Rehab with tenants present?

Question

Hi BP, I'm proud to say we finally took the plunge and bought our first property! It's a 1920's craftsman duplex, 2/1 + 1/1 with one vacant unit and a 15-year tenant in the other (luckily no rent control so they're near market rate). It's not much on paper, but we're in Los Angeles, so starting where we can.

Our game plan is to fix up the place, live there for a while, and refi out of our FHA as soon as humanly possible because the PMI is no joke. We need to increase the property value by about 60k to hit 20% equity and be eligible, so the reno needs to count.

If it weren't for the looming refi putting a squeeze on us, my initial instinct would be to leave the tenants alone and make updates to our unit and the general structure only, then update the other unit either gradually or once they leave. However, updating both kitchens and bathrooms would certainly net a higher appraisal. Also after the reno we should be able to get about $500 more for the 2/1.

Question is: how do you work in updates around people living in the unit? I think they'd be cooperative if we offered to update their place, but working around all their things and furniture would make the process much harder/longer. How do we get them and all their stuff out while the work gets done, or do we even need to?

Thanks in advance!!

Justin Thompson · Answer

Hello,

Congrats on the purchase!!  First you need to ask yourself if you're going to rehab their unit are you going to simultaneously raise the rent on them? If that's the case, then I'd pitch the rent increase before you start work, because if they decide to not pay the higher rent, then they are going to leave. Wait for them to leave and then rehab the property. If they are on board to pay the higher rent (which I doubt) but lets say they are. You need to be organized and fast.  Meaning if you are going to gut the bathroom and renovate it, you need to be able to make sure you can get it done quick so they are not out of a bathroom.  If you're going to replace the kitchen, make sure you have everything planned to make the gut and remodel smooth.  Painting and things like that they will understand. You could even pitch it to the tenants to paint for you and you'll knock some off their rent that month.

Moving their items out is out of the question. You'll have to do a room by room rehab.  The process needs to go smooth. If you have a problem and for example like I did once, I broke a pipe off in the wall when I was redoing the bathroom. I stayed there until I had it fixed so they had a shower. Took me till 10pm and 4 trips to the hardware stores, but I had it fixed.  So you need to prepare if something goes wrong and it's a necessity for them that you can get it fixed quickly. My advice though is to pitch the higher rent increase to them. If they say no, then rehab your unit first and then rehab theirs once they move out within 30-60 days. Then rehab their unit and rent it for the higher rent.

Justin Thompson · Answer

Sure!  Like I said in my other post you have to remove emotion for you to stay in control as the landlord. When you go to renovate their unit and let them use yours, you are accommodating them to much.  You need to pitch the rent increase and remodel as you want to remodel their unit so that they can be "proud" to call their place home.  They are going to have to understand and endure the temporary inconvenience of the remodel. This will give them a sense of you are trying to make their home better and they should be receptive to the remodel without any issues. If you accommodate them by letting them use your unit, they will, in my opinion, lose the sense of who actually is in control.  This could lead to issues down the road when things need fixed or they don't have the money on time for rent. If you show to much kindness (emotion), not all, but a majority of tenants will see this as a sign of weakness and try to take advantage of it at some point or another.  You will lose your upper hand of control and then you start having a tenant that thinks they call the shots. My tenants know I am a kind, considerate guy but they also know I am in control.

I'll give you an example of what happened to me when I bought my first duplex with tenants in place in one of the units.  Unit 1 was vacant and needed a complete rehab.  Unit 2 was rented but to someone that had no lease in place and they were paying $100 less per month than I expected to generate. Well I started the rehab on the vacant unit and I notified the tenant in the other unit that I would be remodeling theirs next. Or if they did not want me to remodel I was still increasing the rent by $50 per month. Well long story short, I tried to be to accommodating to them during my remodel and I did not maintain my control. They brought a dog into their unit, when I strictly said no pets.  They did a few other things that I let slide as I was the "new" landlord trying to play nice to the existing tenants.  Well I will never do that again. They started acting like they called the shots. Well rent was due and they didn't pay. I went to collect it, they stated "they'd call me when they had my money. Until they call, don't show back up."  Now I know this is an extreme case, but if I had stayed in control when I first bought the property and stood my ground when they pushed the limits of the new landlord, I wouldn't have had an issue.  They probably would have last a little longer than they did.  I evicted them after owning the property less than 2 months.

