Advice on Taking Over Mismanaged Multi-Family (8-Flat)

[Shawn Good]

I am closing on an 8-flat next week in Lincolnshire, IL (NW Suburb of Chicago). There are 6 - 2beds/1bath units and 2 - 1bed/1bath units.

Currently, it is rented far below fair mark rent. The lady who we are buying it from is 92. Her husband built the building in ’74 and passed away a few years back. It was never managed well. Some people have lived there for 20 years without rent increases.

Current rent-roll is as follows:

• 1 bed – Current: $735 -Verbal agreement with the tenant at $850
• 1 bed - Current: $ 800 -Verbal agreement with the tenant at $950
• 2 bed – vacant ->Projected: $1,300
• 2 bed - vacant ->Projected: $1,350
• 2 bed – vacant ->Projected: $1,400
• 2 bed - Current: $865 -Verbal agreement with the tenant at $1200
• 2 bed - Current: $635 -Verbal agreement with the tenant at $1000
• 2 bed Current: $1000 -Verbal agreement with the tenant at $1300

All of the current tenants are month to month. The 3 vacant units will rent for $1400- 1350/month. There are small differences in the floor plan and one is a garden level, that is why I projected a slight price difference in the rental estimates.

I am a lawyer so I am familiar with sending written notice to all the tenants because they are month to month. I intend to make all the current tenants go through the application process. I have talked to several of them and many of them cannot afford fair market rents. Some are willing to stay and sort of meet in the middle of fair market and current rent.

The struggle I am havening is the balancing act of raising rent, repairing the building, and the cost of re-leasing. The cost of turn-over is high and there are no guarantees with how fast we will find tenants. Thus, it doesn’t seem worth raising rent from $1,200 to $1,400 if it is going to cost me $3,000 to remodel a bit, and account for vacancy. Some of the currently occupied units need a decent amount of work. 

The building is in a great school district and new homes on the same street are in the 7-figure price range. We are looking to re-fi and cash out ASAP. We will be doing a lot of work to the building once we take over management.

Aside from getting the vacant units occupied, does anyone have any tips, advice, or stories from experience on taking over management control of a building that is seriously rented below fair market value? Any tips or experience anyone has on taking over management control of a mismanaged multifamily would be greatly appreciated.

Thanks,

Shawn

[Dennis Cosgrave]

The building currently has 3 vacant units. I would suggest that you renovate one unit to bring it up to par with market equivalents and discover the true market rent. Once you know what the true market rent is you can plan accordingly. I don’t know if there are common interior hallways or other common areas. If so, I would upgrade them to give the building better curb appeal. Once the vacant units are renovated and rented I would then start rotating the under market tenants out. When the renovations begin, the under market tenants will see the writing on the wall and will likely move out on their own. 

I had a similar situation with a 10 unit building in Florida. When I took possession, 3 units were vacant. I refinished the exterior, renovated the pool and updated the landscaping. I renovated the 3 vacant units, and before they were even finished I started getting notices from the remaining tenants. Of the original tenants, all of them except one moved out within 90 days. The one that remained agreed to pay the higher rent. He was thrilled with what I had done with the property.