Property operations
A $30,000 Unit Turn in 4 Months: Why You Budget for This
One tenant did $30,000 of damage in four months. Here's what that unit looked like, how we handle it, and the reserve structure that keeps it a rounding error.
I love buying real estate low to no money down. But sometimes you also get some problems.
On this one I want to walk you through two units in one of our latest acquisitions, a 76-unit property, and show you what renting apartments actually looks like when it goes wrong. One unit is gross. The other is a 10 out of 10 nasty. That second one is the unit we started calling the Poonit Part 2, and the tenant who lived there did $30,000 of damage in four months.
Related reading: How the 76-Unit Deal Put Me at 170 Units in Stephenville, Texas
The reason to examine this unit is the decision that comes before closing: how much capital to reserve for repairs. A difficult turnover can be manageable with a realistic budget and much more damaging without one. The damage and the numbers show why reserves belong in the acquisition plan.
The First Unit: Filthy, But Fixable
The first one I'm not super stoked to be standing in, but the smell is not as bad as you might think. This is about a two out of ten for how bad it can get. There have been some units where you can smell it from a block away.
There is just a ton of junk. The kitchen is nasty. I didn't even want to touch the light switch.
But look past the mess for a second and check the actual condition of things. The tiles are in good shape. The sink isn't damaged at all: it's just filthy. There's stuff everywhere, and we're going to go through all the perishable goods, but a lot of what's in there is canned, safe, and not expired. That goes to a local food bank. We always want to help people in need where we can.
So this is a cleanout, not a rebuild. Ugly, but fixable.
The prevention question comes up every time I show one of these: how do you stop it? We do annual inspections. That catches a lot. But when you pick up a property, you inherit problems that were created before you ever had keys. That's the part people underestimate. I see it all the time: somebody buys a building with no reserve, and then every dollar they make goes straight into fixing inherited messes instead of improving the asset.
The Poonit: $30,000 of Damage in Four Months
The second unit is the one that earned a name.
This tenant signed a lease one month before we went under contract on the property. I don't usually allow a seller to move new tenants in while we're under contract, and this is exactly why. In four months, she destroyed the unit.
Does the floor look dirty? That's not dirt. That's feces. There were three dogs in there, and they went all over the floor and the walls. Turds and urine. The couch is saturated with pee. It's hard to describe the smell: it's so thick that the air in the apartment ruined the AC unit. It didn't just shut it down. It killed it. The entire thing has to be replaced.
It was never cleaned once. Not once, in four months, with kids living in there.
When I post things like this, people beat me up online: "I can't believe you evicted a single mother." I'm not big on being the big mean landlord. But there's a difference between being kind and being nice. This person had to go. That's not cruelty; that's the job.
Here's what's getting replaced: the AC, every appliance, and the drywall. This is a full gut. The whole unit gets taken down to the studs. We're not going to attempt to save anything: rip it out. Not to mention I saw six or seven cockroaches while I was in there.
Related reading: Out of Money Mid-Renovation: 3 Ways to Save the Deal
Cost: $30,000 to $35,000. For one unit turn.
I'd put this one at a nine out of ten. I've seen worse, but it's the second worst I've ever seen. I have over 500 units today, and I'll tell you honestly: on most properties you get a bunch of awesome tenants who do a great job with their space. And you will also get some tenants like this. The one small mercy here was that the AC she cooked was an old one that needed replacing anyway, and we have a bunch of new ACs on this property. At least it wasn't the biggest loss.
The Property Itself Is Beautiful: That's the Point
Walk out the door of that unit and look at the campus. Seventy-six units on about 14 acres. We're in the main courtyard, and it's the middle of winter at 32 degrees, so the grass isn't the beautiful green it usually is. But there's no trash anywhere. There are usually kids playing around this courtyard.
This is a genuinely nice, clean place to live. And then you have a unit like that one, which you could smell from two doors down.
That contrast is the whole argument. As a landlord, your first order of business is making sure people want to live here. Which unfortunately means you sometimes need to remove the people that you would never want as a neighbor. You are not just protecting an asset. You are protecting every other resident on the campus.
What They Look Like Done Right
Let me show you the other side of it, because the renovated units are the reason any of this is worth doing.