That's what happened on my first duplex I bought.  Now I am a kind, respectful landlord, but my tenants know I am in control and since that property, I have not had another tenant try to push the limits with me. Sure someone will down the road, but I maintain a control aspect that I see most landlords struggle with that leads to issues. I look at is as, I may be causing them a few weeks of mess when remodeling but they need to understand they are "renting" from me. I own the property, they are privileged enough to live in my property, that I pay for, that I maintain.  All my tenants show me a great amount of respect and I show them the same respect and it has been a pleasure renting to them. I know it may come across as I am a jerk or something to some, but I am by far one of the least stressed landlords I know because of it!  Landlords that try to play friends with their tenants will lose every time. You're running the business, you're the CEO, you're the head person.  Treat it that way and I promise you that being a landlord will be a completely different experience. It will be a much more pleasurable adventure!!

Manolo D. · Answer

I'm not a landlord nor do I have knowledge about it, but I have read it in the forums that it's best to place them on a month to month apartment or motel/hotel, the things you want to do wouldn't take you a few weeks anyway, I say only 1 week if your contractor has a good crew, maybe crew of 6, 3 doing bath 3 doing kitchen. Remember that CA is employee and tenant friendly states, so whatever happens, the authority tend to favor tenants/employees.

Tatiana K. · Answer

Thank you@Justin Thompson!

@Pat L. that's an amazing experience and one I can't expect we'll achieve as newbies to both landlording and renovation. The thing we have to remember is this property is in a nice area on a lovely street, and the rental market is strong in our area so worst case scenario, renting it will hopefully be easy enough.

@Manolo D.  this is definitely something we thought about as well.

Manolo D. · Answer

Working while tenants are present is aliability waiting to happen, if they step on a nail or break a leg because there is a 2x4 laying around, they're not going to sue themselves for negligence.

Pat L. · Answer

I doubt if I could do it around existing ever present tenants but.....

we just did something similar with a current tenant who had given the required 30 days notice. In fact he allowed us carte blanche access to show the place & it rented faster than we anticipated. But to get the much higher rent we were asking we promised the new tenant some major rehab to the bathroom, all walls/ceilings would be painted & all the old 'crime scene' carpets would be replaced (they were literally 3 deep without padding).

We also put in a couple of new doors & upgraded all the trim & baseboards. Then of course we decided to upgrade the disgusting pre 70's hydronic baseboards.

We were lucky as the tenant was away for a week, on business, & he had already started packing. So we tore it apart & had everything done except the new carpets (not our fault) by the time he got back. He patiently lived without carpets for several days but we did give him his full security deposit back a week before he moved out & a glowing reference to his new Landlord(s) in Iowa.

It saved us a month of downtime & the carpets were being installed the morning the new tenant was loading their U-Haul 20 miles away. A seamless integration !!!!

The only other time we did it was May of this year when a tenant moved home because of a serious work related injury. He had paid his rent but a week later he belatedly informed us that he would be vacating but couldn't move his 'stuff' until month-end. So we 'helped' move all his belongings to the storage area we have on-site & then gutted the horrible 70's era, heavily 'smoked in' unit to the studs. I had it done in 25 days & we never lost any rent, in fact he also conceded his security deposit. We had it rented before the kitchen & bathroom were built & we were able to jack the rent $250/month. I also converted the unit so they are now paying for their own heat.

Tatiana K. · Answer

Interesting, that's something I never thought of. Can you please elaborate?

Justin Thompson · Answer

You're very welcome! That's a good idea but I personally wouldn't advise letting them use the other unit while you do theirs. I believe that would cause a tenant/landlord issue later down the road but that's just my thoughts.  I know you want to do right by them and that's a great quality to have as a landlord.  However, money is money to me and my wife has a hard time withdrawing emotion when we buy a property with tenants already in place and I plan to increase their rent.  She puts emotion into every deal we do, but that's what balances her and I out. I remove emotion and let the numbers be my reasoning. The only way to increase cash flow is to either lower expenses and or generate more income.  I'd offer to do a semi-remodel of their unit and raise the rent at least 50% of what you wanted/needed.  That will give your unit a better appeal, you increase the rent and they don't get sticker shock of the rent increase.  I've raised rent before $150 the day after I bought a property, people had no problems and they are still there. I raised rent by $25 once, people left the next weekend.  So it all depends on the tenants and what they can handle.  If I can live with a little lower rent and keep good tenants I will. If they are already having a hard time affording to pay the rent now and you keep it the same for 6 months and then increase it then, they still won't be able to afford it.  I'd see what their income is and see if they can even handle a increase in rent.

Tatiana K. · Answer

@Justin Thompson thank you for the input! Luckily we're not planning to move into our unit right away so we could ostensibly update ours first, then let them use the bathroom/kitchen while theirs is under construction.

I'm also willing to cut them a deal on the rent and raise it gradually, or even keep it as is for a period of time to keep them happy. A month of vacancy would cost much more than a few months of lower rent and I want to do right by them.

Rehab with tenants present?

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