Turnover on Multifamily Value-Add in 1st Few Years

[Chris Eaker]

Hello All,

In a value-add multifamily property (say 75-125 units size) in the early years, there will be quite a bit of upheaval for the current tenant base, i.e. construction onsite to renovate the property, renovation of units, possibly implementing RUBS, enforcing more rules on the tenants, and raising rent. How much turnover can be expected during this early period, say the first, second, and third years of owning the property?

Thank you for any info you can offer.

[Andrew Cushman]

@Chris Eaker, as @Michael Le said, that is largely up to you and there are quite a few factors to consider.  Since we reposition properties that are roughly the same size as what you asked about (75 - 200 units), I'll let you know what has worked well for us:

1.  We always go full-out on whatever exterior improvements are planned so we can immediately improve the curb appeal and start looking like a better property.

2.  For interiors, we upgrade them as they vacate.  

For the C+ to B class value-add deals we usually do, we've found that improved screening, enforcing good community rules, requiring on time and in full payment of rent, and raising rents will generally result in most of the existing residents leaving as their leases come up for renewal.  In most cases, when a unit comes up for renewal, we will require the unit be renovated and moved to the new higher rent.  We have found that this forces enough turnover that we can get the property completely renovated within 12-18 months without dropping cash flow too drastically, which is a major risk of trying to empty a property out before renovating.

Finally, keep in mind most lenders will be very nervous about anyone who plans to move out all the residents in order to do renovations.  Many lenders will require you to submit some form of renovation plan (albeit a simple one), and if they see you are going to empty the place out they won't give you the loan.

Best Regards,

Andrew