How I turned a Class ‘D’ Apartment Classification complex into a Class ‘B’ complex.

PistolWhen I purchased my first 4-plex, it was in a first ring suburb, in a nice area of town. It was built in 1985. You could throw a rock outside the complex, and hit $300K homes on all sides. By anyone’s definition, this should be a great place.  Unfortunately, the apartment classification was less than to be desired.

The Neighborhood. The neighborhood is in a complex where there were shootings. Taxi and pizza delivery persons would not come into the complex for fear of getting robbed. The police used to have a sub-station there, to be in the center of the action. Police would not come into the complex, without double or triple backup. Large neighborhood fights, featuring 10 to 15+ people, were common. There were 500+ police incident s per year, for 120 units. It was by anyone’s definition, a class ‘D’ neighborhood, with an apartment classification to match.

The Association. The building is in a Homeowners Association (HOA), with very few rules. With thirty 4-plexes in the complex, there were 120 three bedroom units. The buildings were 95%+ rental, and all of the investor owners lived off-site. Many of the buildings were in foreclosure, for the second or third time.

Although there was a solid set of Declarations and By Laws, the Homeowner’s Association Board of Directors was very loosely formed. The officers met about once or twice a year. They discussed things of interest, but not much substance. I was elected to the Board, by offering to help in any capacity I could, and at a meeting I did not attend, to the position of Secretary.

The Rules. One of the only rules in place at that time was the requirement to do a background check on tenants, and exclude any felons and sex offenders. It was the honor system, as no one was checking the reports, or if anyone even did the checks. After an incident in 2010, where a SWAT team was called out and several buildings evacuated, I became more interested in the crimes that were in the complex. I knew action needed to be taken, or I could lose my investment.

The local police department sent out a daily report of incidents in the complex to our HOA President. She would periodically email them out to the owners, and no one would do anything. By the time the list was sent out, it may have been 3+ month’s old. The tenants may or may not have still been there. So I started to take notice of the names on the reports.

The Beginning of Change. I would go to our MN Court website, and look up the names. I looked up all names, whether the incident was a medical one, or a violent one. I looked up victims and perpetrators. Any name I could find on the report, I looked up. Criminal convictions, and arrest warrants are on the site. Low and behold, I saw a felon in almost every report. I immediately notified the owner and requested them to remove the tenant. The owner was caught red-handed; they had to get rid of the tenant.

I then contacted the police department, and got on the daily list. No longer did I have to wait for several weeks to get the incident reports. I could notify the owners of their tenant’s adverse behaviors immediately, and the owners could take action sooner. It is always the case that a small number of individuals cause the most havoc. This is true in life, and in problematic tenants.

The New Sheriff. I started a concept of a centralized tenant screening committee. I contacted mccgrp.com, who I already did business with, and got a master account set up. From there, every owner would fax their tenant applications into MCC. A standard set of reports were to run, credit, county level criminal, employment and past landlord checks. The HOA Tenant Screening Committee, made up of several like-minded owners, created a minimum threshold of credit score, criminal background, income and rental history that was required. The Committee approved or declined the tenant. The initial requirements were very minimal. But we had instituted a process, and had a plan.

I started a weekly email that is sent out to the Owners, explaining what was happening in the complex, and how to be a better landlord. Some of that information is posted in this blog. You cannot be a great landlord, if you do not know how. I was elected President of the HOA very quickly after I started. The President enforces the rules, and sets the vision of the HOA. I was a bulldog, and did not let up.

I created a set of rules that owners had to follow and got Board approval. We initiated fines for non-compliance. If you bring in a bad tenant, or if you refused to remove a bad tenant, you were going to be fined into oblivion. I made it clear I would stop at nothing short of foreclosure or bankruptcy in order to enforce the rules.

It did not take long to remove most of the tenants that caused issues. Bad people cannot be good for too long. Once people started seeing their friends’ leave, some tenants moved out on their own. Bad former tenants that came back to visit a friend or relative, soon found their friend or relative was leaving.

I tried to create an atmosphere where it made criminals uncomfortable. If I knew a person had an arrest warrant, and I saw the person, I would have them arrested with a 911 call. If I knew a person that frequented the area had an arrest warrant, I posted signs for people to immediately call the cops if they saw the person. I took pictures of suspicious cars, knowing full well the car owner was watching. Some tenants would give me tips I could follow up on.

I called the cops often; I was always looking for a reason to call them. I probably made over 50 calls that first year alone. A cop driving through might see something, or criminals see the cops, and make a mistake. These calls also factor into the following year’s police budget, to help determine the number of officers needed.

