REI Newbie and (desperately) need some help with my OOS LTR

[Cheryl S.]

Hi everyone, 

RE Investing Rookie here, and I have been in a very tough situation lately that I really need some advices. I purchased my first OOS and Turnkey investment in South Euclid, OH last year and things have never been easy with this investment. Tenants have been late in rent every month and owed a few months' rents plus (a huge) utilities bills (my PM discovered this later in the year) during their stay. Their lease was up in July this year but refused to move out and we had to file an eviction so that we can collect the missing rent payments and the past due utility bills. Then in late Aug, my PM found a note stick to the door only to find out the tenants moved out already without any notices, and my PM suggested me to file a claim in Court in order to collect all the money that the tenants owed. Long story short, my PM cleaned and had the unit ready for marketing around mid-Sept but until today the unit is still vacant. When we discussed the rent in Sept my PM suggested that we would go higher with the rental amount at the beginning and we can adjust down the price in 2 weeks if traffic /inquires are low. I trusted their expertise and agreed with the process. I was then on an out-of-country trip for a month and half, and when we came back home at the end of Oct,  I learned that my unit was still on the market with the high rent amount from the initial listing. Apparently my PM never adj. the rent amount after 2 weeks and just let my property sitting on the market without doing anything to try to promote the rent. Ever since I am back home, I have tried to work with my PM actively  to lower the rent, and promote the listing, however, we had no luck to find a potential candidate due to the snow falls in the area and holidays.  I had to lower the rent amount (even lower than the previous rental from the turnkey provider) to attract more tenants. But the property has been on the market for more than 2 months, and I feel I've already lost the best time to market the rent and will have to continue lowering the rent. I am really concerned at this time, and feel that my PM has dropped ball in marketing the property - 1) to initiate the rent too high in the beginning and 2) to not follow up, make adj. accordingly, and promote the rent timely when inquires were low in the first couple of week or marketing.  The other side of me, I blame on myself and think that I should've had been more active in managing my PM during my out of country trip. I have a questions or options and can experienced RE investors help me in this tough situation: 

Regardless the option below, I plan to travel to OH and check out the property in person before the first week of Dec. I know I don't want to rely on others (i.e. PM) heavily in managing the property going forward,  but I don't know what would be the best option in my current situation. 

1. Find a new PM in the market - I've tried to talk to a couple of PM in the area and will try to call a few more after Thanksgivings. My concern here is that the transition to a new PM won't be smooth due to the current pending/ongoing lawsuit. How to best handle the transition? Even with a new PM, given the upcoming holidays, I am afraid that we possibly won't find a tenants until after the holidays (in Jan), or I have to lower the rent more which I really don't want to.  What if the new PM fails to perform and manage the property again - so many bad stories about PM I heard online / or on this forum. 

2. Keep the current PM and give them another try. -- I somehow don't trust them anymore because the previous tenants they screened and found.  The tenants ended up not paying rent and owed a lot utility bills that I probably have to cover for them eventually. 

3. Take over the property and start to manage and screen the tenants myself. Is anyone familiar with the City of South Euclid regulations on rental property? I read through the city website, and seems like for an outside investor like myself, we need to designate an agent to assume and take on all the non-compliance responsibilities. In that case, should I work with a local realtor who can also help show the property to potential tenants and manage other small things around the property while I am away? I do plan to travel to the property twice a year if I self-manage. Any thoughts on this?

4. My PM mentioned that she would also list my rental on travel nurse site for unfurnished LTR but it would mean my tenants won't stay at the property for more than 18 months, which I really don't mind. However, I learned this week that she never posted it on the nurse site to promote the marketing. But this had me think that if it would be feasible to convert my rental to mid-term rental, and I can furnish my home and rent it out to travel nurses. But this could be a risky option as well because I would need some cash up front to furnish the house and the demand is uncertain as well. 

Thank you so much for your advice, and have a great Thanksgivings everyone! 

Cheryl 

[Leo R.]

@Cheryl S.  based on your description, I'm guessing your property is C class or lower, in a C or lower area?

I assume it's a C or lower property because tenants in B and A properties/areas rarely behave the way you describe.

If it is C or lower, the problem is probably the property, not the PM!

Most investors--especially inexperienced investors--should NEVER try to do a C or lower OOS property. Why? Because a C or lower property is usually at the absolute bottom of a PM's priority list, and there is almost no financial incentive for a PM to put in the considerable amount of work required to successfully manage a C or lower property. 

It's different if it's a large multifamily complex that pays the PM a lot of money, but assuming it's just a single house or small multifam, the considerable amount of effort to manage it is not worth the relatively low amount of money the PM is making from the property--and that's why your PM is ineffective. More importantly, if it's a C or lower property, it's doubtful that ANY PM will put in the significant amount of effort needed to successfully manage this property (unless you pay them accordingly).

Think about it from the PM's point of view: would you put in effort to manage the SERIOUS problems of a C or D class property (e.g.; deadbeat and unruly tenants, vacancy, non-payment, crime, property destruction, etc.) for a few hundred (or even a few thousand) a month?  ...personally, I wouldn't take on those types of problems for ANY amount of money; life is too short, and I can make money through much easier channels. Because of this, any PM with any skill will quickly begin focusing on B's and A's, and will avoid the C's and D's like the plague (unless they're being paid very, very, very well for their time).

If the property is C or lower, I'd be more concerned about getting rid of the property than getting rid of the PM.

Unfortunately, this is a somewhat common trap that inexperienced OOS investors fall into (and it's the thing that gives OOS investing a bad name).  All too often, inexperienced investors are lured in by the incredible cashflow opportunities of C and D properties, not realizing that many C's and D's aren't worth the hassle and expenses they produce--regardless of the cashflow. 

Here's a thread of another inexperienced OOS investor with similar (arguably even worse) problems at a C or lower property--I'd suggest reading this thread, as it provides some solid suggestions:

https://www.biggerpockets.com/...

On the bright side, there's a LOT you can learn from this type of situation (a lot of the lessons are outlined in that thread), and if you take the time to learn those lessons, it can make you a better, more effective investor. 

In theory, it could be possible to rehab the property and turn it into a B or A--which ***might** make it less of a headache, and therefore a higher priority for a PM... but, that depends on a lot of factors--for instance, how much the PM's income would increase as a result. Also, if the property is in a C or lower area, rehabbing it might be a complete waste of time and money (you can change the property, but you can't change the neighborhood).

Try not to let it make you too discouraged--all RE investors experience big problems like this eventually; it's almost an inevitable part of RE investing. I've gone through similarly major RE problems myself. Persevering and overcoming these types of problems is what separates successful investors from those who give up and never succeed.

Good luck out there!