Need advice on deals gone bad

[Gaurav Nandola]

I am newbie and I was motivated to invest and acquire a number of properties to create a portfolio.

I took the plunge this year and bought 2 duplexes in Columbus, Ohio. However, in my enthusiasm, I made several rookie mistakes. 

First, my deal analysis was showing a cash flow of 5-6%, which was low, but I thought it would be good for a start. 
Secondly, I trusted my realtor too much and didn't verify all the information about the neighborhood, expenses, vacancy rates, etc
Third, I assumed that rents would go up.

Now, after owning the place for 6 months, I find a lot of pain points
1. The deal is not turning out how I thought. I knew about some repairs, but the operating expenses seem much more that I budgeted.
2. Recently, 2 of the tenants moved out and I found that I had to lower my rents by $100-150 per unit per the new comps in the area, eating further in to cash flow
3. One of the tenants hasn't paid rent for past 4 months. While the property management team managed to get some support from a non-profit, the funds are yet to arrive.

I also thought it would be more of a passive investment since I hired property management. However, I am constantly replying to their emails and following up.

Anyways, given what has happened, and since interest rates are on the rise, I was thinking a few options.

1. Sell one or both duplexes and take a small loss due to commissions, etc. Maybe now is the time to get out, before the market corrects significantly.
2. Grind my teeth and hold on to these properties. Since RE Investment are long term investments, wait a few years to see if things improve. But right now they seem to be like money pits.

Appreciate your thoughts on this.

Regards,

GN

[Drew Sygit]

@Gaurav Nandola how well do you actually understand what you bought?

Many OOS investors set themselves up for failure because they don't truly take the time to understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

So, make sure you understand what these properties are and if they meet your investing goals.

Regarding the PMC contacting you all the time, would you rather they make all the decisions on spending YOUR money?

You may want to tabulate these emails you reference to determine which ones you want to give your PMC the authority to handle without contacting you. Just be careful of giving up too much control which may lead to higher losses.