Once of the worst owners had a building full of felons. Some were on a rent assistance program geared specifically for felons. The tenants were meth heads, robbers, swindlers, and had committed other various types of crimes. Looking into the HOA records, I saw that this owner had an unpaid HOA assessment. It became an easy matter to convince the Board to foreclose. Once the HOA started the foreclosure, the bank followed.

Targeted Man. Unfortunately, getting great tenants was still difficult. If you had a showing, often you would see the car drive by, and never stop. Often they would cancel after the drive through. Over the phone people would decline a showing when they heard the address. Rents declined. The neighborhood still had a bad reputation. Some owners refused to comply; we took those owners to Court and won. We were winning the battles, but the war was still waging.

There was still a lot of gang related activity in the neighborhood, and I became a target due to all of the enforcement action. Knowing this, I bought a bullet proof vest. I already had a permit to carry, so actually carrying was a no-brainer. I already had several run-ins with bad people, but no direct physical attacks. I was thinking I could handle most situations; but I am not 20 anymore.

So, for a while, I was a hated man. People were moving out because of me, and they did not like it, meanwhile I was enjoying it.  Some owners were not getting tenants approved, due to the new requirements. It was still hard to get great tenants. I was in the complex every day, doing my renovations, and looking for bad behaviors. I would see people leave the area when they heard my diesel truck coming.

The Result. In just a few short years the rental market in the neighborhood improved, we continued to gradually increase the hurdle for incoming tenants. Bad tenants continued to be forced out. People wanted to live in the complex. It was affordable, and we had many professionals living there. There are pilots, teachers, accountants, nurses, business owners, lawyers and others. Now, rents are as high as they have ever been. It is a great place to be a landlord. It is easily now a class C+ or B neighborhood.

Increased rents mean increased property values!

Have you ever lived in a bad neighborhood?  Did anyone attempt to make changes ever succeed?  You ever re-positioned a property to a better class?

 

10 Replies to “How I turned a Class ‘D’ Apartment Classification complex into a Class ‘B’ complex.”

  1. Wow this is quite the story. I can only imagine how much willpower it would take to make something like this actually happen. I’m honestly not sure I’d have it in me to spend that much time and energy in turning around a neighborhood. At the same time I’m sure you’re very happy with where the rental units are at now. Almost reminds me of some efforts in Frogtown to change the neighborhood, except in that case it’s the government massively subsidizing various developments like the lite rail and building new modern buildings at major intersections.

    1. Thanks for the comment!

      It was definitely an adventure. Especially when I had one of the tenants come across the complex and confront me. Nothing ever came of it, but it was a good lesson in diplomacy. I had one County prosecutor tell me they should erect a statute of myself in front of the Eagan PD building.

      We did have an advantage, because of the HOA, it was a closed environment for the most part. In a regular neighborhood, you do not have the ability to force a neighboring landlord to do something.

  2. Fascinating story. Glad to see you were able to turn that place around, but that must have been some scary times.

    Just curious, for HOA, are there no guidelines as it pertains to rental/owner-occupied ratio? A lot of the HOAs around my area tend to require 50/50 split.

    1. There are some owner/occupied ratios in place in many HOAs, due to the FHA’s guidelines on whether or not they will lend money in certain areas. I know 75% is common. When a property becomes more renter occupied, it losses eligibility for FHA loans, and the low-down payments that FHA allows. When you need a 20% down payment, it reduces the amount of buyers that are eligible. Some investors play ‘tricks’ with the system, let in a class ‘D’ renter in a class ‘C’ or ‘B’property, and in the end lower their own values as the property degrades.

      This neighborhood I am in was built for investors. We do have the requirement for a Tenant Screening Committee in our Declarations, but it was never enforced or loosely enforced, at best. Once I started to enforce that Screening rule, most investors bought in, but there were a couple that did not believe we could do that. We are currently in the process of foreclosing on one owner.

      Even some owners that are on Board sometimes find a tenant that they think is ‘great’, but fails our requirements want to backtrack. It is a constant battle to maintain our property values.

    1. Thanks for the comments. The cash flow from the property is tremendous now. It was always good, but the maintenance expenses were pretty bad. Now, with better tenants, maintenance is a lot less and tenants stay longer as I do not have to evict.

    1. Thank you for reading!

      I figured that I added $75K to $100K per 4 plex. Rents are up and now a lower cap rate is necessary to sell. One just sold for $355K. The previous one sold was one I bought for ~$197k.

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