I will share my experience with you owning 5 class D duplexes in the Midwest! This is my experience and this experience has taught me a lot. I hope you find this post helpful.
If you live on the West coast like me where small 900 sqft homes go for $500K, a duplex for $20K in the Midwest that generates $1100-1300 a month in rent sounds very lucrative!
I paid $100K for 5 duplexes (package deal) thinking I would have higher returns than my class B SFH rentals.
I bought these sight unseen!!! Huge mistake. I flew to Milwaukee, met with a broker who was recommended by a BP member. His company was a do it all, broker and PM. We looked at many properties and wasn't ready to pull the trigger then.
For the next few months, he sent me properties, we made offers and wan't able to secure any deals. Then he called me one day saying he's got a great deal that he thinks I should move on fast! 5 duplexes for $100K, 2 of them fully occupied and 3 needed repairs and If I put about $20K into the repairs, it would be the deal of the century!
I trusted him and didn't fly out to look at the buildings. Closed on them and sent $11K to start the repairs. I was told the repairs were complete and units were listed for rent which I verified online! they were listed and the third building was now fully occupied. The last two building sat on the market for months.
The most stupid thing ever was not buying insurance on these properties!!!! The premium was $4K a year and I thought after they start cash flowing, I'll buy insurance!
Then one day my phone rings at 5 am! It's the Milwaukee fire department! There was fire in one of the buildings! Then the police department calls, then the tenant calls stating that she had been requesting repairs of an electric socket in the living-room and the PM never came out to repair. The tenant have been taken to a shelter and the PM was nowhere to be found! I called the PM and told them I'd be flying out the next day to meet with the broker! I got on the plane and showed up in their office the next day! The broker didn't show up to the meeting! One of their repair crew agreed to take me to my properties!
The vacant buildings were full of trash!!! mice running around! No repairs done!!!!! The crew member didn't speak English but kept shaking his head! The building with the fire incident was condemned by the city! We returned to their office and I raised hell and wouldn't leave without getting all my $11K back, which I did!
I tried suing the PM for mis-management, but after a PI looked into their entity, I was told I would lose more money in the legal battle since all his assets were owned by family members. He also had a long history of cocaine trafficking and all sorts of scams he'd served time for ...
Demoing the building, fire department fees, city fees cost me $15K and yes I insured the rest of the buildings.
I went through 6 PMs in 4 yrs
PM # 2, another scammer! I paid for new water heaters and then the plumber calls me directly saying these are used heater! This was month 2! I got scammed out of $4K and I fired them! I knew a local investor who had 300+ units was using them, so I called him and told him about the scam and to watch out!
PM # 3, honest, but not good! kept dropping the ball on things constantly and finally decided he didn't want to be a PM and referred me to another PM.
PM#4, The local investor I mentioned in PM#2 texts me one morning, The PM is gone and didn't deposit $100K worth of rents collected the previous month! Police is involved now!
We got on the phone and chatted, he decided to do his own PM and take on my properties too. He did turn things around and the properties started cash flowing monthly, but I was so deep in the red zone at this point that even the cash flowing, I never recouped!
He decided to sell his properties since I believe he didn't recoup either after the PM scam!
PM # 5 honest, but difficult to work with. Always behind on statements and deposits also high fees.
Now on the tenant side!
These class D buildings are usually occupied by the worst tenants! Don't get me wrong, you may get lucky and get good tenants, but just the location and quality of the buildings attract the worst of the worst!
Most of them have eviction history and if you wait for a tenant with good history, your units will be vacant for a long time!
This happened more than once
- tenant pays deposit and first month's rent, move in. Then call the city on you! The inspector does a walk in and sends you a four page violation of things in the basement, attic, chimney, etc that are out of code. remind you that these buildings were built in the 1920's some of these items have been out of code for decades! The tenant stops paying rent. It takes 2 months for the PM to pull permits, fix things. You can't evict while you have violations open. Then you serve them a 30 day notice after the violation has been closed. Then they jam stuff in the furnace and claim they don't have heat. the HVAC guy finds foreign object in the furnace and knows the tenant is doing it. They show up to court claiming they forgot their documents, set another court date. they no show. by the time PM shows up with the sheriff to evict, they are gone, but have kicked holes in the walls, kitchen cabinets broken, doors missing, etc ...
The cycle repeats itself. tenant floods the unit upon moving out when evicted!
Dog poop everywhere, pest problems, water damage, missing window screens, missing toilets, cracked bath tubs, the list goes on and on ....
when you are at your lowest and want to sell, local investors will offer you $5-10K but now you are $30K in the red.
I finally sold the units. I made up lost money! technically I didn't loose $$$. as if I put my $100K in a safe!
But if I would have bought just one grade B SFH for $100K, I would have made $$$$, appreciation, etc
I paid $100K, I walked away with $125K (I was $25K in the red) and a world of knowledge about what not to do!!!!
Sorry about the long post! If you are out of state investor, think twice about buying class D buildings!
