56 unit apartment complex - raising rents and submetering timing

[Serge S.]

Hello BP Nation - I am happy to report that I will closing on a 56 unit complex this week. I will post more details regarding numbers but the short of it is as follows:

56 unit, class B building in class B area, submarket of PHX (Pinal Co), 50 2bd/2ba 1000 sq feet w washer/dryer hook ups and 6 3/2 1300 sq feet units. Cost was approx $35k per unit and average rents are around $600.

This is a quality 1986 complex, well built and maintained w approx $100k max in deferred maintenance. 92% occupied at time of closing and I'm purchasing at roughly a 8.5% cap on actuals.

The reason I liked this project was the relatively easy value add that would bring the project to a 12% cap and over 16% cash on cash within 12 months. These include:

Approx $5000 in loss to lease. Last landlord has not raised rent on the most seasoned tenants. New tenants are paying $640 but there are 15 tenants paying in the low $500s. One unit is used as an office, another as storage both of which will be put into service.

Property tax is over assessed by $24k. I will be fighting the assessment which says the building is worth double what I paid and appraised value. Per my lawyer, this should be a slam dunk.

Submetering - currently landlord pays for water, sewer and trash. I will be submetering and recovering approx $40 per unit after bad debt.

So ... my question to you guys out there is how aggressively would you go after the rent increases and submetering. Submetering will cost each tenant approx $45-$50 per month. My concern is raising rent simultaneously could lead to tenant loss and turnover. Would you do it slowly upon natural turnover or do it at all once? The loss to lease number is big so its hard to see that unrealized. I've done a detailed competitive analysis and nobody on the market has the sq footage, washer dryer hook ups and is charging less than $650 plus $30 RUBS. I will still have a competitive product after the increases. All leases are currently month to month. There is a lot of development and population growth in the city and demand is there.

I'd love to hear some successful war stories and strategies.

[Joel Owens]

Serge that is great this deal you were telling me about awhile back is coming to close.

I might monitor ownership for a few months and implement the plan over time.

What do the new tenants units look like compared to the loyalty tenants that have been there for a long time??

If the top market units are fresh and redone expect to get big push back from the long term tenants with the tired and worn units. If they are going to pay more then they are gong to want more. The tenants talk and if one has a new A/C, water heater, fresh paint, carpet, new cabinets, etc. then there is a higher rent value for that.

If the tenant leaves with the more run down units how much money per unit would be needed to get to the condition of the newer tenants units commanding more rent??

If 2,000 Is spent per unit and 1 month is lost for releasing and turn that is about 2,600 lost. New rent at 640 you have about 2 years to get back that money per unit on breakeven.

Is water and sewer typical for the area for tenants to pay or landlord?? If landlord they will go down the street. If tenants pays I would try to do a direct connection first with the water company and the tenants. If that isn't possible then do the private company route. The statistical average is 30% more consumption with water when the landlord pays for it and the amount is actually higher with loss as they are slow to report leaks which turn a 100 problem into a 500 problem by the time you find it. I would also review the leases for the existing tenants at the lower rent and see if they are already maxed out on income or can afford a rental increase based on their lease file.