manage several buildings in the area, or just yours? Do they have a lot of multifamily experience? Do they OWN competing buildings?

Do you view their ads for your property? Where, BESIDES CRAIGS LIST, do they advertise? How are their photos of the property in their listings? Did they "stage" one of the renovated units with rented furniture for some photos?

What's their rating on Yelp and Google? How does it compare to their competitors?

When you call and act like a prospective tenant, how do they treat you...do they try to get you over to the property THAT DAY and hook you? Do they follow up with you a couple days later? Do they respond the same way they were contacted: If by text, then by text. If phone, a callback. If email, then an email? Do they have a web site for your property, with sample floor plans and tons of pictures? Updated Facebook page? Do they allow applicants to fill out applications online with a mobile device? Pay rent online with a mobile device?

Have you visited the competing properties? Do you review tenant applications? Do you set the tenant screening standards, and how do they compare with those for competing properties? Are your security deposits higher than your competitors?

Are they sending you regular photos of the common areas? Is there garbage blowing around? Is the landscaping kept up? Is the "curb appeal" at least as good as your competitors? Is your parking lot in good shape?

Do you keep close track of when each unit goes vacant and when it gets filled? How often are you on the phone with the PM, asking them, "Have you shown Unit 7 this week? Did they have the open house last weekend? Did the new water heater get put into Unit 9? I looked at Mrs. Johnson's application and it seems like she would be ideal for Unit 12. What happened with her?"

No, a PM will not like micromanaging. But "The squeaky wheel gets the grease." If most PMs were worth a darn, they wouldn't need micromanaging, but yours does.

Why not see if you can find a local, someone here on BP perhaps, to be your eyes and ears? Maybe you can find someone (Realtor, handyman) who, for a small fee, will help you with local aspects: Meet contractors at the property, inspect the contractor's work, take regular photos of all common areas (and contractor's work), note vacancies, note garbage/landscaping issues, etc. Even if that service cost you $250/mo., it beats air fare and hotel for going out there yourself.

You could also see if you could find a local partner who would buy into your deal and be an active owner while you shift into passive mode.

Finally: Why not consider selling? We're at the peak of the market. Maybe now is the time to get out of this one and try something closer to home, or in a stronger market, or perhaps a Class B neighborhood. Or perhaps diversify by investing in multiple buildings in different regions as a passive investor via the crowdfunding sites. You are not a passive investor now, but if you thought you were going to be one by owning 40 units a long ways from home and just turning your worries over to a PM, then, by now you've realized that isn't possible. Owning multifamily by yourself takes an ACTIVE owner. And it's riskier than owning little pieces of multiple properties around the country.

Lots of things to consider! But maybe for the next week or 10 days, put it on the back burner and concentrate on having a good holiday instead. There will be plenty of time to worry in 2017.