Should I fix up my multifamily or just sit back and earn cashflow

Question

I bought a 3 unit multifamily. This is my first property EVER, I have been a landlord for a month. All long term tenants on this property that I have inherited. And hope that they stay for as long as they did with the previous owner. Property cash flows about $700/mo after the mortgage and expenses.

The property does need some work to attract better tenants in the future and to make the property look more appealing. Property needs new doors and windows, also needs to be switched from fuse system to breakers. These are the only things this property does need.

My question is this. Should I worry about replacing these windows and doors, and switching to a breaker system now or later? 1. I plan to refinance next spring as I have 20k of equity in this property. 2. The tenants are very laid back and I have ran these ideas of updates by them and they have no problem with it, especually considering they are paying for heat and this will deduct on their cost.

PROS: 1. Updated Windows and Doors and breaker system before my refi. 2. This will also spruce up the property. 3. Will attract a better tenant in the future.

CONS: 1. More money out of pocket up front. 2. I have to live with my property looking slightly rundown with all of these old windows and doors for I take a lot of pride in what my assets look like. 3. Tenants say they don't mind but in all reality I would expect them to get a little irritable in some way with their unit under construction.

Not sure which route to take here. Should I go for it and spend the money up front then refi, or should I sit back, leave the good tenants alone, enjoy the cash flow, live with the property in my view looking slightly rundown, and wait to do any major updates after a tenant leaves.

P.S. Either way I still plan to refinance this spring.

Marco G. · Answer

Also, congratulations, it sounds like you did a fantastic job landing a phenomenal deal! Welcome!

Michael Le · Answer

Is the property under market? You said that improving it will attract better tenants, but will it attract higher paying tenants? Conversely, if you don't fix it up, will you either eventually lose tenants or not be able to keep up with the market due to its condition?

Drew Shirley · Answer

Look at it through the idea of return on investment. If you spend money but that money doesn't allow you to raise rents or lower expenses, then you're just spending it to spend it.

On the other hand, if you spend $5,000 per unit and increase the rent by $100 per month, that's a 24% return on your money and that's hard to beat. ($1,200/$5,000 = 24%).

Similarly, if spending money increases the appraised value of your property for the refinance, that might be worth it. Remember, though, that 3 units will be valued based on comps, not the net operating income, so you won't necessarily have a more valuable property just because you spend money on it.

Robin Boyer · Answer

Also looking into buying my first multiple family thinking of having 50k in reserves?

Todd Dexheimer · Answer

Breaker panel will not increase rents, but could decrease insurance costs, so check w/your agent. Can you fix up the windows without replacing them? New windows don't really add much value unless you pay heat. If you can make the windows look nice without replacing them, I would consider that. Be sure to look at the cost difference - if it is close, then go w/new. For doors, that could add value if they are plain or dented. If you can keep them and paint them, consider that as well.

I am usually a replace things to get higher rent and better tenants and to keep them happy, but the things you're talking about doing aren't big ROI items

John Lenhart · Answer

@Andrew Michaud I would focus your spend on what will generate the most income for you either through increase rents or reduced expenses. The fuse box is nice to change out, but does the tenant really look at that when they are renting? I had a duplex at one time with a fuse box and to be honest, that was not something the tenant ever paid attention to nor did it really reduce expenses. New windows definitely have more of an appeal to the tenant because they offer a fresh look and will reduce your energy expenses.  I would first focus on items that are going to get an instant return and then take care of other upgrades that while important do add value to the tenant or reduce your expenses.

Kurt Jones · Answer

Don't know what a fuse systems, thankfully. But my approach would be to treat it like crabs in a pot of water. Turn up the heat slowly. Bump rents a bit and see if one of them bails. If so, then update the unit and increase the rent again. It allows you to stage the rehabs while also increasing the rent and thus your NOI.

Matt Vezina · Answer

Have you checked with the insurance company about an improvement to your rate if the fuse box is swapped out?  That could offset some of your cost on that front. If a fuse blows and a spare isn't readily available it's all too easy for a tenant to stick something like a penny or piece of pipe in the panel and create a fire hazard. I have no idea what kind of change to expect in the rate but I would be surprised if there was none.

Should I fix up my multifamily or just sit back and earn cashflow

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