Renovate and Increase Rents?

Question

Hi BP Members looking for some advice. I just read this great post from Carol Wong: https://www.biggerpockets.com/forums/223/topics/26...

I'm sort of in a similar position. I have a duplex (each 2bd 1ba) that is south of downtown San Jose California (only minutes away). When I purchased the duplex last year each were renting for about $1250/mo. I knew this is under valued and provided the tenants with a 60 day notice with rent now at $1600/month. Tenants have been great and paying their rent on time and overall market is for 2bd rentals I've seen as high $2250/mo

I'd like to eventually renovate the inside of the units redoing the kitchen, bathroom and hardwood floor throughout and possibly new windows. I'm estimating about $40K in total. Now here's my dilemma/options:

1) Increase rent to $1700 knowing each unit is not updated (very livable but won't demand higher rents)

2) Have the tenants vacate the property, renovate and bring in new tenants at $2150/mo?

thoughts?

Amos

Radhika M. · Answer

Amos M. If you plan to sell or want to do a cash out refi then yes it would make sense to renovate and increase rents as soon as you can. Are you cash flow positive with current rents? If not I would renovate and increase right awayBut you do not plan to sell or refi and are cash flow positive then I think this depends on few factors. Are you happy with your current tenants? Are they on Month to Month or yearly lease? How long have the tenants stayed in the place? Since the rents were low when you purchased I would assume a long time. Do tenants they pay on time and are they low touch (not many complaints and easy going)?Since the difference in rent is 450 per unit for a total of 900 for both units and it will take you 4 years to get back what you spent (remodel cost + loss of rent when you are remodeling) I would wait for a turnover and then remodel at that time. In Carol's case she has rent control and it would be very hard to get a good increase. In san Jose for a duplex as of not there is no rent control so you can increase the rent every year until they vacate and when they vacate I would renovate. Just my 2 cents

Radhika M. · Answer

@Amos MuiI own property in west San Jose so not very familiar with Downton San Jose but the rents of 2100 for 2 br seems actually on the lower end depending on the condition, Size and location of property. @Minh Le deals with downtown San Jose area so he may be able to provide more accurate data than me.

Colleen F. · Answer

So $450/month more with how much vacancy time to complete the renovation? How much will the renovation cost? How long will it take you to recoup the cost of the renovation? Is the renovation primarily cosmetic or does it include required mechanical updates? If the current tenants are a pain/annoying and you want to get rid of them anyway I would definitely renovate at the next opportunity but stagger the unit updates. If the tenants are paying on time, not harassing you regarding updates, and generally quiet and good I would wait on at least one unit until they move raising the rent along the way as needed. I would figure the payback period of the cosmetic rehab, the longer to recoup the cost of the rehab, the more likely I would wait. If the renovation includes mechanicals you need to update-- that changes the equation. That I would do before it is essential but mostly you can do that with tenants in the unit.

Carol W. · Answer

@Amos M. My biggest motivation to renovate the unit and raise rent as much as possible is not only to get a higher cash flow, but also to increase the property value so I can get cash out to purchase another property. My equity was at $300k with the initial down payment, but after the renovation & rent increases, I now have $375k in equity + $170k cash out to invest.If I can find another property that yields higher return than the 4.875% interest that I am paying for my new mortgage, then I am making my money work harder. So, I think my thoughts would be 1) if you want to get cash out to invest/pay off higher debts, and 2) whether you would be able to increase enough equity to get the cash out you need.Hope this helps. Best of luck!

Garrett Mayo · Answer

Amos M. I live in San Jose but dont have any properties here beside my primary residence. I do watch the market and the rent amount seems about right pending the exact area. If its only going to take 1 month for renovations I say bite the bullet and just go for it. If you have the issues of both units are rented by same family members may be to hard to rent one and renovate another. Either way good luck!

Alex Brookbank · Answer

Amos M. Have you thought about renovating one at a time? Increase the rent to 1,700 for one, and fully renovate the other. I did something similar to this for a triplex I recently bought as an OC. All three units' rents were under-market. I renovated the worst conditioned unit first, while keeping rent the same in the other two. Now, I'll get a new tenant at a higher price in that unit and I'll move into and renovate the second worst unit. You could do the same thing.

Amos M. · Answer

@Garrett Mayo appreciate the feedback@Radhika M. - no plans on selling but possibly refinance and will depend on a new apprasied value if I renovate with the new rents. I'm cashflow positive now. Tenants were previous owners and were foreclosed on. They've been living on the property for 10+ years so there's definitely some attachment to the property for them. They're good tenants and only calls when there really is something in need of repair. Otherwise I don't hear from them. They are month to month. Correct no rent control in SJ on Duplexes but there's definitely been a lot of talk to move towards it. Are you also seeing rents near downtown San Jose in the $2100+ range for a 2BD?

Amos M. · Answer

@Alex haven't thought about that but both tenants are close family members. Taking emotions aside this could be a possibility to minimize the loss of rent.@Garrett Mayo $40K is not an issue. Renovations about 1 - month. I see you're an investor in San Jose. Are you seeing the same rent increases around downtown San Jose at about $2150/mo

Garrett Mayo · Answer

If he funding of the 40k isnt an issue (now vs later) and you can take the hit of the the units being vacated during renovation process do it now would be my 2 cents.Whats the time frame for renovations?