My partner and I purchased a 6 unit complex in Shreveport, La. roughly 8 months ago. The property is in a less than attractive neighborhood however Shreveport is very block by block and sometimes home by home. After observing the properties performance we have noticed three major deficiencies which need our attention for the property to perform much better - 1.) Better tenants 2.) Less Vacancies 2.) utilities.
Let me elaborate. The property needs updates. It is structurally sound, however the interiors attract lower end tenants who pay low rents and have high turn-overs (Vacancies). One thing I have learned about lower class units is that the tenants willing to live in these conditions typically have bad credit and little income. These tenants are screened by the utilities departments and typically are required to pay a deposit to have utilities turned on in their name. The property used to be a 4-plex and the upstairs was divided into 4 units making it a 6 unit without individually metering the units. For these reasons, currently, the utilities are included in the rent for all units.
Here are a few pictures to give you an example:
My partner and I currently have a vacancy and decided to put some capitol into the unit to attract working class tenants and reduce turnovers. We also want to attract a class of tenant who will not have an issue placing utilities in their name.
We have received a $10,000 increase in loan amount from the bank for repairs and renovations. This required no money down as they just increase the amount on the mortgage and wrote us a check. We are discussing the best use of our funds in order to ensure we increase the rent enough to cover the increased mortgage, as well as add at-least $10,000 in equity to the property.
Here are our concerns:
1.) We want to individually meter the electric (Estimated $3,000) and make the tenants responsible for this expense. With electricity included, tenants have no since of conservation for use.
- Concern* - If we individually meter the units, and switch the utilities over to the tenants all at once (All are on month to month leases), we fear we may loose the majority of the tenants all at once. This will force us to use some of the $10k towards mortgage as the rental income would likely no longer cover debt services.
*** if we loose the majority of the tenants, it may be a blessing in disguise as we can renovate multiple units at once bettering our economy of motion (saving time and money with repairs) and quickly change the tenant class (it is hard to convince one working class tenant to live amongst majority low class tenants).
2.) We recently renovated the unit pictured above and want to occupy it immediately.
-Concern* - If we place a working class tenant now, how do we explain that utilities will not be included once the meters are split. Should we simply lease the unit to not include electricity and explain that we are in the process of splitting the meters and will inform them of when to have the utilities switched?
3.) There is currently a covered parking area which is an eye sore, as well as a junk collection point. There is no off street parking because the covered area is filled with workout equipment, non operable cars, and metal waist. We intend to remove this covered area because it promotes junk storage. Additionally, working class tenants need a place to park the vehicle they take to work each day.
- Concern* - Nothing - we are doing this regardless if one of the tenants looses his home gym.
Here are some pictures to show the level of renovations we are performing. These are the "After" photos of the above efficiency (The fridge is coming soon) Nothing special, and all cosmetic. (Fresh paint on all walls, doors, trim, cabinets. New countertops and sink. New appliances. New flooring in kitchen. Refinished Hardwoods. Changed out toilette and vanity in bathroom.) $2,000. Expected rental increase is $100 p/month and utilities in tenants name ($75 p/month). Total $175.
Phases of operation: (Please, this is the part in which I want you to make recommendations and adjustments)
Phase 1:
- Lease renovated unit without including utilities
- Post 30 day notices to all current tenants that utilities will be switched into their names (expect to lose 2 of 5 remaining tenants)
- Begin exterior updates in preparation of attracting new tenants, as well as electrical to separate meters.
- Separate meters ($3000)
- Repair/paint soffits and facia boards ($250)
- Remove covered parking, clear waste, and replace with designated parking spots via railroad ties ($500)
- Repair broken fence ($150)
- Add attractive, low maintenance landscaping to front of building. Trim trees and remove weeds ($200)
- Repair handrails ($100)
- Paint common area stair wells ($500 labor/materials)
Estimated 20 days / $4700
Once Phase 1 is complete, if everything goes as planned (as it will not) we should have the recently renovated unit occupied at $600 per month, and $550 of electricity expenses out of our name. I expect the two tenants on the bottom floor will stay even after changing electricity into their name. They have larger units and rent is already inexpensive.
Phase 2: (repairing newly vacated units - estimated two)
- Same renovations as above $2000 per unit / ($4000 total).
Rental increase of $100 p/month - performance increase = $200
Total performance increase
$300 for increased rent
$550 electricity savings
$850 total
Phase 3:
- With a stabilized, cashing flowing property, phase three will be spread out over a period of 6-8 months. We will set aside $600 of cashflow per month until we have $2000. After we have saved $2000 we will increase the rents on the existing tenants expecting a turnover. Once a unit becomes vacant, we will renovate and repeat.
- Exterior updates in Phase 3. - Fill parking spaces with gravel - They are currently very uneven, broken concrete ($800) - repair retaining wall ($450)
Final performance increase should be as follows:
- Rental increases = $600 per month
- Electricity Savings = $550 Per month
total performance increase = $1150 per month / $13,800 annual
Total renovation expenses = $16,700
Time = 8-9 months
ROI = 82%
Please let me know if there are any adjustments to this plan you think we should consider.
Respectfully,
Ramsey
