Strategy to increase rent-$800 to $1100 on all 3 units property?

Question

I am putting in an offer for a 3 unit multifamily building. The rents on all of these three units are way under market value at $800/monthly. The current market value for a 2 bedroom unit in Manchester, NH is $1,100 to $1,250. What are your strategy for increasing in all three of these units and not having these tenants all leave at once? Thank you ahead for your valuable advices!

Michael Ealy · Answer

Hi Doanh,

We are buying a lot of apartments in the Cincy area whose rents are way under market. So here are the things that we do:

1. We only increase the rents of the vacant units and when the tenant leaves - we have to honor the lease

2. To justify the increase in rents, we improve the outside first and give it a better curb appeal - examples will be blacktop the driveway, put a new sign, put better landscaping. Here's an example of a deal we're working on right now, where the rents are $600-$630/mo and market rent is about $900/mo

At Acquisition

After Improvements

3. Next, we improve the unit finishes. Our philosophy is make the units better than for its location. SO if the apartment is in a C area, we make it look like it's an apartment in a B area or even in an A area

Here's the before and after pictures where we were able to increase the rents from $300/mo to $1250/mo

Bjorn Ahlblad · Answer

@Doanh Mai check your local LL tenant laws and your leases, as well as market rents. With an 800 dollar difference you need to decide if you are going to take the hit or your tenants will. This is not a popularity contest and losing tenants is not something you should worry about too much or you give them the upper hand. Lots of fish in the sea. All the best!

Bryan Mitchell · Answer

I wouldn’t know exactly know, but I’d guess:

1. Kitchen; appliances, flooring, countertops (upgrade but not high end), backsplash, painted cabinets, sink, faucets.

2. Bathroom; see above

3. Flooring throughout

4. Paint throughput

5. Fans; lighting

Lots more to consider, but this is what I’ve focused on with my rehabs.

Theresa Harris · Answer

You may not be able to increase the rents 50%  Definitely check your local laws.  If they are on a lease, then you have to wait for the lease to expire.

Jim Cummings · Answer

@Doanh Mai. I would proceed with caution.

1. Meet with tenants, and get a feel for their personalities. Obviously, this means making some values assumptions.

2. Pick one of the units based on your meeting and with proper notifications have it vacated. Do a Rehab / Update and place new tenants at close to market rate rent.

3. In turn, Rehab / Update other units and place new tenants at close to market rate rents.

Obviously, this is all predicated on the current rental market demand in your area, and what your outlook is for the next few years. It doesn't make sense to vacate all three units at once, and lose even below market rent in hopes of finding new tenants quickly for all three units.

Jim Goebel · Answer

@Doanh Mai

You can offer them reduced rent for some period of time while you do updates.  You can let them know that in exchange for their signing a lease during that period of upheaval, (only through when you're done) you can give them a discount.

You'd rather have the reduced rent during that period than none at all and it could give you some certainty with regards to your ability to manage the needed updates to get market rent.

You could even offer reduced rent in the future once the place is niced up.

You need to do an A+ job during the updates of course if it will dramatically affect their living situation.  One at a time, perhaps.  Get good help, that can use dust containment procedures.  The ability to manage these projects with tenants present means you'll be minting money vs the alternative : running a second rate business like everyone else.

Corby Goade · Answer

A lot to consider here, of course check with local laws, but in general, if you are trying to avoid three vacancies at once: if there are no leases, the tenants will have default rights in your state, find out what those are. Have them sign a month to month lease, and give notice to one tenant to either come up to market rents or give them 30 days notice. Once they are out, fix it up and find a new tenant at market rate, then go to the next unit and the next.

Also- its best to use a different metric on residential properties such as CoC, raw cash flow, etc. Cap rates won't allow you to accurately asses the value and return of your investment if it's four units or less.

Good luck!

Michael Ablan · Answer

@Doanh Mai Do you know why the rents are so low?  If it's because of tired landlord syndrome then I'd just raise the rents to market when the leases expire.  If the units need work then,

Paint

Flooring

Light fixtures

Michael Ealy · Answer

Depends on the project Bjorn.

For our latest acquisition in Bond Hill in Cincinnati, we are spending about $6,500-$7,000/unit and we are getting a rent increase of $200-$250/month per unit.

Bjorn Ahlblad · Answer

@Michael Ealy Fabulous job, Michael! Approximately how much are you spending per unit?

Strategy to increase rent-$800 to $1100 on all 3 units property?

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