How aggressive would you get with rent increases?

[Steve Buchanan]

I recently purchased a 10 unit apartment building in Long Beach, CA and my strategy is to do a value add. The exterior of the building has a decent amount of cosmetic deferred maintenance (needs landscaping, exterior paint, junk removal) and all of the units seem like they haven't been renovated since the 80s and are in varying conditions. The building came with 1 vacant unit and we inherited tenants in the other 9. All tenants are on month to month leases and the property is not in a rent controlled area which means we can raise rents to any amount as long as we give the tenants 30 days' notice and can even have the tenants vacate if we give them 60 days' notice.

Existing rents are currently well below market. Our 1 bed 1 baths are averaging $1100 while market rents (compared to similar units in the area) are closer to $1400. If we do complete upgrades to the units (new floors, kitchen, bathrooms) I think we can get close to $1600. Our 2 bed 2 baths are averaging $1375 while market rents are $1600 and after full upgrades I think we could get $1850. The things we are doing right away are new landscaping, upgrading the courtyard, clearing out the junk and painting the building along with doing a full upgrade of the vacant unit. 

The part I am unsure about is how exactly to approach the rent increases once this is complete. Based on rental comps in the area the market supports us immediately increasing rents to market rate which would see all tenants receiving notices of rent increases in the ballpark of 30%. The thing is, by spending the money and doing full upgrades of the units we can raise rents even further (up to 50%) which gives us the greatest ROI based on current CAP rates.

My question is how aggressive should I get with rent increases? Legally I can raise rents to whatever amount I like knowing that if tenants leave I can upgrade the units and get higher rents. However by doing so tenants that stayed would end up paying a good amount more for their current units and tenants who didn't stay were forced to find somewhere else to live. From a completely financial standpoint we do best by upgrading all units and increasing rents but we are dealing with people and not just numbers on a spreadsheet. What would you do?

Thanks in advance!

Steve

[Mike Dymski]

With a 50% increase, you are changing the resident profile and none of the current residents will be able to stay (which is fine).  Regardless, below is a common re-positioning plan:

• Rehab the exterior, landscaping, and amenities first, which adds value to the existing residents (and curb appeal to the new ones)
• Rehab the vacant unit
• Notify another resident and provide them with the option to (1) stay in their un-renovated unit at the new rent (2) move into the renovated unit (3) move out.
• Repeat (with as many or as few units as you like)
• Assume (and be prepared) for some residents to provide notice on their own to move out (as word gets out)

Provide 60 day notice, be respectful, and just run your business.  Congratulations on the value add...sounds like a great one.