Add bedroom - Increase Rents - Adding Value

[Spud Davis]

Hello friends,

I'm looking to acquire my first multifamily property.  One property I'm looking at has four 1-bedroom units (all occupied) $900/mo, and I plan to add a bedroom making them 2 bedroom units 1,300/mo. My first question, how do I add a bedroom or do any serious updates while the tenant occupies the unit? (Thinking if I were the tenant I wouldn't want my unit updated to a 2 bedroom, just to get notice shortly after that my rent is 1,300).  Do I have the right as the owner to do construction, are there Minnesota laws I need to abide by?

I'm trying to figure out how to best add a bedroom, raise rent, and also not feel like I'm ruining 4 tenants lives (obviously I'd like to do right by everyone and also be able to create the value in my investment.)

Next, the current owner pays all water, sewer, trash, and gas.  I plan to have the tenants pay for these eventually.  Again, while the tenants are in their leases, can I simply give them notice that they will need to pay an additional $20/mo for utilities.  Are there Minnesota laws I need to abide by?  Thank you for any insights.

Last (just a side thought if you're willing to give additional insight)

 I'm wondering specific to us here in Minnesota. What are the top value adds that add value to a property in your opinion.  I've read a few books and it seems updating bathroom, kitchen, minor landscaping, painting, adding coin laundry, and storage lockers. I'm wondering if I have say 30k to update a 4 plex and say everything can/has the ability to be updated, what are the top items that 30k can turn into adding 90k in value(just a example number). Any no-nos or things to stay away from?

[Evan Kraljic]

First off, there's almost no scenario I can see possible where you can convert a 1 bedroom unit to a 2 bedroom while they are living there. 

Now, there's also some very important contextual information missing here as well. What are the lease situations with the tenant? If they are on a fixed term lease, you can't do anything until the lease is up. If they are on a month to month lease, DURING NORMAL TIMES you could give them a notice that you are terminating the lease. I believe in Minnesota the minimum notice is one month and a day, but some leases specify more. Also before you do this you'd want to check the landlord tenant handbook and not just take some stranger on the internet's word for it, but that kind of goes without saying. During COVID times, you cannot terminate a tenant's lease unless it's mutually agreed upon. All the power is in their court, so I wouldn't piss them off by saying you're going to terminate the lease until it's within your power to do so.

2nd: You said they are 1 bedroom units at 900 square feet, but how easy is the bedroom conversion going to be? Is there an extra room that meets all bedroom code requirements (70+ sq ft, minimum dimension 7 ft, 2 electrical outlets, egress window, heat source) where all you have to do is frame up a door and voila, there's your 2 bedroom? If so that is awesome, but that's not normally the case and you need to make sure all your bases are covered and that it actually make sense! Sure you could convert a dining room to a living room, but do you need to frame in a new hallway since it's branching between the living room and kitchen, and now the room is only 7 ft wide and the layout is kinda off-putting? Might still make sense for a rental, but these are just things to think about. 

Same thing goes for the utilities, you cannot bill these to your tenant until you start a new lease, unless you both agree to terminate the lease so you can charge them more which they'd never agree to. 

Sorry, I don't mean to sound like I'm going in on you here and I see it's your first post. I just want you to be strategic with these renovations. I like your mindset on trying to add bedrooms because that is definitely a great way to add value in any market. And a quick filter is to look at square footage and see if there could be another bedroom. But there's a lot more to think about with code, load bearing walls, etc. that if there isn't already a spare room framed in that just isn't being used as a bedroom currently, it's not as easy as Brandon Turner would lead you to believe.