Not Well Thought Out First Deal?

Question

Hello BP,

This is my first post. My name is Robbie and I am a new "investor" in Charleston, SC. I work full time on top of "real estate investing." I am a military pilot stationed in Charleston. I just closed on my first deal last Tuesday! It is a triplex, with 1 main unit and a 2 story duplex. I thought I would be knocking it out of the park with this first one, but now I am having some doubts and minor set backs. Here is the deal:

Listing Price: $315k

Offer Price: $305k

Final Price: $311k (closing cost rolled into loan)

~2400sqft split between main unit and duplex (1200 main, 600 each in the duplex)

Financing: Used a VA Loan through a local bank, after all said and done about ~$2200 for mortage ($1500 P&I, $700 escrow)

Found off of Zillow, inherited  2 tenants in the duplex, top floor B (2br/1b) paying $850 rent, and bottom floor C (1br/1b) paying $800 rent. The owner lived in the main unit A (3br/1), and that is where I will be moving to once my current apartment lease ends.

The plan is to live in A, and renovate it gradually until my 1 year required residency is up. I will be renewing C's lease, and will not renew B's lease. When B moves out in September, I will renovate it to get better rents.

For those that like to analyze deals, the rents will be $800+$850+$1650. I plan on paying myself rent, all of my housing allowance, for the year I am staying here. After utilities, my cash flow should be around $900,

$500 of which will go towards Vacancy/Repairs/CapEx. I am planning on putting ALL cash flow into the reserve bank until I hit $10k, then I'll cut the $500 to $250/month. After I leave, I'd expect unit A to command ~$1300 in rents.

First problem: Supposed unit B is noisy and heavy-footed, which is driving unit C crazy. There is only 1 sentence in the lease as far as noise goes, and its the "will not disturb other tenants' right to peaceful enjoyment of premise." What else can I do? I've talked with downstairs, and will meet upstairs for the first time today since taking over. Beyond the "please be respectful," what else can I do? When they move out, I plan on putting down carpet to absorb some noise.

Second problem: Unit B (upstairs) does not have washer/dryer. The current tenant uses a laundromat. When they move out, I would like to offer W/D, but realistically there isn't much space left. Would a W/D "discount" work? Considering average 2br/1b rent in the area is $1200, a $100-$200 discount would be fairly attractive, and would still make my math work.

Third: Unit A has 4 rooms, 3 of them have closet. I plan on putting up a wall in the room that doesn't have a closet. One side will be a walk-in closet thats connected to another room. The other side will be a laundry room, and I will be able to move the W/D out of the kitchen. This would keep the 3br/1b configuration and 1br will become a "master bed". Would this be a worthy value add?

BLUF: What do I do about noisy tenants? What options do I have as far as not offering W/D to the top unit? Would a master bedroom option/cleaner kitchen configuration be a good value add?

Thanks in advance, pictures included, none yet of unit B

Main unit front, duplex in back:

Kitchen of unit A, notice W/D next to stove on left:

Main unit layout, planned wall in red

Patrick Orefice · Answer

@Robert Lei

Hi Robbie, I think you’ve got a great property here. I’m an architect and investor in the area. I think there’s value add in the units with what you’ve described and could go even further. There are ways to help with the sound between units as well. Let’s connect and I’d love to discuss it with you.

Maximilian Glodde · Answer

@Robert Lei naturally you have to follow the lease terms if you cannot reach an agreement. I am aware though that you could offer "cash for keys", a strategy often discussed on the podcast. I don't know what you are charging them in rent, but basically offer them a sum of money contingent on agreement to terminate the lease early. Make sure they sign the appropriate release forms etc.

You probably know this, but just in case: you can absolutely not discriminate (or make it seem like you are) against the upstairs tenant for having kids as this is considered on of the protected classes. You will lose your a** if they ever had reason to believe that's why they were kicked out.

In all honesty, it's only 4 more months until September. Yes, it sucks for the downstairs tenant, but this isn't a new problem for them. I would just stay out of it and let the downstairs tenant know that there's a high chance that you will be non-renewing the upstairs lease (don't give a definite though) and subsequently work on improving the soundproofing. That should keep them happy as they have something to look forward to. For you, it's guaranteed cash (well hopefully) and you can focus on dealing with the other things you mentioned in your original post.

Robert Lei · Answer

@Maximilian Glodde

Thanks for the insight! I honestly thought as landlords we have more power and responsibility to help mediate disputes between tenants. I guess not. The upstairs have 3 young kids that run around the unit. In addition, it seems like the downstair tenant is the good behaving one, so I have an incentive to keep her around.

The other option I’ve considered is somehow ending the upstairs lease early (ends in September) by essentially buying her out ie giving her security deposit + 1 month of rent. This would get the renovation train moving a lot sooner, which could potentially mean higher rent. It would be a fairly drastic move though, and might not be legal?

Maximilian Glodde · Answer

Hi Robbie, welcome and congrats on your purchase!

I currently have 3 rentals and happy to provide my 2 cents on the above:

Problem 1 (noise): I've had this complaint come up before and honestly I would try to stay out of it as much as you can. Usually there are quiet hours (e.g after 10pm), which state that you can't play loud music etc. If they're just walking around during the day and are heavy footed, there's not much you can do to be honest. It's really up to the tenants to work this out between them (they're adults). When you renovate, even with carpet, make sure you put down an acoustic underlayment (rubbery membrane), and then carpet. That should help things a lot.

Problem 2 (W/D): I assume you have checked what apartments in the area are renting for without a washer and dryer?! When you say there isn't much space, could you sacrifice some storage space for a W/D at all?

Problem 3: It's difficult to comment without knowing the cost, the estimated increase in rent you think this will bring and how much storage you are realistically adding in the kitchen that is absolutely necessary. The walk-in closet is a nice touch for tenants, especially a family with 1+ kids. Honestly depends on your target market. If your target market is single people that live with roommates, i would consider turning it into a 4th bedroom.