Welcome back to another edition of The Rookie Real Estate Blog! We are currently getting settled over here in Japan so I apologize in advance for a bit of jetlag-induced stream of consciousness as well as the delay in posting this.
In the last post, we talked about 5 more reasons to invest in Multifamily properties and I hope you realized the awesome potential of apartment buildings! While I love talking about all of the great aspects of real estate investing, I wanted to shift back to our Carver Triplex and break into the “Problems” post to look at some additional issues we have run into.
Looking back, we had reviewed some red flags we found in the inspection, how we found partners, and how we ultimately brought the whole deal together…so here’s where it gets exciting. After closing, we thought the major issues were over and we could start cashflowing immediately like we had planned. Boy, were we wrong. Since this is such a dense topic, I broke up the issues into several categories including: Tenants, Property/Maintenance and Crime. Below I will discuss some of the early tenant issues we’ve had and in succeeding posts you’ll find the other two issues. We were amazed at how quickly these problems stacked up, so sit back and enjoy the ride!
When we first put Carver under contract, we were so confident that we could fill the vacant quickly that we put out the “For Rent” before we had even closed. Who doesn’t want to move into a newly remodeled place? While we had anticipated filling the units in only a few weeks, it ended up taking nearly 3 months!! You may be thinking that the reason we couldn’t find tenants was lack of interest but, in fact, it was the complete opposite! We had a hundred calls a week for showings and applications but the issue we kept running into was the quality of the applicants. We were unpleasantly surprised to find that so many of the potential tenants did not meet the baseline qualifications to even apply. We set our standard at income as 3 times the rent, no evictions or judgments and a credit score of at least 600. The fact that so many of our potential applicants did not meet these criteria was just another in about a dozen red flags so far.
After a while, we did get a few people who at least met the baseline qualifications who scheduled times to view the place with our property manager. This being our first tenant placement, I was surprised at the level of flakiness among the potential tenants. Our PM would schedule showings a few times a week and only a handful of the 30 individuals who called and scheduled a time actually showed up. You would think that given the level of interest in the property more people would honor their commitments, but it really goes to show the mindset difference between tenant bases. Finally after a few weeks, we found our first tenant who met our tenant screening requirements and she moved in right away.
Our second tenant seemed like a nice enough guy initially, but he quickly turned out to be a nightmare. Right after he moved in, he reported there were mice in his unit. Easy enough… We called the pest control company and they came out right away. One problem solved. Then his window didn’t work properly. Again, we think “easy enough”! However, when our window guy went over for an estimate the tenant wouldn’t let him to see it. One week goes by, then two weeks go by and we are still trying to schedule an estimate. Initially, we gave the benefit of the doubt. Sometimes there are scheduling conflicts, we get it. No big deal. During this time though, the first of the month rolls around and no rent. By the 5th of the month though, we still had not received a rent payment. After reaching out to the tenant, it turns out he is refusing to pay because we are taking too long to fix his window… Okay then… He also is refusing to switch over electricity to his name, so his electricity bills are getting sent to us. If this guy wanted to play hard ball, we would give him hardball: we notified him that we would be turning off the power. This game of “chicken” went on for about two months until we decided to begin the eviction process.
I will break here from the story to say that when you find a property management company that is all inclusive in their services (leasing, advertising, evictions, court costs, etc), hold on to them! Our PMs have been worth their weight in gold so far and they make our lives so much simpler. In the case of this eviction, I literally didn’t have to do anything for except tell my PM to evict the tenant. They handled the filing, court fees, appearing in court and all the lovely interactions with the tenant throughout the process. This saved me from a ton of stress and time spent mediating the situation which in turn is probably really good for my marriage. But now, back to the story!
It turns out the tenant’s girlfriend had a baby the same week as the court date, which I suppose helped them focus on their priorities (such as keeping a roof over their heads). Sure enough the money was “found” and all overdue rent was completely paid off the day of eviction court. Since then, the only communications we have had are with the girlfriend. As a result, we have had no profanity filled voicemails or nastygrams and our interactions have been much more productive. The rent is paid on time every month and so far, so good…
Lesson learned: you’re running a business and the lease is a legal contract between you and your tenant. According to one of our more seasoned property managers, there are people who will go from apartment to apartment, act appropriately for the first month or two, and then weave intricate stories to try and stay longer. At the end of the day, if a tenant doesn’t hold up their end of the contract, don’t play chicken with them. Hold them accountable for any rent, damages, etc. that they are contractually responsible for. Your life will be a lot easier and your business won’t suffer.
Thanks for tuning in for this edition of Rookie Real Estate! Come back in two weeks for our next post. We are going to do our utmost to actually get it posted on January 2 and get back to our every-other-Thursday schedule.