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The top 10 headaches, problems, and nightmares from our first apartment building: Part 1

In our first blog post, we said that we want to be transparent in sharing our real estate journey.

Many people only like to share the good things, the wins, and the success stories. In this post, we are going to pull back the curtain and give you a look at the things that aren't always shared publicly. We've only had our apartment building for 10 months and we've already had more crazy stories than we ever expected!

Before we get to the headaches, problems, and nightmares, I do want to give some context to this post. We are overall thrilled with our 8-unit building. Despite the challenges that we are about to discuss, this is still going to be a GREAT investment for us. If we could go back in time, we would do some things differently, but we would definitely get this building again. We just want to be transparent that real estate isn't all rainbows and sunshine. There are many challenges along the way.

Coming up is a David Letterman style Top 10 countdown of our biggest challenges from the last 10 months. In each section, I will also give a quick "lesson learned" to share either what we learned or what we would do differently in the future. Learn from us so you don't have to make the same mistakes that we did! We are breaking this into 2 separate posts since it is pretty long. Make sure you read all the way to the end... you don't want to miss hearing about drug deals in the church parking lot or a homeless person sleeping in a storage closet in the basement... no joke.

#10. The mother-in-law's lease

The previous owners were leasing one of the units to their mother/mother-in-law. Before

listing the building, they resigned her to a 12-month lease at about half of market rent. Every other unit in the building was on a month-to-month lease. Since a lease remains binding even after the sale of the building, we were stuck with one of the units having

negative cashflow for several months.

Lesson learned: Find the good in the bad. While we were stuck with low rent on that unit for a while, charging her such low rent hurt the seller's net operating income (NOI) which directly impacts the value of the building. If they were getting full market rent on that unit, the NOI would have been higher and we would have needed to pay more for the building.

Also be sure to fully utilize your due diligence period while under contract. You should know how much money each unit is rented for and also when each lease ends. We should've gone even one step further and asked for proof that rents were being paid because after closing we learned that 3 of the 8 tenants weren't current on their rent!

#9. Spending over $100K too much for the building

Shortly after closing on the building, I took the Multifamily Bootcamp through Bigger Pockets. I learned so much about finding, evaluating, and managing multifamily properties! It was just a little too late to put much of that knowledge into practice as we had already closed on the 8-unit. Upon doing some practice underwriting a few months later, I determined that we likely overpaid for the building by over $100K! I'll share what we did wrong in the lessons learned. This sounds devastating, but I'm not as upset about that as you might think. First, the market was still pretty hot when we saw this building and there was another interested party. We never would've gotten it if we offered $100K less. Also, we have the potential to increase the value so much that we can overcome this by executing our business plan. By the numbers, I later determined the value of the building to be closer to $830K. We spent $950K. Upon completing our renovations and increasing rents to market levels, we expect the value to increase to $1.4-1.7 million. By adding midterm rental units, that number could go north of $2M. It stings to overpay, but in a couple of years we will just be happy that we got the building.

Lesson learned: We didn't fully know how to conduct our due diligence on a multifamily property. Since the broker usually represents both sides, this is an important piece to know. The seller gave us his financials and we took them at face value. After all, we would provide complete and accurate information in that situation so we expected that others would too. Don't.

The seller didn't disclose any vacancies in the past 2 years so he accounted for rent numbers as if the building was fully occupied. He also accounted for every rent check being received, even though multiple units were behind.

The seller didn't provide any expenses for maintenance or repairs. He also listed his annual insurance premium to be $1,077. After working with several companies and brokers, the lowest quote that we got was $4,957. To be clear, I don't blame the seller for this... this was on us. We now know that it is ok to ask questions of the seller. It is ok to audit random utility bills and to ensure that the numbers provided are correct. It is ok to request receipts, bank statements, or tax returns to corroborate what a seller providers. If we would've done those things, we could've shown that his NOI (and therefore the building value) were inflated.

#8. Can we blame the seller now?

There was 1 unit that we couldn't get into when we saw the building. The tenant claimed to be sick, but the seller told us that there was always an excuse. He told us that the unit was a 2 bedroom unit like the other three 2 BR units that we had already seen. We completed our underwriting with the assumption that we could get 2 BR rent for that unit. When the tenants moved out and we first saw the unit months after closing, we were very surprised to find out that it was only a 1 BR unit. That impacts the rent that we will be able to get for that unit.

