Evicting Tenants on 4 plex under contract

[Ross Y.]

Team!

The BP community got me started house hacking 5 years ago and now I’m up to 9 doors with this one! Thanks!!

I’m under contract on a 4 Plex in San Diego area. I was looking for some collective thought on my approach to get this property up to market rent. After walk through, I believe my best option is to give a 60 day notice upon closing. Once tenants are out, renovate, and re-rent. See factors below.

- Total rents are roughly 2500 per month under market.

- current rents will not cash flow. PITI capex 4800… rents total at 4500.

- each unit is over occupied; one 2 bedroom has 8 occupants with beds in living room etc. lots of poor tenant improvements… extension cords coming out of windows, sheets on windows, etc

-fairly nice area

- property was mismanaged and is quite sloppy. Lots of junk, too many cars parked there, etc

- the tenants are friends/family of each other

-estoppel agreement showed that none are US citizens. Language barrier is difficult.

-cosmetic renovation needed on each unit. One needs kitchen renovation

- I have reserves to cover costs.

-I’ve tried to raise rent to market on tenants in past RE purchases and it’s always been a PIA and they move anyway.

-will probably offer cash for keys (Ill have all their deposits through escrow)

- my 1031 clock was getting close and I needed to get into this property for the tax savings… the numbers work but it will take a little TLC to get it up to market.

-this is a long term income property for me.

- I self manage.

[Dan H.]

Hopefully you realize that is a rent controlled property (state rent control law). 

Evictions on rent controlled units are not allowed except for non payment and unaddressed lease violations.  Any lease violation the tenant must be giver opportunity to rectify.

Maximum rent increase is 5% plus local CPI capped at 10% in any given year. Do you know if rents have already been raised this year?  Cosmetic renovation is not grounds for tenant termination.   The kitchen renovation could be grounds for tenant termination (assuming it is extensive enough that tenant cannot reasonably stay in unit).  

There is some chance tenants will not know their rights under rent control, but I would not rely on this and I am not sure it is ethical to take advantage of their ignorance (I know the tenant advocates would say this is not right).  If the tenants know their rights, the cash for keys could be expensive if the rents are really >$600/unit per month under rent.  If the tenants know their rights, I can see the cash for keys being at least $7k/unit (one year equivalent of their below market value).

It appears you purchased an opportunity, but it will take some work.  

Good luck