The floors get redone in a simple click-together LVP that looks absolutely beautiful. Appliances are all in. Carpets are brand new and cleaned. The blinds are new and fixed. The walls get repainted to a neutral color, which is extremely important. Countertops clean. The bathrooms are uniform with the rest of the building: tile bathroom, tub cleaned up, cabinet space.
One thing I'd do differently if I could go back in time: match the appliances. We have stainless steel next to white, and it makes the kitchen look a little jumbled. I wouldn't refuse to move into a place because the appliances weren't color matched, but if you want to do it right, that could have been done better.
Upstairs there's a three-bedroom, two-bath layout. Everything clean, everything simple, nice floor plan. This is a LIHTC property: it's affordable housing, so it's meant to be simple. But it's a clean place, and the toilet doesn't have anything growing out of it.
That's the standard I hold: your goal is to make the space somewhere you would be willing to live if you were in the same situation as your tenants. If I were looking for a place in my own portfolio, this is one I'd move into.
The Money-Saving Tip Nobody Talks About: Quiet Fans
Here's one that saves real money. Make sure the bathroom fans in all your units don't get too noisy.
If a fan is loud, tenants stop using it. If they stop using it, you get moisture. You get moisture, you get mold. Now you're looking at expensive renovations and actual huge problems across your portfolio.
Put it in your annual preventative maintenance: check the fans, check the water heaters, service the ACs. When your fans are quiet, your water heaters are serviced, and your ACs are serviced, a lot of your big-ticket items simply don't fail. Everything lasts longer and you save unbelievable amounts of money.
That compounds in a way tenants feel. When you're not dumping your whole budget into appliances and general upkeep, the money gets to go back into making the property nicer: the small projects that actually move the needle. Fences. Landscaping. New amenities. This summer we're adding movie nights on the lawn.
Speaking of fences: we had a whole bunch of downed fences on this campus, and one is still going up around the trash cans. Downed fences meant trash blowing all over the property and residents looking at a big dumpster from their windows, which is terrible. We went with steel posts this time, so as the wood ages (and there's a lot of wind and weather out here) we can just replace the boards and put them back on the same posts. The little things go a long way on these campuses.
How a $30,000 Surprise Becomes a Rounding Error
Now the part that matters most.
Raising enough cash to close your deal does not make it a deal yet. Every deal needs three layers of money behind it:
- A capital reserve: two to three months of full expenses. The test is simple: if you received no income at all, could you float the property out of your reserve?
- Your full renovation budget: the money for the work you already know you're doing.
- An overage on top of that: so when you take over a property, the unexpected is accounted for and expected.
On this 76-unit, we have a $250,000 budget set aside purely for "oh no, we didn't find this before we closed." So when a $30,000 unit turn shows up, it's a rounding error in the overall deal.
If I had bought this building with just enough cash to close, one or two of those units could blow my budget. Suddenly I'm behind on all my projects, behind on maintenance, struggling to make ends meet, maybe making owner contributions just to float the property. And projects like that fence never get done, because I'm always chasing the necessary renovations and never getting to the things that actually bring the property to the next level.
If you don't factor for this in your transactions, it can be a deal killer. Always budget for it.
Key Takeaways
- Damage like this is inherited, not created by you. Annual inspections help, but when you buy a building you buy its existing problems: assume some of them are expensive.
- Don't let a seller move new tenants in while you're under contract. A lease signed one month before closing cost us $30,000 in four months.
- Being kind and being nice are different things. Removing a tenant who is destroying a unit protects every other resident on the campus.
- Preventative maintenance on fans, water heaters and ACs is the cheapest money you'll ever spend: noisy fans lead to unused fans, which lead to mold.
- Fund every deal in three layers: cash to close, a capital reserve of two to three months of full expenses, your renovation budget, and an overage on top.
- A $250,000 contingency is what turns a $30,000 surprise into a rounding error instead of a crisis.
Watch the full video if you want to actually see these units: the walkthrough tells you more about what you're buying into than any spreadsheet will. If you want the deeper version of how we structure these acquisitions, my mentorship is linked in original episode description, and there's a free course there on getting started in multifamily. We also have a free Skool community with mini courses, thousands of investors around the country, and the same deal calculator I use on every single one of my deals.
