To keep or replace tenants?

Question

I am a new investor. I haven't purchased my first property yet. I have made about two offers a week since I took on real estate as my side hustle. Looking to BRRRR SFH's.

Educating myself as much as I can and here's my situation today.

My agent brought me a 4 plex and it's fully occupied. I made an offer on it kind of just to see what happens. I have been rejected or out bid on ever other deal , so I didn't really even think twice about it just wanted to see if I can get one on the hook. The selling agent said it was a strong offer and that the seller was motivated to sell.

Honestly wasn't expecting that, up until this point I have only really been studying about BRRRRing SFH's. The property cash flows $675 with 20% down however, the property does need work and it is low income housing, not so much the area,  but the apartments themselves are.

My questions here is: Do I keep the current paying occupants and leave the property in its current state? Do I get them out to try and BRRRR the property? Is that worth the hassle? Would purchasing a property like this be worth it, even though it cash flows, there is not a way to get my capital back out until the property is rehabbed/ refinanced  and does that mean I have to get them out for that to happen?  I will continue to research this situation , but I feel like this is not the first time anyone has came across this situation. I figured I'd get a head start by opening up the discussion and getting some feed back on it in the meanwhile.

Thanks ahead of time for your advice, have a  great day.

Rose White · Answer

Hello, Victor -

so it cashflows around $168/unit, right? I think you should look into properties nearby and do some comps for fourplexes to see if its worth the rehabbing. yes, rehabbing will take more time and energy, but if the return is there... wouldn't it worth your while? (i would)

Also, if rehabbing the whole property at once seems difficult, you could do unit by unit after the purchase. Send out a letter to the tenant to let them know you are the new landlord/owner of the property and you want to assess each unit to see if there is any fixer uppers needed and you'd potentially raise rent. After that, create an agreement contract around the rehabbing inconveniences for the tenant(s) to let them know there will be people coming in to fix things one or three at a time. Also, if the tenants dont agree with rehabbing inconveniences after the original agreement, i'd move to next unit and etc- if all tenants don't want you to do anything, you can either keep it the way it is... or ... kick them out and start the rehabbing process anyway. lol - after all, its your property! Just remember to do the CMA before deciding to rehab!

Good luck!

Bob B. · Answer

@Victor Colon Are the tenants on a lease?  If so you have to honor their lease.  If you haven't asked this question and your agent didn't bring it up, you need a new agent and also need to step back and not tackle this project until you know more about being a landlord. You might find a local partner or mentor.

Hai Loc · Answer

In Toronto an investor would want vacant possession because the rents can be reset to whatever they want based on demand..

We only have a cap of 2.2% increase on rents per year.. so assuming the tenants will only realize those gains..

You need to understand what the market bears for rental.. if they are already paying market rents and the increases are flexible then there is not much of an issue assuming but I would also get some kinda background reference for each tenant.. you might be assuming a horror tenant..

Erik W. · Answer

Evaluate how much you'd spend and how quickly you'd make that back.  I'm a fan of upgrades creating "payback" in 36 months or less.  So unless you're fixing something that must be fixed (i.e. roof) regardless, do a cost to rent increase analysis.

What I've found is often you cannot justify the cost of upgrades, unless you're prepared to kick out ALL the tenants and reposition the property to a whole different class (i.e. take it from a "C" to a "B").  In other words, if you boost one unit from a $600 to a $900, it's going to be hard to rent that one unit while the other 3 are still too far below that standard.  People like to live where their neighbors are roughly "like" them economically.  In my town a $300 difference would be enough to turn off higher price range applicants.

Marlen Weber · Answer

@Victor Colon congratulations on possibly accepting this amazing offer and starting your real estate investing career with a bang. If rehabbing will increase your profit, then the hassle is completely worth it. The additional work that comes with rehabbing will only last so long, afterwards it will all pay off. Good luck.

Max T. · Answer

If you are using a conventional loan it will be 25% down.

You have to honor the existing leases. It is easier to move out tenants who are month-to-month.

I will generally keep tenants in place when possible, but usually at least one tenant wants to move out upon change of ownership.

I then renovate the vacant unit(s) as they become vacant. I don't rush the move out process unless it is a major renovation. It is nice to have some money coming in while you are putting money out.

Heath Jones · Answer

@Victor Colon Hey Victor, we’ve lived in Enterprise the past 4 years and have bought a 4 unit, 16 unit and 3 SFRs here in the last year. The quad we bought is in a similar situation as yours. As you mentioned, there is really no benefit to putting in 5k in upgrades to make an extra $100 per door (if your lucky). If I was to raise the rents by $100, I would not be able to rent them because all the other quads rent for around the same price. And anyone who might be willing to pay the higher rent, more than likely could find a better area to rent in for the price. Send me a message and we could talk more about it and the area. Rock on!

Rob Beene · Answer

@Victor Colon

Good luck on hat deal. I have having my monthly meetup tomorrow from 11-1 in Enterprise if you are available come by and share your story with the group and let’s all look at it and see what the numbers tell us!

Thanks,

Rob

Victor Colon · Answer

First I'd like to say thank you to everyone that has took their time to leave advice, I truly appreciate it.

@Rose White  Yes, they did cash flow at $197 when I ran the numbers my agent gave me however, that number was not accurate. After I posted my original question I ask my agent to find out who the property management company was that had them. He got back to me shortly after with the information , so I decided to go down to the office and just speak to them myself. This is the information he gave me: three of the units pays $425 and only one unit actually pays $450.

@Erik Whiting The property manger and I spoke for about an hour. He himself is an investor and owns a couple buildings similar to these. I explained to him that I am  mostly interested in properties that I could BRRRR. I went on to say just that , what if I could elevate the the class of the building. His opinion was that the other  owners of the remaining buildings would have to want to do the same thing since they are in close proximity. The person that could and/or wants to pay $600 month is going to want to be around other people that want and can  pay $600. Upgrading the units would dive of the rent and  price the current tenant out and the neighborhood would not attract the higher rent paying tenant.

@Hai Loc I did get some information about the tenants while meeting with the property manger. He said they don't pay on time, but they pay within the week and the additional late fee. The one great thing was that three of the four tenants have been there over 2 years.

@Bob B. Honestly, I have been working with a couple of agents and I seem to always have questions they can't answer. I am in a smaller town called Enterprise, AL. I am here only for about another year, my wife is here for flight school. That being said that's why I went directly to the property manager to get the whole picture on these properties. Kind of a laid back town information doesn't move very fast.

@Marlen Weber Thank you so much. I know that cash flow is nice ,but I need to be able to get my cash back out of the property , so that I can continue on to another and grow my portfolio at a faster rate. I am not sure if this one will work out.

Again, thank you guys so much! This one may not work out , but I will continue on! Sorry if my answers are kind of all over the place. I tried getting back to everyone at once.

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