In other news, this 8-unit building had 9 electric meters which is to be expected. There is a building meter for the common areas paid by the owner and a separate meter for each unit paid by the tenants. However, there were only 8 gas meters, one for each unit. The lease for each unit stated that the tenant is responsible for gas. Therefore we didn't account for any gas expenses in our underwriting. The seller never informed us that the gas meter for one of the units also includes some building gas (one of the two dryers for laundry and the hot water heater). He did include in his financials that he was paying for the gas for the unit that included the building gas, but it was his mother-in-law's unit, and the lease stated that she was responsible for her unit's gas. It looked like he was just paying for that for her. This also affected our underwriting of the deal.

Lesson learned: In the future, we will ask much more pointed questions during our due diligence.

We will specifically ask what utilities the owner is responsible for

This seems almost silly now that we didn't ask. We assumed

information based on the financial documents and the leases, but we learned the important lesson about assuming. We will also be more adamant about seeing each unit prior to closing. All 7 units that we saw had similar finishes so we didn't see a need to get into the last unit. I never in a million years would've guessed that he would lie about the number of bedrooms that it had. As noted by the title to these sections, many lessons have been learned.

#7. Ever heard the term "deferred maintenance"?

After we closed on the building, we started getting maintenance requests. This isn't unusual for rental properties, but as we started talking to the tenants, we realized that these weren't new issues. One tenant had a bedroom light that had been flickering for months, a window without weatherstripping that let snow into her kitchen, and only one power outlet in her bathroom and it didn't work. Another tenant had a shower door that had fallen off the hinge onto her and a kitchen drain that was leaking into a bucket. That same kitchen sink had previously fallen into the cabinet because it wasn't appropriately mounted to the countertop (Side note: it was super glued... to the quartz... for real. And when it detached, the landlord superglued it again and told her not to put anything in the sink so it wouldn't happen again!!!) In each case, when we talked to the tenants we were told that they had called, texted, and/or emailed these issues to the previous owner but never received a response.

This was mind-blowing to us. We pride ourselves on customer service in our property management business. We commit to responding to all tenant requests within 24 hours. To hear that a shower door fell off the track onto a tenant and the previous owner never even responded infuriated us. Maybe the previous owner knew that he was selling the building and had checked out? At this point, our only option was to go to each tenant, get a punch-list of deferred maintenance, and schedule a time for each unit to get all of these items taken care of.

Lesson learned: Have plenty of reserves set aside when you close on a new property. If we would've assumed that each unit had $500 of deferred maintenance on average and set aside that $4,000, we would've been much better prepared to not only address these tenant concerns, but to hire a handyman to do it for us. Instead, I did most of the repairs myself to save on costs, but that took away time that I would've preferred to spend renovating our 2 vacant units.

Also, read those inspection reports closely! There were things on there that seemed like small things that we didn't think too much about. However, many of those small things are the things that the tenants brought up... and across 8 units all of those small things add up.

#6. Screaming, swearing, threats, and police

One day when Holly was painting one of the units, she heard a male voice screaming and swearing. She went into the hallway and identified which unit it was coming from. We later found out that it was the tenant's grandson who was homeless and suffered from a mental health disorder. However, we didn't know any of that at the time. He was screaming "F*** YOU, I'll F*** YOU UP". After the grandma said that she was going to call the police if he didn't leave, he yelled "GO AHEAD, WHAT ARE YOU GOING TO TELL THEM? THAT I'LL SHOOT THE PLACE UP?!" At the same time, another tenant came out into the hall to see what was going on.

Thankfully, Holly's mom knows the sheriff well and we gave him a call to get some advice on handling the situation. He agreed that for everyone's safety officers should be sent to assess the situation. The officers ultimately asked him to leave and determined that he didn't have a weapon and wasn't a threat to others at that time.

Lesson learned: Through this experience, we learned to be more direct in handling tenant issues. We checked in with the grandmother after the incident, but didn't address the situation further. We thought it was a 1-time event. A couple weeks later, he was there screaming again in the apartment and on the sidewalk outside. At that time, we told the tenant that the grandson was no longer allowed on the property and that if he was there, we could call the police and file a restraining order against him.

Where are #5, 4, 3, 2, and 1?

Since this article is pretty long, I'm going to split it into 2 posts. Next week, I'll post 5 through 1. Make sure to come back for the rest because believe it or not, these get crazier as we go!

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