Q3 2024 Fund Update: First Rental Success, At Last!

Intro

Happy October and fall!

Q3 has been productive but exhausting quarter. To my relief, it seems the tough decisions seems to be bearing fruit. In the last 3 months, we switched property managers while completing 2 move outs, and we finally rented our 1st apartment. This is more progress than the 7 months prior.

Renting our 1st apartment with our new property manager has been extremely energizing. For the 1st time, we have demonstrated our new team in this new market has the capacity to secure our apartments, renovate them, and rent them out, from beginning to end.

Overall I am relieved to find myself familiar in familiar territory as we work to turn over the remaining units. We've still got several months of work to push till the end of the year to turn over the units and then target the cash-out refinance. Goals for Q4 are to copy paste what we did for our first rental to the other units, then do a retrospective for lessons learned.

For more details, read on. Any questions, comments, or concerns, just reply and be in touch.

Mission Statement

Courtyard Sihe Partners offers quality affordable housing by renovating multi-family apartments in historic American cities like Cleveland OH.

Highlights

1. Successfully switched from Real Property Management Valor to Realty Now.
2. Received rental assistance for one of our tenants who had been behind all summer.
3. Completed move-outs of 2 tenants, after 10 months of legal negotiation. We have 3 vacant units that are pending renovation and then rental.
4. Visited Cleveland for an in person inspection in Sept, met our property manager as well as 2 of our tenants face to face to understand the situation.
5. Completed renovation for St. Clair which rented this month; move-in for new tenant is next week!

Lowlights

1. We will need to initiate legal procedures against 2 of the remaining tenants (1 in each property) who remain unresponsive.
2. New rental rates are lower than what we forecasted—the previous landlords got higher nominal rents but were unable to collect due to non-paying tenants. Priority was placed on putting in a quality tenant and letting the price slowly return to market as we stabilize these buildings.
3. City regulation has been ambiguous, leaving us uncertain about the requirement of rental registrations with regards to eviction for non-payment.
4. Still have to dig into financials of the old property manager and sort out the disputes there before we can fully shut down.

Financials

Q3 Snapshot:

• Folsom: One tenant received $6725 in rental assistance which is the lion's share of rent here. Two units vacant for Q3, one being renovated for rental now. Once all turned over, should collect $700 x 4units x 3months = $8400 total.
• St. Clair: One solid tenant paying September rent. U2 just got rented in Oct. One vacant, and the last one starting legal motions.
• Out of 8 units, 3 are vacant, 3 have reliable tenants and 2 are undergoing eviction. This number should hover as we simultaneously rent apartments and complete move-out of non-paying tenants.

Rent Roll By Property

*Note: these are simplified versions of the Cleveland Unit Tracker our team uses internally.

Closing

At the end of this quarter I will have been working on this fund for a year. Naturally, I will be reflecting on what my results are.

My property manager has given me 3 big rules of thumb in our last call:

1. It takes around 8-12 weeks from serving eviction to vacating an apartment.
2. Then, depending on the apartment's condition, it takes around 3-4 weeks to renovate an apartment
3. From there, it's finally 4-5 weeks from listing to getting a qualified tenant.

Meaning from beginning to end, serving an eviction, vacating the apartment, renovating, and renting it to a qualified tenant, it should take 15-21 weeks, or 4 to 5 months.

This lines up with my experience in Rhode Island, where I expected it would take me 3-6 months to turn over a 3-family apartment building when all cylinders were firing. If we can get this complete by Q1 next year, it will have taken me ~14 months to turnover and refinance my first Cleveland project, which is roughly the same time it took me to do my first Rhode Island project (albeit, with 8 apartments as opposed to 3. And yes, there were unforeseen hiccups in that one too!)

Last quarter, I wrote:

By the end of Q3 we should have a new team, aligned around a unit tracker dashboard that we are building to track unit turnaround progress. Although we have faced setbacks, learnings and corrective actions have me looking forward to refinancing at the end of the quarter. It’s never a dull day in real estate investing, but up close this type of value creation is very much what I’m used to.

At the end of Q3, I'm happy to report we successfully completed switching to a new team, although no concrete deadline for refinancing is available yet. Perhaps I should take a hint from my past self and stop trying to forecast a refinance. Instead, I'll say that I expect to have 75% of both buildings rented to paying tenants by the end of the year. We lost 2 quarters of time due to mismanagement with our former property management, and with our first successful rental it seems we have successfully corrected that misstep.

Thanks for tuning in, see you in the new year,

Muhan & the Courtyard Team