For the purpose of this article, I'm going to define a small residential rental property as any property with two to twelve rental units. I don't consider single-family houses to be rental property per se because they're never built to produce rental income. Fact is most of the single-family houses that end up becoming rental property do so by default. Generally, what happens is that when a homeowner is forced to move, and for whatever reason they can't sell their house, they're then forced to rent it out in order to pay the mortgage payment, and end up becoming a landlord by default, and not by choice.

How Residential Rental Properties Are Classified

Residential rental properties are classified as either a class "A," "B," "C," or "D" property based on local rental housing market conditions and the property's:

1.) Age.
2.) Location and views.
3.) Quality of construction, level of maintenance and physical condition.
4.) Size and shape of floor plans.
5.) Income level of tenants.
6.) Modern amenities.

The Four Classes Of Residential Rental Properties

Lenders, insurers, investors and property appraisers classify residential rental properties into the following four classes:

1.) Class "A" residential rental properties.
2.) Class "B" residential rental properties.
3.) Class "C" residential rental properties.
4.) Class "D" residential rental properties.

Five Reasons Why Many Small Rental Properties Become Mismanaged

From my experiences with small residential rental properties, I've found that incompetent ownership is the main reason why many small rental properties end up being mismanaged. This incompetence has a snowball effect and is the direct result of the owner's:

1.) Lack of knowledge about the local residential rental housing market that results in rental units being rented at below market rental rates that only produce a breakeven cash flow that's barely sufficient to properly maintain the property and grounds and pay the mortgage debt when there's a hundred percent occupancy.

2.) Lack of knowledge and professional property management skills necessary to screen and select only qualified tenant applicants as customers that results in tenants who won't or can't pay their rent on time and creates a negative cash flow that the owner must subsidize from personal funds in order to keep the mortgage payments current.

3.) Failure to respond to routine maintenance requests in a timely manner that causes tenant turnover and vacancies which increases the negative cash flow and the owner's subsidy needed to maintain the property and grounds and pay the mortgage debt.

4.) Failure to perform routine maintenance that results in a neglected, run-down looking rental property with thousands of dollars worth of deferred maintenance that only appeals to a class of tenants universally known as tenants from hell, who don't pay their rent and are malicious vandals!

5.) Failure to initiate eviction lawsuits against the nonpaying vandals that results in the property being taken over by the tenants from hell which usually ends with the lender foreclosing on the mortgage loan because the owner is broke from subsidizing the negative cash flow, and has filed a bankruptcy petition.

Four Types Of Property Mismanagement That Effect Small Rental Properties

1.) Tenant mismanagement: This occurs when there are no tenant qualification standards, screening requirements or eviction procedures in place. Tenants are selected strictly on a first come; first served basis, and there's no sense of urgency when it comes to evicting tenants for nonpayment of rent.

2.) Financial mismanagement: This happens when units are rented at below market rental rates, and there's no organized effort to collect rental payments in arrears, and there's no formal records being maintained for income and expenses.

3.) Maintenance mismanagement: This is the result of tenant maintenance requests being deferred, or botched by hapless handymen masquerading as professional repairmen, and no preventive maintenance program in place.

4.) Records mismanagement: This happens when there are no formal property, tenant, employee and tax records being maintained for the property.

Six Telltale Signs Of A Grossly Mismanaged Residential Rental Property

You don't need to be a Mensa candidate in order to be able to quickly identify a small residential rental property that's suffering from gross mismanagement, just look for the following six telltale signs:

Sign #1: Property and grounds are suffering from an obvious lack of routine maintenance, and are in a neglected, run-down condition.

Sign #2: Tenant turnover and vacancy rates are abnormally high.

Sign #3: Unregistered and non-operable vehicles are conspicuously parked on the grounds.

Sign #4: Uncollected rental payments are more than thirty days in arrears.

Sign #5: Rental units are damaged as a result of tenant negligence and vandalism.

Sign #6: Property, tenant, income and expense, and tax records are either nonexistent or in total disarray.

