Drowning in repairs, any advice would help

[Mann Phan]

Hello fellow BiggerPockets members,

I find myself in a bit of a bind with my real estate investments. Last year, I took an aggressive approach and purchased six rental properties in the Midwest, specifically in the Cleveland and Akron areas.

A year has passed, and two of these properties have significantly drained my cash flow due to extensive repairs. Recently, my property manager informed me that an HVAC unit needs to be replaced, which will cost $7,200.

At this point, I’m considering offloading some of the properties as the current situation seems untenable. I would greatly appreciate any advice on strategies to mitigate these issues and manage my investments more effectively.

Thank you in advance for your insights.

[John Clark]

Quote from @Mann Phan:

Hello fellow BiggerPockets members,

I find myself in a bit of a bind with my real estate investments. Last year, I took an aggressive approach and purchased six rental properties in the Midwest, specifically in the Cleveland and Akron areas.

A year has passed, and two of these properties have significantly drained my cash flow due to extensive repairs. Recently, my property manager informed me that an HVAC unit needs to be replaced, which will cost $7,200.

At this point, I’m considering offloading some of the properties as the current situation seems untenable. I would greatly appreciate any advice on strategies to mitigate these issues and manage my investments more effectively.

Thank you in advance for your insights.

How are you selecting properties? You are buying crap property, so your selection process is wrong.

You don’t tell us how much experience you have or where you are.

[Matthew Paul]

Once the HVAC unit is replaced , its done . Repairs are going to always be necessary , some will cost more than others . With 6 properties I would want a reserve of a minimum of $15K . Some years expenses will be low and others will be high . Just the nature of the business 

[Mann Phan]

Quote from @John Clark:

Quote from @Mann Phan:

Hello fellow BiggerPockets members,

I find myself in a bit of a bind with my real estate investments. Last year, I took an aggressive approach and purchased six rental properties in the Midwest, specifically in the Cleveland and Akron areas.

A year has passed, and two of these properties have significantly drained my cash flow due to extensive repairs. Recently, my property manager informed me that an HVAC unit needs to be replaced, which will cost $7,200.

At this point, I’m considering offloading some of the properties as the current situation seems untenable. I would greatly appreciate any advice on strategies to mitigate these issues and manage my investments more effectively.

Thank you in advance for your insights.

How are you selecting properties? You are buying crap property, so your selection process is wrong.

You don’t tell us how much experience you have or where you are.

 For this particular property, I was working with a team from Real Wealth,  this house was advertised as a "Turnkey" property, went through inspection and all the due diligence. But I've had nothing but issues with it ever since. I just had to redo the grading and dry lock all of the basement because of leaking from the rain now this HVAC issue. If I replace this HVAC I'm already 10k in repairs on this property alone.  It's only been 1 year! 

[Regina Blake]

Hi, yes with investing in real estate you are correct there may be a lot of expenses if it gets to the point that you are done because the expenses are draining you financially consider selling them. Or keep them and fix them up but, you are right it may be gamble because, everything may be fine after it is fixed, or it may be other expenses that come up. In real estate, you do not want to entertain a money train or issues and no profit. But, overall, you will never know until you cross those lines. If you have any other questions, reach out anytime!  Best Wishes!

[John Clark]

Who did the inspection? Someone selected buy the seller? HELLO!?!? Can you say “conflict of interest?” There, I knew you could.


Never sign anything or buy anything until you have physically inspected it yourself, and checked out the neighborhood, and (sez me) live in the area. Then you have an independent inspector inspect. Don’t skimp on the inspector— pay the price of a good one, they ain’t cheap.


why? Because you can afford a house, you can’t afford a surprise.

[Alecia Loveless]

@Mann Phan This is precisely why I decided to only invest locally.

I take my contractor with me to view all the properties I am considering then if I put it under contract I have an inspection. My inspector is so thorough many of the area Realtors won’t recommend him because his inspection reports scare off many buyers.

This is precisely what I want. I want the most thorough inspection report I can get.

On my first property we were planning a cosmetic flip based on the inspection report with a mediocre inspector and unfortunately once we got into it I spent close to $60,000 rewiring and making many mechanical and physical upgrades. I learned my lesson quickly.

If you think you can’t stop the losses then the best thing to do is sell and find a better property.

[Andrew Weiner]

If you aren't local I would suggest coming in and doing an in person inspection of your properties.  You will be able to understand the real condition and how many more big repairs may be coming your way (or not).  Also depending on the price that you got the properties plus your investment you may be in a positive equity situation that you can take the money out in the future.  

The challenge in the older home markets is that every one of the homes has some deferred maintenance, its just a question of how much.  I have seen it before where someone fixes everything and then out of frustration passes it along to the next guy who can then go years without any major repairs.  Its very tough, if not impossible, to know if you are exiting right before you get to the light at the end of the tunnel.

[Samuel Diouf]

If it was a bad deal you bought. I would unload before it becomes more costly. 

