MultiFamily Live In, Rennovate with Tenants?

Question

Hi BP community.  We are a looking at a few 2 unit properties on the north side. I would owner occupy one unit.  Many of these buildings already have tenants.  I'm hoping you can help me answer a few questions that have come up for me -- In particular a property that has one unit vacant and the other with tenants.

1.  What can I ask for to ensure there are good tenants in the building? I will work with my agent, but given the Covid eviction moratorium I'm a little weary.

2. I know I need to notify the tenants in writing that I am the new owner.  Anything else you would suggest to ensure a smooth transition?

3. We would want to renovate and then move into the vacant unit. This would include re-doing the roof, replacing windows, some demo/replacement of kitchen/bath but no "major" plumbing/electrical.  What are the risks of doing this while we have tenants in the building? How would you notify them? Would you offer a rent discount?  My contractor said there would be noise during demo and possibly some periods without water while they replaced bathroom fixtures, etc.

4. How do you proactively address any potential issues in the tenant occupied unit?  The current owners have been cited by the city a few times for lack of smoke detectors and some electrical issues (cover of an outlet missing, etc.).  This was 4-5 years ago so I'm not sure if it was current tenants.  Would you do a walk through with the RTLO or another checklist to ensure compliance?

5.  Should I just offer cash for keys or cash to break their lease?  Wondering if this is the less stressful route.  We could then move into that unit while the other was being rehabbed and have more time to check it out and address any issues, make minor fixes etc.

John Warren · Answer

@Desalina G. you have had some good advice on here already. I am going to provide a counterpoint for you. If you are going to grow a portfolio, you will end up inheriting tenants at some point. I recently acquired a 22 unit in Cicero and a 7 unit in Berwyn. I had minimal due diligence docs on the 22 unit but was willing to take a chance knowing that I could have quite a few issues. So far, I have one tenant who hasn't paid and he is working with me to find a relief organization.

It is possible that you could end up with a bum tenant, so you do need to take that into account. In investing there is risk. If you take a building with a tenant in place just know your worst case and be prepared for that to happen. Then when you take over the building, be hands on and a good communicator. That solves a lot of problems.

Ron S. · Answer

I recently went through this same experience, so I'll answer in the way I was thinking.  Probably worth discussing with your agent or lawyer for more formal answers.

1. I only asked for the rent roll to ensure they were paying on time consistently.  I think you can also ask for the initial background check, but I didn't because I couldn't really act on any information in there.

2. I just sent a welcome email with my contact information.

3. I waited until the existing tenants moved out before starting the noisy rehab.  I asked the contractors to prioritize the loudest work and whatever would need water shutoffs.  Then when I got new tenants, I warned them of some remaining noise occurring and it wasn't an issue.  I also looked for ways to improve the tenants unit at the same time to make them less likely to complain -- for example, adding a video doorbell and a Nest thermostat.

4. I would proactively ask the tenants if they have any issues they'd like to see addressed.  It may set a welcoming tone as well.

5. That's definitely a route to consider.  We didn't go that route because we had the time to wait for their lease to expire.  We let them know 90 days in advance that we wouldn't be renewing and they ended up leaving 2 months early, which allowed us to start sooner than planned.

Andrew Holmes · Answer

1. As a rule unless you have a proven background from the previous owner of the tenants very bad idea to adopt old tenants if you have not done the homework on them. You should be weary of tenants during covid because you cannot evict them.

2. Try to verify the payment history from the current owner before buying. If you can get a copy of canceled checks that would the best so you know they are paying on time and have a history of that. If they are paying late or other issue make sure they are out before you close. If they are bad tenants you may buy the building and if you serve them a notice and they do not leave there is nothing you can do at least till Nov of 2021.

3. This totally depends on the tenants. How much they are going to get disturbed. If they are working from home etc. Most tenants are going to get irritated after a bit if there is a lot of construction going on. Plus do you plan on pulling permit. You do not want them to call the city and open up another can of worms if you had not pulled permits. Just things to consider. Also if the units are empty you may be able to renovate and find good quality well screened tenants and get better rents.

4. Yes that is important so the tenants know who you are and you get a chance to understand who they are as well. Plus you can inspect the property to know what you are getting yourself into.

5. If you are going to offer cash for keys or anything else negotiate that before hand. Do not close unless the unit is empty and do not give the tenants the money until you get the key and the unit is empty. Of course this all needs to be coordinated with the current owner and should be a part of your negotiations and attorney approval. Do not close if the conditions you agreed to are not met. You have a contract and if they owner has agreed they are in breach of contract. All of this needs to be negotiated on paper before hand so just keep that in mind.

MultiFamily Live In, Rennovate with Tenants?

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