Just like you, I didn't begin my career as a successful real estate investor. I have people like Robert and the Rich Dad team to thank for opening my eyes more fully to the immense wealth-building potential that real estate investing affords. Well before I began investing in real estate, I made my living by managing other people's assets. In the process, I've built some of the largest and most well-known property management companies in the southwestern United States.
In the course of managing more than 20,000 apartment units, I saw firsthand how poor property management can cause untold damage to a property's value and to the net worth of an investor.
I still remember the day when John called me at my office. John was part of a group of investors in Colorado who had purchased a multifamily property in Phoenix, Arizona, and he was in a bit of a panic.
"What can I do for you, John?" I said over the phone.
"I think we have a bit of a problem with one of our properties," was his response. "I was wondering if you could help us out with our operations."
As it turned out, John had more than a just a little problem. His company's property was literally in shambles. What brought them to this point was a series of mistakes that, in the course of my career as a property manager, I've seen over and over again.
John's first problem was that his group purchased a large multifamily building with very little research, which is commonly called due diligence, and they had little knowledge of the local real estate market since they were based in Colorado.
John and his partner's second problem was that they decided to be cheap. In an effort to save some money (or to make money off the property), they gave the task of managing their property to someone in their office, who was located in Denver, and who had no experience in property management. This person flew down about once a month, if that, to see how things were going. Why an investment group of very smart individuals would trust a multimillion-dollar asset to someone with no experience is a mystery to me.
I knew things had to be bad because John was basically firing himself for poor performance, and things are usually in pretty bad shape for this to happen. In fact, things had gotten so bad that they were having trouble making their mortgage payment.
I reluctantly told John I was willing to help him. After hanging up the phone, I shook my head. I knew the property he was talking about, and while it was in a good location and in a great neighborhood, the property itself was known for having high turnover of residents and high crime. Drug activity was prevalent at this property, and members of local drug cartels were actually living in some of the units. In the first week that we took over, one of these problems came to a boiling point when one resident, a local drug dealer, was shot down in cold blood inside his unit right in front of his girlfriend. It was well known that this was a gang-related incident because the man's hands were tied behind his back, and he had been shot point blank in the head, execution style. His girlfriend was unharmed and is now in the witness protection program. So, as you can see, this was definitely not a little problem.
You're probably asking yourself: What kind of property was this? What a terrible neighborhood! I can tell you that this property was in an upscale area near major employers, a school, and an upscale regional mall. This kind of thing can happen anywhere.
When my team surveyed the 250-unit property, we were shocked at its condition. We already knew its reputation, and we were expecting it to be bad. What we didn't expect was just how poorly the asset itself had been maintained—the physical condition of the property was astonishingly bad. The landscaping was completely shot, decks were rotting through and posed potential safety risks, and more than 20 percent of the interiors of many units were so rundown that they were not rentable. The result was that while comparable nearby properties were enjoying occupancy levels in the mid-90 percent range, this property was collecting less than 70 percent of the potential income. This, of course, is because many units were vacant, and many of the current tenants were not paying their rent.
Beyond that, people were leaving the property in droves because they were worried about their own safety and disgusted at the condition of the property.
So, the owner's problem was twofold: They couldn't rent to new residents because they did not have the money to fix up the property and the existing vacant units; and many of the current residents were moving out, citing health and safety reasons. As a result, the financial performance of the property was very poor.
We quickly realized we had a lot of work on our hands. Thankfully, my company has tremendous experience in turning around poorly performing properties, and we were eventually able to get this property in good condition. But it took a lot of time and a lot of money. In the end, the poor decision to "save money" cost John and his partners millions of dollars. But the damage to their partnership was irreparable. The tensions boiled over, and their partnership came unglued. Harsh words were spoken, friendships were destroyed, and John's reputation was severely damaged.
I had little pity for John and his partners. While it is unfortunate that they lost so much money, those losses could have easily been avoided if they had retained a quality property manager to partner with them in both the due diligence process when purchasing their property and to help them manage it effectively after they acquired it.
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