[Henry T.]

Not really enough info here.  I'd say sell them. Then find yourself a rental/inspector guru that knows what constitutes a winner rental property based on your capabilities. You have to be able to see a property and know the faults and positives, if you can't find someone who can.

Regrading and HVAC is really not a big deal. Its done and solved.  Btw, immediate cash flow on a new purchase is not an easy thing. You're lucky if you're cash flowing on day one.

[Michael Smythe]

@Mann Phan why did you buy TurnKey without some type of warranty?

Who's your PMC? How many bids did they share with you?
-$7200 to replace an HVAC unit is pretty steep! What's included?
---We can get a new furnace & AC unit for less!
---Maybe this is a boiler?

This is why we caution novice investors about buying TurnKey properties. Most are rehabbed with paperclips and duct tape, so everything lasts through the typical 90-day Warranty (if a warranty is even given!):(

Who referred the PMC? Guessing the TurnKey company? 
-They are probably marking everything waaaay up and laughing about how much you're agreeing to pay.

[Mann Phan]

Apologies, this was my first post so bear with me adding all the details, I do have a home warranty. I was part of this REI group called Real Wealth, on this site they have vetted REI teams in diffrent GEOS, definitely learning REI with some hard knocks, but I'm not going to stop. I have not agreed to anything yet which is why I'm posting on BP for guidance.

[Jonathan Bui]

Quote from @Mann Phan:

Quote from @John Clark:

Quote from @Mann Phan:

Hello fellow BiggerPockets members,

I find myself in a bit of a bind with my real estate investments. Last year, I took an aggressive approach and purchased six rental properties in the Midwest, specifically in the Cleveland and Akron areas.

A year has passed, and two of these properties have significantly drained my cash flow due to extensive repairs. Recently, my property manager informed me that an HVAC unit needs to be replaced, which will cost $7,200.

At this point, I’m considering offloading some of the properties as the current situation seems untenable. I would greatly appreciate any advice on strategies to mitigate these issues and manage my investments more effectively.

Thank you in advance for your insights.

How are you selecting properties? You are buying crap property, so your selection process is wrong.

You don’t tell us how much experience you have or where you are.

 For this particular property, I was working with a team from Real Wealth,  this house was advertised as a "Turnkey" property, went through inspection and all the due diligence. But I've had nothing but issues with it ever since. I just had to redo the grading and dry lock all of the basement because of leaking from the rain now this HVAC issue. If I replace this HVAC I'm already 10k in repairs on this property alone.  It's only been 1 year! 

 Did you vet the properties thoroughly yourself as well? 

[Mann Phan]

Best as I could, Im located in California. 

[Stetson Oates]

Hello,

Sorry for the issues you are having.  I will say for HVAC units,  sometimes it depends on the contractor you are using.  I've had contractors come to my properties and tell me I need an entire new system at a cost of $6,000.  At that point I remembered I had a home warranty policy.  I placed a claim, and the tech came and replaced a capacitor for $75. I got the tech's contact information and used him on all properties. He ended up being a fantastic contact for me.

[Theresa Harris]

You said you went through a turnkey place, but did you actually inspect them yourself or did you rely on the inspector they picked?  I'm going to guess they are also managing the place and are taking you for a ride-they either sold you something that wasn't turnkey or they are bilking you for repairs.

I'd go and tour the properties yourself, hire your own inspector to go through and do an inspection and then get repairs done or sell if you don't want to deal with it and get rid of the PM (assuming they are connected with the turnkey company you bought from).  Do not let them sell it for you, get your own realtor. They've made enough money off of you.

[Henry Lazerow]

I see this all the time on here. Truth is low grade properties are not profitable unless you self manage and get work done for below market rates. I own some so know first hand. For my realtor clients I always recommend class A- to B- 4 units, these actually cashflow without being heavily hands on. 

[Jeff Schemmel]

if you haven't already, do a Capital Expense/Deferred Maintenance analysis of all six properties.  This will help you understand if you've weathered the storm, or if it's just starting.

Walk the properties, and look at all the major stuff... here's a quick list, below, to get you started.  From there, form an estimated replacement cost, and write down the estimated remaining life left.  Then, separate that list into urgent (need to replace now), 3-5 years life left, and 10+ years remaining.  From there, it's already too late for the urgent stuff, and you'll need to chalk that up to a hard lesson learned about due diligence up front; trying to sell a property with urgent deferred maintenance is most likely going to punish you.  the property with the most 3-5 year stuff should be on your short list to sell now if you're cash-strapped and you can at least cut your loss without having to inject more cash.  Anything with mostly 10+ years of life remaining you can probably feel good about.  

Of course, you can't protect yourself completely, but this will also help you prepare for buying the next properties a little better, and it's an exercise I generally do when I'm on a showing for a property I'm serious about so that I'm factoring this into my analysis to some degree in a "capex" reserve.

