How to transition a multi-family property

Question

Hello Fellow BP-ians,

I just bought a 18 unit property in Ohio. This property is currently a run down property in a decent neighborhood. The property has 4 vacant units that I am going to turn around in another month or two. My plan is to turn this property into one of the better ones in that area.

My plan so far:

I intend to give a lot of face lift to the apartment building itself which includes,

new roof

2 tone complete external paint job

tear down old raggedy patio fences and replace with new ones.

Turn the vacant units into really good ones with new appliances, wood finish PVC flooring recess lights etc.

Individual water meters

Better laundry room facilities.

New solar street and parking lights. to mention some of it.

My question:

The current rents are well below the market because of the condition it is in, but once these upgrades are done, I intend to raise the rents to market rates at least for the newly refurbished units.

But here is my dilemma. Since the rents are low, there are some "not so ideal" tenants living there currently and I cannot let all of them go at once, as I need the cash flow, but this may affect my plan of steep transition from semi-ghetto to semi-luxury at the same time.

I don't intend to keep 75% of the current tenants as I had inherited them and don't really trust the background checks done by previous management team.

Any ideas? I am sure some of you would have faced this situation and so would like to dig into some of your experiences and see if I can replicate it.

PS: I could not find an answer searching through the bigger pockets forums.

Hope to hear from you guys.

Thanks in advance.

Thomas S. · Answer

The only thing you can do is renovate and replace tenants in blocks. You have 4 vacant now, when they are done you terminate and renovate 4 more. Time is money. You need a crew or crews of workers that can do the renovation work in short order. You should be able to turn them in a month.

What you do is hold one of the first 4 units as a model display unit. Start generating future tenants by advertising and showing the finished model.

Once you have the process in place you should have only the 4 units you are working on vacant, plus the model apartment, and have tenants already lined up to move in when they are completed.

Advertise units 2 month ahead to get the best applicants. Make sure all exterior and building common areas are completed first.

Timing is key to quick and efficient turn over.

David Stafford · Answer

Hi, @Dhanush Kondoth,

One item of note that I didn't see mentioned: if many or even most of the existing tenants have similar lease-end dates, you will want to stagger the new lease contracts. Take the total number of units and divide the leases into quarters (as an example) so that each quarter of the year, a quarter of the leases expire -- or something along those lines. It might also mean that at the outset you need to offer either shorter or longer than normal leases to get everything lined up the way you want. This way, in the future, you'll never have a bulk of your leases coming due at once. Good luck!

-dave

Wade Sikkink · Answer

It's going to take time.  If you are doing it on a budget, then don't expect to make a big transformation in a short period of time.  We had basically this exact situation with a 14 unit.  Good structure in a good neighborhood, but the previous owner neglected maintenance and was handing keys to anyone that handed him $400.  We had a number of undesirable tenants when we took over.

We just tackled it one unit at a time.  We tried our best to deal with some of the original tenants while we worked on improving the property.  As units turned over we would gut them, renovate and raise the rents.  After 3 1/2 years, we've renovated all but 3 of the units and those 3 units are occupied by long term tenants that were there when we bought the building.

You have to be willing to kick some people out.  There were a few situations where we gave a tenant a 30 day notice that their month to month tenancy was not being renewed.  Once they were out, we renovated the unit and rented it out again.

Taking on something like this takes patience, but you will be rewarded.  We refinanced the property 3 years after buying it and the increase appraisal plus what we'd paid down on the mortgage at that point gave us a $200k increase in equity.  Making $200k in 3 years seemed pretty good to me.  In addition, the cash flow of the property paid for all the roughly $75k we spent on renovations during that time.  We didn't pay any of that out of pocket.

The icing on the cake happened just the other day.  My wife was out and about and ran into a deputy from our local sheriff's dept.  In chatting she mentioned the building we own.  The deputy said, "We don't ever get called out to that building anymore...."   Ah, success....

Good luck.

Jeff Greenberg · Answer

If they are on leases, you will need to wait until the lease is up. As @Eric James mentioned raise the rents and they will move out.  If you want to keep them, let them move into the upgraded units at the new price.

David Stafford · Answer

Hi @Dhanush Kondoth,

I would try to stagger them anyway you see feasible: some might have to agree to shorter than normal leases while others might have to agree to longer than usual leases. It might only need to happen once after which you'll have the balance you're looking for in the leases and from there everything can go back to 12-month.

-dave

Dhanush Kondoth · Answer

@David Stafford currently 12 out of the 15 tenants are on month to month lease. And most of them i intend to let go. So should I worry about locking them onto an extended lease? I will try to do that with me new leases.

Dhanush Kondoth · Answer

Thanks

@Wade Sikkink, Yes it does sound like you were in the same situation that I am going through. So far the rehab cost will be covered by the income and I hope to increase the actual cash flow in the next few months.

Dhanush Kondoth · Answer

Than you all for the generous inputs. All except 2 tenants are on a month to month lease. If I raise the rents, I might run into the unfortunate situation of having high turn over within a short time and that will put me in an undesirable financial situation,especially when I am pouring in large amounts of cash into rehab.

This also ties into the situation where I won't be able to afford to keep 4 units as display and rehab four more.

In all of these situations,the existing tenants and their behavior exists and if I was to move in with my family, I would love to move into the newly renovated units, but not with that neighborhood. And that is the sort of dilemma I am in where I would like to hide the notime so exciting side of the apartment from the inflow of good tenants.

Anthony Dooley · Answer

I would give them all a 90 day notice that the rents will increase as of the specified date, or the end of the lease whichever is sooner. That gives you time to renovate and get new renters at the new price, so that when the low renters move out, your cash flow will still be good.

How to transition a multi-family property

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