Happy hunting out there. Let's go buy some more real estate.
Read the episode transcript
0:00 Hello and welcome back to Multif Family 0:01 Strategy. On today's episode, I'm going 0:02 to show you some of the grossest units 0:04 in one of our latest acquisitions, the 0:06 76 unit. Now, while I love buying real 0:09 estate, low to no money down, sometimes 0:11 you also get some problems. We're going 0:12 to go through a gross unit and a 0:14 absolutely 10 out of 10 nasty unit. In 0:16 fact, this tenant did so much damage. 0:19 $30,000 of damage in 4 months of living 0:22 here. We call it the punit part two. poo 0:24 is just soaked into the carpet and the 0:26 walls so bad it ruined the AC just 0:29 sucking in the air from the apartment. 0:31 Going to show you this how you deal with 0:33 it and what renting apartments really 0:35 looks like on this episode. Let's go. 0:37 This I'm actually not super stoked to be 0:40 standing in. The smell is not as bad as 0:42 you might think. This is like a two out 0:44 of 10 for how bad it can be. There have 0:45 been some units where you can smell from 0:47 a block away. There's just a ton of 0:49 junk. I mean, this is this is nasty. 0:51 Check out the kitchen. 0:55 So, as a landlord, how do you prevent 0:57 this? Well, we do annual inspections, 0:58 but when you pick up a property, you're 1:00 going to inherit problems. I see this 1:02 problem done all the time. People buy a 1:04 building, they'll have no reserve. Then 1:06 all of their money goes towards fixing 1:08 this stuff. This is actually quite 1:09 fixable. If you look at the condition of 1:11 stuff, I don't even want to touch the 1:12 light switch. I'm trying not to touch 1:13 anything. Tiles are in good condition. 1:16 The sink is actually not damaged at all. 1:18 It's just filthy. There's stuff 1:19 everywhere. We're going to go through 1:21 all these perishable goods. And this 1:22 actually a lot of this is canned, safe, 1:25 not expired, can go to a local food 1:28 bank. We'll salvage what we can cuz 1:29 always want to help people in need. But 1:31 like 1:32 this is pretty gross. The next unit 1:35 we're going to go into, we call the 1:36 punit. It's about $30,000 of damage. She 1:39 signed a lease one month before we went 1:41 under contract for the property. In 4 1:44 months, she destroyed the unit so bad. I 1:46 am horrified to go into. But it's part 1:49 of the game. So when I say we're getting 1:51 free real estate, yeah, we'll make some 1:52 money, but this is part of what you're 1:54 dealing with. This is not passive 1:56 income. This is actually pretty gross 1:58 money. Okay, now the punin. So this 2:00 tenant was only here for a few months. 2:02 They moved in while we were under 2:03 contract, which I don't usually allow, 2:06 and this is why. $30,000 of damage. Does 2:10 the floor look dirty to you? Well, news 2:12 is not dirt. That is feces. There were 2:15 three dogs in here. They let them 2:19 all over the floor in the walls. Look at 2:21 this. That's all just turds and urine. 2:24 This couch is just saturated with pee. 2:29 This one woman let her dogs Oh, it's 2:31 just it's horrible. So, we're going to 2:33 keep exploring here uh rather quickly. 2:36 I'll be burning my shoes after this. 2:38 Fortunately, these awesome barefoot 2:40 shoes here are only 50 bucks on Amazon. 2:43 So, I am not going to miss them. We're 2:45 order a new pair and I'll be driving 2:46 home barefoot. Holy goodness. 2:51 Let's check out the toilet here. 2:54 Oh, that it's it's hard to describe 2:59 the smell in here. It's so thick. The 3:03 actual air in here ruined the AC unit. 3:07 It didn't just like 3:10 shut it down. It killed it. It ruined 3:12 the entire thing. We'll have to replace 3:14 the AC, every appliance. We're going to 3:18 have to redrywall. Oh gosh, that is so 3:20 gross. 3:22 Never cleaned once. This damage was done 3:24 in 4 months when you people beat me up 3:27 online for Oh my gosh, I can't believe 3:29 you evicted a single mother. There were 3:32 kids in here. This is disgusting. I'm 3:36 not big on being the big mean landlord. 3:39 There's a difference between being kind 3:40 and being nice. This person had to go. 3:44 This is absolutely disgusting. Check out 3:48 the kitchen. 