Capital Expense

Roof

Water Heater x2

All Appliances

Driveway/Parking Lot

Boiler x2

Flooring

Plumbing

Windows

Paint

Cabinets/Counters

Structure (foundation, framing)

Components (garage door, etc.)

[Jassem A.]

Sell them on land contracts

[Mann Phan]

Thank you all for the advice, truly appreciate everyone taking the time to respond. So my PM just sent me a message and said there are no other options besides replacing the unit. If anyone has a solid HVAC person out in Cleveland ohio, specifically in Garfield Heights, please have them contact me on BP. Have a great weekend my fellow investors! 

[Jeremiah Dunakin]

It seems most want to beat you up, and show thier knowledge and flex about not getting property management not vetting ………

None of that matters now. You own the properties. Will you be able to build back up reserves betweeen all six properties? Not sure the cash flow but are you able to withstand this short term cash drain? Are you taking a profit from any of them? If so an idea would to not take any money out and throw every bit of cash flow into a repair account.While it may be stressful short term will these places make money in near future. Can u financially support these places if another repair comes up till reserves are met.that is what I would ask myself. Am I able to weather this short term storm, or is it to much and have to scale back?

[Janet Chan gomez]

That first year after buying the property, if you are "truly cash flowing" I would place that aside for any capEx that arise. It is hard to cash flow the first year because many times like other people have mentioned above, properties are repaired to look nice or to pass inspections (point of sales)but it may not reflect the true nature of the property. If you got the extra cash to repair HVAC I would invest in that, if you are on a tight budget maybe ask someone to lend you some money. You got this Mann! 

I am also an investor looking into Cleveland and Akron. Let me know if I can be of help. 

[Alfath Ahmed]

Quote from @Mann Phan:

Hello fellow BiggerPockets members,

I find myself in a bit of a bind with my real estate investments. Last year, I took an aggressive approach and purchased six rental properties in the Midwest, specifically in the Cleveland and Akron areas.

A year has passed, and two of these properties have significantly drained my cash flow due to extensive repairs. Recently, my property manager informed me that an HVAC unit needs to be replaced, which will cost $7,200.

At this point, I’m considering offloading some of the properties as the current situation seems untenable. I would greatly appreciate any advice on strategies to mitigate these issues and manage my investments more effectively.

Thank you in advance for your insights.

 You might have scaled too fast without really understanding the area since the prices are so low. With Cleveland, you want to understand where you are investing. You can off-load the properties. 

I would rent them out with strong cashflow before selling and make all the necessary updates and have your agent pull detailed comps to see what you can actually get out of the property.

[Alan F.]

IMHO REI is all about performance and accountability, I'd get out to Ohio ASAP and make things right.

There are no problems, only opportunities for solutions. 

[Marcus Auerbach]

You are not the first one going through this. You bought 60 to 100 year-old properties primarily for cash flow and now you feel your investment is not working because you are forced to re-invest some of your cash flow back into the properties.

Here is the thing: they are your assets and you can make them better and more valuable. You can not do that with many other assets like stocks or gold. they are what they are. Real estate you can paint, rehab, improve.. 

The short-term view is you lose money. 

Take a more long-term view, what happens when you continue to reinvest your cash flow and make your assets better? They are worth more, you attract better tenants who pay more rent and treat the properties better.

We replace 3 or 4 driveways every year. We invest in the Milwaukee suburbs and most of these driveways are 60-70 years old, which is a good life for a concrete driveway. Can you still use it with cracks? Sure. How about lots of cracks and with weeds growing out? Trip hazards? At some point it's time for a new driveway. And the property gets an instant curb appeal boost as well.

So yeah, you'll need a new HVAC. Buy quality and you should be okay for the next 25+ years. BTW, for $7200 it better be a good one. Google HVAC direct

[Jimmy Lieu]

Quote from @Mann Phan:

Hello fellow BiggerPockets members,

I find myself in a bit of a bind with my real estate investments. Last year, I took an aggressive approach and purchased six rental properties in the Midwest, specifically in the Cleveland and Akron areas.

A year has passed, and two of these properties have significantly drained my cash flow due to extensive repairs. Recently, my property manager informed me that an HVAC unit needs to be replaced, which will cost $7,200.

At this point, I’m considering offloading some of the properties as the current situation seems untenable. I would greatly appreciate any advice on strategies to mitigate these issues and manage my investments more effectively.

Thank you in advance for your insights.

Hi Mann, did you make sure to budget for maintenance and capex when it comes to analyzing these rental properties? I do believe you may have scaled up way too quickly. Before purchasing these rentals, did you make sure you had a healthy amount of reserves for repairs needed as well? I will let you know that real estate is all about holding properties so yes, right now, definitely a rough stretch but if you hold all of your properties, in 10 years, you'll be absolutely solid. Additionally it may be the cities you have invested in as well. I would recommend taking a look at the Columbus Ohio market - there's a lot of great BRRRR and flip opportunities here! Happy to connect and answer any questions you may have.