Below market rent: Is it better to buy with tenants in place or without tenants?

Question

I am offering on a 5 unit multi-family in a fairly stable rental market. I have been going back and forth on the best strategy to close this deal, whether to ask the seller to remove all tenants, or to purchase as-is with the current below market leases.

The property needs minor cosmetic improvements in all units in order to get full market rent. All 5 units are occupied with month-to-month leases.

So...in deciding the best strategy, my big questions are:

1-Should I buy without any tenants? (if the seller is even willing to evict them)

2-Shoud I purchase with the tenants and then evict them all at once so that I can do the necessary renovations as quickly as possible and get all new full market paying renters I estimate I can renovate entire building within 8 weeks)

3- Should I renovate the apartments one-by-one (I estimate this would take me 6 months)

I would really like to hear some thoughts on this situation! Thank you! - Sean

Account Closed · Answer

I was an apartment manager, so from my perspective, if I was to manage this building for you, and you gave me the choices above, I'd say, empty that building and do the renovations, and then let me find great tenants of my choosing, to be moved into freshly renovated apartments, who will be happy to pay the higher rent.

Why?  Because you will likely have at least some problems with the existing tenants.  First simply because they will be afraid of a new landlord.  Next, when you start kicking tenants out to do renovations, the ones left behind will be unhappy campers, knowing they will be next and/or the rent will be increased significantly.  Then, you may have some you have to evict.  Odds are good, they won't want to stay and pay higher rent, or move out and back in to pay higher rent.  And you'll be dealing with all of their security deposit issues, and any small claims court actions that rise up out of that.

I could be wrong, they may all happily go into the sunset or move out and want to move back in and pay higher rent - but that's not likely.

Plus, they will be saying things like, "My old landlord did things like this...or my old landlord didn't require that..."

It would just be nice and easy and clean to get all fresh tenants who are happy to be moving into your freshly done units and paying the rent you asked.

From a financial standpoint, you'll have to ask an investor.

Sean Peters · Answer

Thanks Sue K. you definitely made some great points... I agree that it might be a complete pain keeping the original tenants so that is why I am considering that option. I definitely need to weigh the financial pro's and cons of going with that scenario.

Barbara G. · Answer

I agree with @Lorraine Pennington

interview all 5 tenents.  Tell them you are preparing to renovate and raise the rent and tell them exactly what you are planning to do.  You will get a good feel of which one's will not pay more rent and which one's will consider staying with the raise and the renovation.  As Lorraine says, the cash flow is important.   Another thing I would be concerned about is renting the 5 apartments in a timely fashion.   its going to be more difficult to rent 5 apartmets at one time as oppossed to renting one apartment at a time. That's more money you will be losing..

Lorraine Pennington · Answer

I think the larger investors/asset managers definitely have good points. I enjoyed reading them and they gave me another perspective. Here is my experience from buying a 4 plex last year ,..

All units were occupied and I wanted it that way. I wanted it to cash flow immediately. During the inspections, I had an opportunity to talk with 3 of the 4 tenants and introduce myself ... along with get a feel for their personalities and of any complaints. No major complaints and everyone seems to keep to themselves.

Two of the 4 units had already been remodeled. Leaving me 2 to do myself. I budgeted 15k for each of those. I wanted to conserve my cash so I did no evicting. I also honored all existing leases. After 3 months of owning the property ... my first lease expired and the tenant left on its own. That was remodel #1 of the 2.

In Jan another lease expired. No remodel on that one but I raised the rents and we are signed on for another year.

The other two expire in May/June. I'll raise the rents. But I'm in no rush to renovate the last unit. Our profit on this specific property was 13k last year ... which is close enough to covering the 2nd remodel without using my own cash. Of course, then I would show 0 profit for year 1, so depends how you want to spin your numbers to yourself! lol But I did already have the 30k of my own funds earmarked ... but it is nice to not have to transfer the last 15k over. I'm big on preserving the cash I do have.

So in my perspective ... I want the units filled and I want the cash flow to keep flowing. I want to limit my vacancies and keep my returns on target. So I would see no reason to evict them all ... plus that doesn't sound like a fun process for the landlord or the tenant.

Of course if your construction plans are extensive ... If you're knocking down walls and such ... then perhaps it would be cheaper and faster to have no tenants. I've not had that experience though. Good luck to you and hope that helps!

Giovanni Isaksen · Answer

I do a lot of asset management which is a fancy way of saying I manage the property managers but what it really means is that I get the benefit of their collected wisdom without having to do all the hard work they do.

We also do a lot of what's called 'value add' deals where we take an uderperforming property and bring it up to market or 'stabilize' it. What the property managers have taught me in doing those type deals  is that one bad tenant can make your life hell and worse yet can make the other tenants' life hell too... and scare off the good ones. And it can take several sets of tenants to clean out the dead wood if you do it in drips and drabs.

So much of attracting good tenants comes from good word of mouth that it's more expensive (especially if you life span is worth anything to you) to go the cheap way by trying to move the old tenants out one by one. Our property managers and I have learned that it's more often much less costly in the long run to do the clean sweep than die the death of a thousand cuts. Most likely you seller won't do that for you so it will but up to you or your property managers to move out the old tenants. Run the numbers for sure but include all the real costs including stress when you do.

Good hunting-

Barbara G. · Answer

I suggest you run the numbers.   How much will you lose in 2 months rents for all the 5 tenents. How much will that raise give you  in one year?  Could it take 3 months to renovate?  How much of a raise are you proposing?   Can you afford to lay out all the renovation money at one time?

We bought our first 2 duplexes with tenents in place, paying $100.00 less then what we wanted or $4,800 less for the year.  One tenent moved out the 2nd month and it took us 2 months to renovate that empty apartment and get a new tenent so we  lost $2,000 (on the vacency), but we raised   the rent for the other 3 the $100.00 so we made  3,000 more for the year.    We piece mealed renovations on the other 3 apartments and still have more renovation to go for those 3 apartments.  We have owned the apartments 13 months now.

I think you might want to consider renovating the apartments one at a time.

Sean Peters · Answer

Thanks @Giovanni Isaksen, @Lorraine Pennington, Barbara G.

Great advice, It definitely seems like everyone has a slightly different approach to 'stabilizing' a multi-unit like this. I like the idea of interviewing the tenants to see which ones could potentially pay more rent and are good to deal with, I wouldn't mind keeping them. I'm starting to lean towards keeping about half the building rented so I don't lose all my income, and renovate 1/2 at a time...

Barbara G. · Answer

Well Renovating half of the apartments at one time sounds like a plan.  You say your renovations are "cosmetic", what kind of renovations are you talking about?  We put in 2 new bathrooms while the tenents were in the apartment, although each apartment also had a half a bath.  We also did some new radiators.  We are planning on putting a kitchen in while the tenant is in the apartment.   We did the renovations on the cash flow.

Account Closed · Answer

It depends on how good you think you are at finding good tenants with your own resources and it will be influenced by the financial pressures you face.

Below market rent: Is it better to buy with tenants in place or without tenants?

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