Many Small, Mismanaged Rental Properties Aren't Worth Turning Around

Needless to say, not all small, mismanaged residential rental properties can be turned around and made profitable. In order to be a profitable residential rental property turnaround specialist, you must concentrate on finding small, mismanaged residential rental properties that:

1.) Are located in stable, low-crime, moderate-income neighborhoods that are within close proximity to large employers, military bases, schools, shopping centers and healthcare facilities.

2.) Have below market rental rates that can be increased by at least one hundred dollars per rental unit once the property turnaround has been completed.

3.) Have mismanagement problems that can be quickly and inexpensively corrected by implementing aggressive, professional property management practices.

4.) Are structurally sound and have deferred maintenance that can be quickly and inexpensively repaired.

5.) Can be bought for at least twenty percent below market value on buyer-friendly terms with seller financed mortgage loans.

6.) Attract a class of moderate-income tenants who can afford to pay the monthly rental rate without any form of government assistance, and are less likely to move out and become homeowners.

Why You Should Invest In Small, Mismanaged Class "C" And "D" Properties

My company specializes in the purchase, fast-turnaround and resale of small residential rental properties in the Tampa Bay Area. I buy small, mismanaged vintage 1950s through 1970s two to twelve-unit properties that are classified as class "C" and "D" grades of residential rental property by lenders, investors, insurers, brokers and property appraisers. Here are seven very good reasons why you too should invest in small, mismanaged

Class "C" and "D" Rental Properties

1.) They offer more opportunities for rental rate increases than newer rental properties that generally have the highest rental rates in most markets.

2.) They usually aren't as vulnerable as newer properties are during an economic slump, and are less likely to be forced to lower rents or provide rent concessions in order to attract and retain tenants.

3.) There's a constant demand for clean, safe, well maintained, rental housing with moderately priced rental rates throughout the nation.

4.) They can be bought at below replacement cost purchase prices that let investors get around the high cost of land along with zoning-restrictions, environmental regulations, impact fees and a myriad of government regulations that make new construction cost prohibitive in many areas.

5.) They're not on the radar screens of the big institutional investors, mammoth corporations and gigantic real estate investment trusts that invest mostly in class "A" and "B" rental properties.

6.) They don't attract many of the same amateur investors who overpay for single-family rental houses and drive-up their cost.

7.) They're readily available nationwide as every rental housing market has its fair share of incompetent small residential rental property owners who are expert rental property mis-managers!

Class "C" And "D" Property Tenants Aren't Likely To Become Homeowners

I've found that once they've been spruced-up and put in tip-top shape, and under competent management, class "C" and "D" rental properties attract a stable class of moderate-income tenants that tend to be mostly blue-collar workers who are less likely to move out and become homeowners. I've found most moderate-income tenants to be excellent customers who act as mature, conscientious, civilized and financially responsible adults.

Properties With Single-Story, Side-By-Side, Separate-Metered Units Best

I only buy small, mismanaged residential rental properties in the Tampa Bay Area that are made of masonry--cinder block--construction, and have single-story, side-by-side, separate-metered rental units that have off-street parking. I've specialized in buying this type of rental property because:

1.) Rental properties made of masonry construction are pretty much immune to the termites, dry rot, moisture intrusion, cracking warping and shrinking that generally effects wood frame construction. And, masonry exterior surfaces are easier and cheaper to clean, prep, repair and paint than wooden exteriors.

2.) Single-story rental units are easier and cheaper to maintain than two-story properties, and they're more appealing to tenants who prefer not to have someone living above or below them. Plus, you don't have the added worry that nitwit tenants will do something stupid and flood out the units below them!

3.) Side-by-side rental units eliminate tenant common areas that can be costly and time consuming to maintain, and can also pose a potential security and liability risk.

4.) Separate-metered rental units make the tenant financially responsible for their own water, sewage, trash removal, electric and gas utility payments. This eliminates the high costs associated with providing utilities to tenants that have no incentive to conserve, and want to get their moneys worth when it comes to water and electricity!

5.) Small rental properties that are located in older neighborhoods and provide off-street parking are in demand as parking a car overnight on a narrow street can be risky at best.