November 5, 2023

JF3349: How to Anticipate and Deal with Surprise Vacancies | Bonus Operations ft. Slocomb Reed




Bonus Operations is a series hosted by apartment owner/operator and Best Ever Show host, Slocomb Reed. In each five- to ten-minute episode, Slocomb provides his top takes for executing your business plan and maintaining cash flow.

In this episode, Slocomb Reed discusses the crucial signs that property owners and real estate investors should be aware of during the due diligence period when acquiring new apartment buildings. Reed shares 12 red flags that may indicate tenants are likely to vacate soon after the transition in ownership or management. These flags include late rent payments, a lack of concern for property maintenance, sparse furniture in units, intentional damage, subletting without permission, vacant apartments listed on the rent roll, unauthorized pets, and more.

Reed also delves into the significance of non-English speaking tenants within migrant communities and how their relationships with landlords can impact occupancy.

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Slocomb Reed:
If tenants tell you that they're leaving informally outside of delivered written notice, which of course you're going to take seriously that they are considering moving on and project that those apartments are likely to become vacancies.

Welcome to the Best Ever Show, the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the puffy stuff.

Slocomb Reed:
Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I'm Slocum Reed and today we are delivering a Best Ever Operations show. In these episodes, I give you our top tips and best ever advice on apartment operations to take into your own portfolio or to discuss with your property manager, in particular in this case, things you need to be thinking about during your due diligence period on a new acquisition. This is 12 red flags that tenants will disappear as soon as you take over.

These are red flags that you should be looking for during your due diligence period, which should of course include document review, rent roll leases, ledger balances, and also a walk through with your own eyeballs or someone in your team's eyeballs getting on every single apartment in every single common area and other space. Number one comes from the tenant ledger and it is either frequent late rent payments or current unpaid balances. Chances are you have a value-add business plan and those are things that you're not going to abide by. So you should be looking at those as tenants who are likely to vacate when the proper payment of on-time rents is going to be enforced. The next several red flags come from your walkthrough of the property and all of the units. Here are some things you should be looking for.

The vast majority of them I would not expect to come from a property inspectors inspection report because they're not necessarily about the physical condition of the property with regards to mechanical services and the structure of the buildings. It's more about tenant behavior and upcoming tenant behavior and indicators that these tenants are planning to leave soon. Red flag number two is a lack of concern for property maintenance.

If you can see that the current ownership, current management, and current tenant base are not taking care of the property, it is likely that they are not planning to live there very long. Most tenants in situations like that where maintenance concerns are going unresolved for a long time are in the process of finding someplace to live where they will feel more respected and have a home that is safer and more suitable for them.

Number three, a big one that you need to see for yourself or at least have someone report to you is a lack of furniture in an apartment. If you have someone who is paying rent and is responsive and you have a lease on paper, but there isn't very much furniture, if any furniture inside the apartment, that is a person living a fairly transient lifestyle for one reason or another. People who don't have furniture don't on aggregate last very long in any one place that they live. So you should expect that they will leave sometime soon. That's a tenant that you're going to have to replace. It's an apartment you're going to have to fill. Number four is intentional damage to the apartment. And I don't necessarily mean that your tenant made a concerted effort to damage the place where they live. And I've seen this in some places in Cincinnati, things like fist shaped holes in the wall or other things that look like damage that was caused by the tenants directly, chances are that is a behavior that you're going to want to notate and a behavior that you are not going to tolerate when you take over that property or your manager takes over that property and it is much more likely that you will have to change the tenant than that you will be able to change the tenant's behavior. So look out for tenant caused or intentional damage to the apartments.

Number five is subletting without permission or when it appears that the apartment is occupied by someone who is not the tenant on the lease. There are several examples of this that I don't have time to go into, but if it appears that the apartment is occupied, however not by the person on the lease, it is much more likely that tenant or that occupant is not going to work out for a long period of time. It's also possible that the tenant on paper is a person related to the occupant who is capable of being approved for an apartment and the occupant is not. So the tenant was helping a friend or family member by getting them a place to live that they wouldn't otherwise qualify for, meaning that you have a tenant who is not qualified to live or you have an occupant that is not qualified to live in your space and it is likely that you are going to want them to vacate soon. Number six is apartments that are vacant in person but rented on the rent roll.