3:50 This is a full gut. Rip out the drywall. 3:53 This whole unit will have to be taken 3:54 down to the studs. We're not going to 3:56 attempt to save anything. Rip it out. Uh 3:59 not to mention, I've seen like six or 4:02 seven cockroaches. This will cost $30 to 4:05 $35,000. 4:06 If you don't factor for these in your 4:08 transactions, this could be a deal 4:11 killer. Always budget for that. Just a 4:13 second. This smells so bad. I got to 4:15 shut the door. 4:18 This is about as gross as it gets. I 4:20 would say this is probably a 9 out of 4:22 10. I have seen worse, but this is the 4:24 second worst I've ever seen. That is 4:26 just absolutely horrible. Sometimes on 4:29 these properties, you get a bunch of 4:30 awesome tenants. to get a bunch of 4:31 people who do a really good job with 4:32 their space. I have over 500 units 4:35 today. You will get some tennis like 4:37 this. I probably shouldn't have gone in 4:39 there. Fortunately, the AC, we have a 4:42 bunch of new ACs here. The AC that you 4:44 cooked is an old one. So, at least it's 4:46 not the biggest loss. It needed to be 4:48 replaced anyway. But guys, this is look 4:51 at the look at the actual campus itself. 4:52 Middle of winter, so this grass is 4:54 usually beautiful green. We're in the 4:56 main courtyard. 76 units. This thing is 4:58 about 14 acres. 5:00 Look at out here. This is actually a 5:02 really nice, clean, beautiful place to 5:03 live. There's no trash anywhere. There's 5:06 usually kids playing around this 5:07 courtyard, except it's 32 degrees right 5:08 now. This is a beautiful place. And then 5:12 you have a unit like that. You could 5:14 smell that from two doors down. That is 5:17 horrid. That is horrid. As a landlord, 5:20 your first order of business is making 5:22 sure people want to live here, which 5:24 unfortunately means you need to remove 5:26 some of the people that you would never 5:27 want as a neighbor. Let's take a look at 5:29 what these look like when they're 5:31 actually cleaned up and done right. 5:33 So, when you go through and redo these, 5:36 the floors are redone. A simple click 5:39 together LVP that looks absolutely 5:41 beautiful. 5:42 The appliances are all in here. One 5:44 thing I would have done different, if I 5:46 can go back in time, stainless steel, 5:49 stainless steel, white, white. I wish we 5:53 would have gone with one color. It kind 5:55 of looks, it makes it look a little 5:56 jumbled together. You should match all 5:58 the appliances, but I've certainly seen 6:00 worse. I wouldn't not move into place 6:01 because the appliances weren't color 6:03 matched. But if you want to do it right, 6:05 that could have been done better. 6:07 Carpets are brand new and cleaned. 6:10 The blinds 6:12 are new, fixed, beautiful. Walls have 6:16 been repainted to a neutral color, which 6:18 is extremely important. Countertops 6:20 clean. This is the type of stuff that 6:24 you want to see consistently. Let's 6:25 check out a bathroom. 6:28 It's cleaned up. It's uniform with the 6:31 rest of the building, tile, bathroom. 6:35 We've cleaned up everything in the tub, 6:38 cabinet space. This is simple. It's 6:40 affordable housing. This is a LITC 6:42 property, but this is a clean place. The 6:45 toilet doesn't have poop literally 6:47 growing out of it. This is much better. 6:50 Ultimately, 6:52 your goal is that you would want to make 6:53 the space a place that you'd be willing 6:55 to live in in the same situation as your 6:57 tenants. So, as we head upstairs here, 6:59 you have a three-bedroom, 7:02 two bath location. 7:04 Everything is clean. Everything's 7:06 simple. Nice floor plan. If I was 7:09 looking for a place to move into in my 7:10 portfolio, 7:12 this is absolutely a place I'd be 7:14 willing to live. Test all the fans, make 7:16 sure they're not super noisy, which 7:17 they're not. This is the type of stuff 7:20 we like to see. 7:22 By the way, you want a money-saving tip? 7:25 Make sure those fans in all your units 7:26 don't get too noisy. Your tenants will 7:28 stop using them. If they stop using 7:30 them, you get mold problems. You get 7:32 mold. Now you're looking at expensive 7:34 rena and actual huge problems in your 7:36 portfolio. You want to save a boatload 7:38 of money