It is hard to believe that someone can totally neglect a valuable investment property like a multi-unit office building or an apartment complex. It happens. The run down property may have been acquired from a seller who did not understand real estate investments and failed to manage it at all.
The professional investor can usually spot the low-priced and currently unprofitable income property that can be purchased, then upgraded with some reasonable expense so that it becomes a cash flow property. That property can then be added to the investor’s real estate portfolio or quickly sold for a profit.
First, a professional management company must take over the property. It is faced with a problem property that the new owner has purchased for the purpose of a “turnaround” for profit.
The new manager must first develop a plan that will help the investment become a success as soon as the new owner takes physical possession. This plan must be short term to get the rents coming in and long term to make it a productive property in the future. The following are some points in a typical plan to create a profitable investment from an underperforming office or apartment building.
Cash Flow
Rental activities and property management functions must be centralized.
Management was nearly nonexistent or the units would not be underperforming. Management efficiency must be improved immediately. For cash flow, rent invoices are mailed on time and payments from tenants can be sent directly to the bank for deposit. Computer financial software can be used for budgeting and for cash management.
A professional management company will already have standard procedures set up and designated employees to carry out maintenance and repairs (schedules for regular tasks such as pool cleaning and landscape maintenance as well as routine requests by tenants for minor repairs such as leaky faucets or cracked windows).
Examine Operating Expenses
After budget is set up, all operating expenses and actual expenditures must be compared to the budgeted amounts. Analyze whether tenants should be required to pay for utilities and whether the real estate tax assessment should be protested. (Tax assessment might reflect the time before the property was underperforming.)
Improvement To The Property
Over-improvement of the property too soon can be a mistake. Concentrate first on improving the physical condition of vacant units; then consider making improvements for occupied units that will justify a higher rent when lease is renewed.
An effective way of controlling capital improvement costs is by adopting a regular maintenance program with the standard procedures.
Leasing Policy Changes
Assess the current leasing policies regarding tenant credit checks and screening, discounts for signing or renewing leases, security deposit amounts, and procedures for dealing with delinquent rents. Search for new ways to alter the tenant mix in the underperforming building so as to generate greater profits. Policy changes regarding base rent, for example, may impact favorably on the vacancy level and on payment delinquencies, resulting in a more profitable building as a whole.