Chances are the documentation that you'll be receiving will be old and not intentionally out of date or fraudulently incorrect, but it is quite possible that there will be apartments where the documentation you're looking at asserts that there is someone living there and current on rent and then you show up and the place is empty. Be sure to make a note of that because that is an apartment that you're going to have to fill and likely an apartment you're going to have to renovate or at least clean up before you get it filled. Number seven is pets in a no pets building. This often happens when operators or managers are not doing their due diligence not only on their tenants but on the properties themselves or are not enforcing their policies. Personally as an apartment operator I am pro pet with pet rent. I believe that on the whole you will see higher income, meaning higher NOIs for accepting pens and having your tenants paying increased rent or paying pet fees for them, not an increased deposit that gets returned to the tenant, but an increased revenue source for you. But it has also been my experience that when you have an inherited tenant who is accustomed to getting away with not paying for their pet, especially when it's a pet that they know that they were violating their lease in having on the premises.

Those tenants are not likely to withstand the rent increase or the fees that you are going to want to impose. Some of them will, some of them won't, which is why it is a red flag that you may have a surprise vacancy as soon as you take over.

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Slocomb Reed:
Number eight is Furniture by the Dumpster. Some of you have heard me expound on dumpsters for an entire episode of this operations show. Furniture by the Dumpster is a very likely indicator that someone has recently moved out, whether or not they notified the landlord. There have been times early on when I've taken over management of a property or taken over ownership of a property and we've showed up and had a lack of communication with a tenant or had disagreeable communication with the tenant and then within a week we found the vast majority of the furniture by the dumpster. It's a quick indicator that someone has moved out.

Now for the last four red flags, hopefully these are things that you can figure out during your due diligence period or before you take over management, but they may not happen until after you've taken over management of a property because in large they involve communication or correspondence with the tenant base. So if you have the opportunity to do that during due diligence, great, but if not, you should be reaching out to every tenant of course the moment you take over a property.

And these are things you should be looking for. Number nine is bad contact info. Speaking from experience, when the phone numbers we are given for tenants are invalid and their email addresses bounce when we send them emails, those are tenants who, if they are actually still in the property, are not going to be there for very long. Number 10, and I say this with some reservation, bestsever listeners, I've attempted to say this for the podcast recording a few times now.

From a purely analytical perspective, this is a valid point to make, though I do not like making it. Inherited tenants who do not speak English are very likely to vacate as soon as you take over management of an apartment building. I say this because the vast majority of non-English speaking tenants are migrants. This is not a...based on the legality of their being in the United States or how it is that they came to be here. But within migrant communities in the United States, especially with my experience in the greater Cincinnati Metro, they place a much higher value on relationship and trust than those of us who can very easily navigate the market, the economy and life in the United States in general as English speakers. Non-English speaking tenants are much more likely to have had a personal relationship with a landlord or a property manager prior to your taking over. And as soon as that personal relationship with their landlord is gone, it is highly likely that they will seek out a different landlord or property manager within their sphere who they know that they can trust because they've been vetted within their community. And if that's not you, they're very likely to leave. Again, this isn't about making a judgment call about such tenants. This is about understanding their behaviors with regards to how it affects your occupancy and your vacancy when taking over an apartment building. Red flag number 11, the tenants tell you that they're leaving.

You'd be surprised how often Tenants will very openly complain about the property where they live and the emotional baggage of months or sometimes years of not being listened to, not having their maintenance requests responded to, feeling disregarded or disrespected by previous management is often too much to bear for a tenant who is experiencing you as a new manager, but not ready to expect that you will treat them any better than previous managers had. If tenants tell you that they're leaving informally outside of delivered written notice, which of course you're going to take seriously, take seriously that they are considering moving on and project that those apartments are likely to become vacant soon. And the last red flag, number 12. Listen to tenants concerns about their neighbors. Just listen. It is not appropriate to act on everything that someone has to say about their neighbors. And this is much more of a subjective than objective observation. It may be more about what comes to your gut than what comes to your brain.

But if you start to see a pattern form and that pattern appears to you to be legitimate, then it is very likely that you have a tenant in this property that is either going to disappear or that you are going to ask to leave through terminating their lease. And there you have it, 12 red flags that tenants will disappear as soon as you take over. I hope this adds value to you, especially those of you who are getting ready to implement value add business plans and are projecting the number of units that you're going to have to turn in year one or years one and two.

Thank you best ever listeners for tuning in. Assuming we have added value with this episode, please do subscribe to our show. Leave us a five star review. Share this episode with a friend. You know, we can invite you through this conversation. Thank you. Have a best ever day.

Hi, best ever listeners. Joe Fairless here again. And one last thing before you go, would you like to receive a short weekly email with proven tips from experienced investors, free tools and resources, and a roundup of the week's most relevant news and best ever content? Well, if so, join the community of nearly 15,000 commercial real estate passive and active investors who receive the Best Ever newsletter. Just go to forward slash access and you'll get the very next one. I hope you enjoyed this episode and as always, thank you for listening and have a best ever day.

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