How to rehab occupied multifamily properties?

[Dan M.]

For large multifamily properties, if your strategy is to rehab, increase rents and refi, how do you handle this with for example 85% occupancy? Do you increase rents immediately, expecting current tenants to leave? Is their lease contract still valid under new ownership?

[Greg Scott]

Dan:

When you buy an apartment complex you are buying a business.  In most cases that means you are also buying, and must honor, the existing contracts including leases that are currently in effect.  So, no, you cannot immediately bump rents unless the resident is month-to-month and even then, you must often give them 30 or 60 day notice.

In a typical apartment, turnover tends to be about 50% per year.  If you want to do rehab on vacant units, that is pretty easy.  In the first year, you should be able to renovate about half of them.  The second year, roughly half of the units you get back will already have been rehabbed, which means you probably can get to 25% the second year.  That leaves you 12% the third year and so on.   In the first year, it is easier to do vacant rehabs because you have a steady stream of vacant units coming to you.  It gets harder the farther along you go, so then you have to decide if you want to keep going that way or just rehab the remaining units. 

We recently updated 30 occupied units on one property and are mid-way through 87 on another property. It was far easier to go through the pain of a big concerted effort than to eek out a unit here or there for months and months.  The downside is that it takes more coordination because you have to manage the tenants as well as the rehab.  You also cannot increase the rent mid-lease just because you updated the unit, so we are playing the long game on those.