Duplex / BRRRR / WWYD?

Question

Hello.  Detroit investor here!  I have one single family home and in search for my second rental property.  Currently, interested in a recently toured brick duplex to BRRRR.  One side is vacant which looks like mainly cosmetic work (can easily get $1000/month).  The other side (well maintained) is rented by a 10-year paying elderly tenant that is only paying $500/month.

Questions

-"Can" you still BRRRR/does it make sense to BRRRR when you can only add value to one side of the duplex?

-In general, what is the suggested way to increase rent when going into a situation like this where the tenant is paying significantly lower than market rate?

Andrew Postell · Answer

@Brandi Young thanks for the post here.  I'll answer these one at a time if you don't mind:

"Can" you still BRRRR/does it make sense to BRRRR when you can only add value to one side of the duplex? - Of course!  That's is, as long as you purchase the property at a correct price and fit your rehab costs in where it makes sense.  We make our money when we purchase a property - every time.  If I don't "buy right", then no matter what techniques I use or however I try to cut costs...it will kill my deal.  Now, this might need to be explained further, but as long as you "buy right" then you can absolutely perform a successful BRRRR in this scenario.

In general, what is the suggested way to increase rent when going into a situation like this where the tenant is paying significantly lower than market rate? - The suggested method here is to wait until the lease renews to either renegotiate the lease or non-renew the lease. I can't tell what state the property is in but in nearly all states your tenant has rights.  And those rights are dictated by the language in the lease.  So, if the tenant has 10 months left...you may have to ride it out for 10 months.  If your tenant hasn't renewed a lease and the lease states they are now "month-to-month" then usually there will be a 60 day notice clause.  So, once you own, you would provide a 60 day notice of increasing rents or non-renewing.

Hope all of this makes sense.  These answers might lead to more questions so feel free to ask away.  Thanks!

Brandi Young · Answer

Lots of great info and feedback.  Thanks so much!

Brandi Young · Answer

Thanks Michael.  I placed an offer at asking, but if accepted, I'll have time to request some adjustments.

I actually tried to feel the tenant out regarding the rent.  They mentioned that they would be open to an increase as they know that they aren't paying market rate.

Brandi Young · Answer

Hi Andrew.  Thanks so much for the feedback.  Yes, your comment regarding making sure that I buy right does make sense.  I wasn't sure if since I can't make updates to the other side, if it would be worth it.  However, it sounds like it is.

Thanks for the tips on the current lease.  That reminds me that I didn't ask where the tenant is currently in the lease.

Thanks again!  Sounds like this may be a good deal.  I did place an offer on Sunday, so now I wait.

Michael Smythe · Answer

@Brandi Young make sure you try to get a discount on the purchase price due to the under-market rent of the 10-year tenant and the repairs & updates that unit will inevitably need.

Expect a battle with this tenant as they will not want ANY increase. DO NOT GIVE EXTRA TIME! In our experience, once this tenant figures out you want to substantially raise their rent, they will stop paying rent and force you to evict them. DO NOT TRY TO HANDLE THE EVICTION YOURSELF! Get an attorney familiar with 36th District judges (VERY tenant friedly), but expect the judges to grant this tenant a lot of time before they sign a Writ.

KC Pake · Answer

Hello Brandi, and congrats on considering your second rental property!To answer your questions:BRRRR Strategy with Half Occupied Duplex:You absolutely can still use the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) with a duplex where only one side needs work. Having a tenant already in place can be beneficial as it provides some immediate cash flow to help cover the property's ongoing expenses.It still makes sense to BRRRR because you can add value through the unoccupied side by rehabbing it and then renting it at market rate. This increase in income can positively affect the property's valuation.When you refinance, the lender will likely look at the income potential of both units, so the improved and rented side can help demonstrate increased value.The fact that you already have a long-term, stable tenant in the other unit is also favorable in the eyes of lenders.Increasing Rent for a Long-Term Tenant:Research Local Laws: First, understand your local laws and regulations regarding rent increases, especially with elderly tenants. Some areas have rent control or require a certain notice period before increasing rent.Gradual Increase: If you plan to raise the rent, consider doing it gradually. A sudden significant increase could lead to the loss of a stable tenant and potential legal issues.Improve Tenant Relations: Before increasing rent, ensure that you maintain a good relationship with the tenant. Communicate openly about your plans and the reason for the increase.Enhance Value: If you're going to increase the rent, it might be a good time to make some improvements to the occupied unit as well. This will not only justify the rent increase but also ensure the satisfaction of the tenant and maintain the value of your property.Market Rate Evaluation: Regularly evaluate the market rate for similar properties. If the tenant is paying significantly below market rate, you could make a case for an increase, but ensure that it's fair and justifiable.Offer Renewal Incentives: Consider offering the current tenant an incentive to sign a new lease at a higher rate, like property improvements they value or services such as yard maintenance.Tenant Replacement: If the tenant decides to move due to the rent increase, be prepared to rehab the second unit and find a new tenant, ideally at a rent that reflects the current market rate.Remember, with long-standing tenants, especially those who are elderly or on a fixed income, it's crucial to balance business objectives with empathy and respect. Not only is it the right thing to do, but it also builds your reputation as a fair and responsible landlord in the community.Good luck with your investment, and may your BRRRR be successful!

Duplex / BRRRR / WWYD?

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