as part of your annual 7:39 preventive maintenance. Check out your 7:41 water heaters. Check out your fans. The 7:43 fans are quiet and the water heaters are 7:44 serviced. Your ACs are serviced. A lot 7:47 of your big ticket items don't fail. 7:49 Everything lasts longer. You save 7:51 unbelievable amounts of money, which is 7:53 great for you as an investor. In 7:55 addition, your tenants are going to 7:56 appreciate it cuz you have more money to 7:58 reinvest back into the building as well. 8:00 You're not dunking all of your budget 8:02 into the appliances and the general 8:04 upkeep. It gets to go back to making the 8:06 property nicer with little projects like 8:08 the fences and the landscaping. Maybe 8:11 adding new amenities or like we're doing 8:13 this summer, adding movie nights on the 8:14 lawn. By the way, while we're touring 8:16 units, check this out. We had a whole 8:18 bunch of downed fences. I actually have 8:20 one back there that's still going up 8:21 around the trash cans. What it was 8:23 causing is trash to blow all over the 8:24 campus and you have to look at a big 8:26 dumpster from your unit, which is 8:28 terrible. The little things go a long 8:29 way on these campuses. We went with 8:31 steel post here. So, as the wood ages, 8:34 and there's a lot of wind and weather 8:35 out here, we can just replace the wood, 8:37 put it back on these big steel post. 8:39 This is much more aesthetically 8:41 pleasing. So, how do you handle problems 8:43 like this? And how do you avoid this at 8:44 the front of your deal? Well, you're not 8:46 just raising enough cash to close your 8:48 deal. It's not a deal yet. Every deal 8:50 needs to have a capital reserve, which 8:53 should be 2 to 3 months of full 8:55 expenses. If you receive no income, can 8:57 you float the property out of your 8:59 reserve? Then you need to have your full 9:01 rena budget. So, what do I have set 9:03 aside for situations like this? for my 9:06 planned renovations. I need to have an 9:08 overage so that when I take over a 9:10 property, all of the unexpecteds are 9:12 accounted for and expected. When this 9:14 came up as a $30,000 unit turn, we have 9:17 a $250,000 budget that's just set aside 9:20 for, oh no, we didn't find this before 9:22 we closed the deal. So, this is a 9:25 rounding error in our overall deal. If I 9:27 bought this with just enough cash to 9:29 close, one or two of those could blow my 9:32 budget where suddenly I fall behind on 9:34 all of my projects, I'm behind on 9:36 maintenance, I'm struggling to make ends 9:37 meet, I might be having to do owner 9:39 contributions to float the property. And 9:42 projects like this fence over here never 9:44 get done because I'm always chasing the 9:46 necessary renovations and never getting 9:48 to the things that actually bring the 9:50 property to the next level. So buy all 9:53 your deals with enough cash to close 9:55 your capital reserve, your rena budget, 9:58 and a little budget on top of that to 10:00 make sure that the unexpected is treated 10:02 like the expected. Oh, and I forgot to 10:05 mention, we have a free school community 10:06 I want you to join. Booming community 10:08 there and a ton of free resources for 10:10 you. Free mini courses, a free 10:12 calculator that I use for every single 10:14 one of my deals. Most importantly, 10:15 thousands of investors around the 10:17 country who are investing in deals just 10:18 like the ones that you are going to find 10:20 as soon as you join this community. So 10:22 check it out. Skol. It's multif family 10:24 strategy community on school. Totally 10:26 free. See you there. I'm also going to 10:28 give you guys a bunch of tips on how to 10:29 actually make money when you find 10:31 buildings that are like this. Now this 10:32 isn't heavy value ad, but there's some 10:34 units in this complex that are. So how 10:36 do you survive these? How do you budget 10:37 for them? And more importantly, how do 10:39 you create an amazing place for your 10:40 tenants to live so you can have maximum 10:42 occupancy, maximum rent, and tenants who 10:44 love living here. Happy hunting out 10:47 there, guys. Let's go buy some more real 10:48 estate this
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