Better to have tenants or leave empty when flipping a multifamily

[Anshul Jain]

Hi,

I’m flipping a triplex in the LA area, and I’m wondering if it makes more sense to lease 2 of the units and leave the front house empty, or to have all 3 units empty when listing it?

Which is more attractive to most multi family buyers? Why?

[Bjorn Ahlblad]

Good and paying tenants are always an asset

[Bjorn Ahlblad]

Good and paying tenants are always an asset

[Bob Stevens]

Quote from @Anshul Jain:

Hi,

I’m flipping a triplex in the LA area, and I’m wondering if it makes more sense to lease 2 of the units and leave the front house empty, or to have all 3 units empty when listing it?

Which is more attractive to most multi family buyers? Why?

 If they are good tenants paying market rent leave them 

[Kim Smith]

Quote from @Bjorn Ahlblad:

Good and paying tenants are always an asset

Agreed. Not just any tenant, but "good" and "paying." Leaving one unit vacant is a smart play right now for a flip. In LA, that's what buyers can afford, a place to live, with 2 rents coming in to help shoulder the mortgage.

[Brad S.]

Quote from @Anshul Jain:

Hi,

I’m flipping a triplex in the LA area, and I’m wondering if it makes more sense to lease 2 of the units and leave the front house empty, or to have all 3 units empty when listing it?

Which is more attractive to most multi family buyers? Why?

***********************************
If by LA you mean Los Angeles, then empty is typically best. As soon as you put a tenant in a unit, you are stuck with them, due to rent control regulations. Therefore, you limit any plans a prospective buyer may have; maybe they want the other units for family members, or rent the front house and live in a rear unit, or none of the above, etc. It is more attractive to more buyers, when it is vacant, especially in a good area. 

[Colleen F.]

@Anshul Jain Also depends on what your flip involves. If you are doing major electric or plumbing you want them out.

[Ben Bagnall]

If you are renovating all 3 units, I would leave them all open.  It won't be hard for the buyer to estimate what they can get for rents.  If the buyer is going to live there, they will appreciate having the option to choose the tenants that will live beside them.  Having the units open, accessible and clean during the sales process will present better and should work to your advantage in getting the highest price.  

[Steven Gesis]

@Anshul Jain occupied - if buyer Is financing acquisition it will be easier for them to get a lender and for you to get a qualified buyer

[Christopher Liu]

Optimally for me, I would want to buy multi-family with all units rented on month-to-month leases. As stated above by @Bjorn Ahlblad, with whom I fully agree, the precondition is that these are good and paying tenants. I would not want to inherit any "problematic tenants" for ANY reason. Why fully leased and month-to-month ?

1. Ongoing cashflow (hopefully positive!) whilst mobilising your efforts for your value-add strategy. Mobilisation of whatever it is you want to do could take one day or up to a few months. 

2. Ability to move on from tenants within a month. Either to find a new tenant or to renovate the unit.

3. Flexibility to adjust rents and lease conditions within a month.

[Marshall Leipprandt]

@Anshul Jain Unless the lack of rental income from the tenants while you rehab would really be hurting you financially, I would plan to deliver all 3 units empty. This gives you the ability to renovate or at least touch the other units up if needed before the sale and gives future buyers more flexibility.

I have had clients looking for places to be delivered vacant because they want the control to find and screen their own tenants. Buyers buying multifamily properties to owner-occupy are savvy and want the ability to decide which unit makes most sense for them to live in to maximize their overall rental income on the property while living there.

I'll be in the market in the next year or so for a multifamily and I will be looking for a 1-4 unit property that has a mix of 2/2s and 1/1s. I would live in the 1/1 and rent out the larger units. I would also prefer something delivered vacant because then I can begin advertising the units right after closing and find tenants to fill the other units.

The issue with many of the multifamily properties on the market that come with existing tenants is that you never truly know whether an existing tenant is "problematic" or not. Is the seller really going to disclose the fact that a tenant has caused them non-stop headaches if they're trying to offload the property? If able, it's best to avoid that drama when possible and sell the property completely vacant.

[Anshul Jain]

@Colleen F. The property is currently vacant as we are doing major renovations.

The first unit is almost ready, hence the discussion.

The property is under LA rent control so new tenants would not be easy to replace.

[Anshul Jain]

@Brad Sand Yes, I do mean Los Angeles, and the property is in fact under LA's rent control ordinance

[Eliott Elias]

Depends on the extent of rehab, it's a liability doing extensive work with a larger rehab. I would try to find them a temporary place to stay 

[Brandon Vukelich]

I disagree with leaving all 3 units vacant.  Speaking from the sales side, it is best to have at least one unit available for potential owner-occupied buyers.  I work with many house-hacking investor-types that want a small MF.  Ideally you would fill the other two units at max market rents to show the "potential" rents for the property, assuming all units are same size, floorplan.  Lenders in the group can correct me if I'm wrong but a buyer can use up to 75% of the current rents on <4 unit properties to help qualify for financing.  If you fill all units with tenants, you reduce your potential buyer pool to investors (non owner occ) only.  Definitely would not leave all three units vacant.  Best wishes on your success!

[Suzanne Player]

Could you elaborate on what you said above, 

"The property is under LA rent control so new tenants would not be easy to replace."  Rents are below market or at market? 

[Matt Giacinto]

Hey Anshul, when the property has some value-add room, it's nice to leave the units vacant for the new buyer. However, since you already renovated the units, it might be useful to get 1 or 2 good and paying tenants that are near market rent, and then let the new buyer choose what to do with the final unit. Just my thoughts. I'm a commercial agent in LA and I work specifically with multifamily, let's connect!

[Anshul Jain]

@Suzanne Player Under Los Angeles Rent Control provisions, it's extremely hard to remove a paying tenant if they don't want to move. So my concern is that if I place a tenant, the buyer's flexibility will be reduced and it might pigeonhole us to a smaller subset of buyers.

You also can't increase rents more than 3-4% a year.

[Anshul Jain]

@Matt Giacinto gonna send you a message to connect

[Simon Ashbaugh]

Quote from @Anshul Jain:

Hi,

I’m flipping a triplex in the LA area, and I’m wondering if it makes more sense to lease 2 of the units and leave the front house empty, or to have all 3 units empty when listing it?

Which is more attractive to most multi family buyers? Why?

 Best case scenario when listing is to have at least one tenant paying at or above market rent. Its great for comps.

[Scott Esmail]

Empty because it give the buyer more flexibility to what they want. If it was many more units I would say fill them. But just 3 is not going to be hard for the new buyer to fill.If I were the buyer I would like to pick and choose my tenants