How to Accomplish Major Repairs with Tenants

Question

Hi,

Im getting close to closing on my 1st multifamily property and I'm in need of advice and opinions. A little background on the property: The property is 2 brick ranch duplexes on crawl spaces and on one piece of property. 3 out of 4 units are occupied. I have asked that the other unit not be rented out until I take over. I plan to do some light renovation on the 1 unoccupied unit and put it back onto the market. The tenants are month to month with verbal leases, I have signed estoppels. The tenants have been there 2,10, and 13 years and there are no tenant applications or anything for me to look at. The owner just inherited the units and doesn't want anything to do with them so he doesn't much information. My questions is:

- Unfortunately, the unit of the 13 yr tenant needs work pretty quick in my opinion. I believe they are still happy and not complaining because they are paying below market rent. I feel like I need to address the issues in their unit but I don't believe it can be done with them living in it still. For instance, one of the bedrooms has a sagging floor due to a few floor joist needing to be replaced and their bathroom needs the same thing. I feel like it needs to be addressed because if the joist decided to give out then I may have a lawsuit on my hands. My 1st thoughts since I have to give them 60 days notice to evacuate the unit was to renovate the one vacant unit and see if they would like to move in it for good and then that would free up their unit to be fixed. I feel like it wont go over well because the rent on the renovated unit will be a minimum of $150 more per month. On the other hand at least it gives them the option of a place to live and I'm not kicking them out on the street. I just don't see how I can get their unit fixed safely with them in it. What would you do in this case? My head keeps going back and forth from a business stand point to being a nice landlord. I'm sure I need to weigh the fact that they have been there 13 yrs, but on the other hand they are the messiest unit. So much clutter in their unit that my exterminator probably could not treat their unit properly for pest, I guess from being there the longest.

Thanks ahead of time for any information and opinions.

Matthew Lindsey

John Warren · Answer

@Matthew Lindsey this is one of the most challenging parts of this business, and there is no easy solution to be honest with you. I have purchased many, many buildings with below market rents and the tenants often times do not want to move because they know they cannot get a similar deal. The first time you run into this scenario, you often times get too personal with the tenants. Having done this recently in several buildings in Cicero and Berwyn where I invest, I can tell you that it is better to rip the bandage off. If you try to work around the tenant, you will bleed cash for a few years while you try to fix the place up and then they will eventually leave. At that point, you will end up remodeling the apartment anyways and you end up doing a lot of double or triple work.

Once a building gets to a certain age/condition level, it is better to really do a deep renovation so you can create a turn key product that you can be proud of as a housing provider. Then you will have better tenant relationships as well since your housing product will be high quality.

Matthew Lindsey · Answer

@Nathan G.

@Karl B.

@John Warren

Thank you all! It’s pretty clear what I should do. That was my first thoughts however I had recently read some comments on other post on here that made me second guess my thoughts. I’d like to start my journey into multi family property on as much of a correct path as possible. Again thank you for your opinions.

Matt

John Warren · Answer

@Matthew Lindsey in general, I normally just vacate the unit and let the existing tenant find a new place that suits their needs. Normally there is a reason they are occupying a unit that is in rough shape. Typically it relates to their budget and I prefer to start over from scratch when possible. The times where I have gone the other direction, things did not end well.

The challenge here is that most housing providers want to do the right thing and take care of people. Tenants do not realize that at a certain point, buildings are beyond repair without a substantial renovation. When I haven't cleaned the slate, the tenants left on bad terms thinking I didn't care so I not only lost money, but also had no "feel good" factor either.

Karl B. · Answer

I would give them the option of moving into the vacant unit at $150+ more per month and would add that they can move into their original unit at $150+ more per month if they really like the place and want to stay there after they've moved out of that unit temporarily while the repairs have been made.

Sure - they'd have to move their belongings once or twice depending on which option they'd prefer but you would at least have a clear conscience as you're not simply giving them a 30-day notice.

If they decide to find another place then that's cool also.

I'm under contract on a 4-unit with mostly under market rents and the place needs a lot of work (the newest tenant pays a fair rent but the others are 20-30% under market after repairs have been made) and there's only one meter for water, gas and electric.

I don't plan on raising rents right off the bat but I'm getting separate gas and electric meters right off the bat else I'll be drowning in expenses (I saw the 2021 expenses for utilities and it's bad).

If any of the tenants want to leave I'm all for it as I can rehab the inside of the unit and get more in rent - so it's their choice.

It's the same decision for you: lay out the options and stand firm that current monthly rent is not an option.

Nathan Gesner · Answer

$150 a month = $1,800 a year. Just so you know how much you are subsidizing these tenants.

If you keep them in there, you are probably losing more than that because the unit will continue to degrade further and make renovations more expensive. And the longer they stay, the more they'll pull on your heart strings and the harder it will be to get them out.

I would remove them now, renovate the unit, and rent it at market rate because that's how a business operates. You don't have to be cruel about it but you do need to decide if you're running a business or a charity that subsidizes living expenses of strangers.

Matthew Lindsey · Answer

@John Warren

Thank you for your reply. I respect that opinion and can see where that makes sense. Would you recommend doing as I mentioned by offering the other unit to them once it’s renovated for the higher price. I am very certain that it won’t take the 60 days that they have to move out to renovate that one unit. I thought about telling them that if they want that unit that they will have to move into it within 30 days but I’m not sure if that causes any legal issues.

Thanks

How to Accomplish Major Repairs with Tenants

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