We are analyzing a multi of 13 units which needs a LOT of repairs. Pretty much everything on the inside (walls, floors, ceilings, appliances, etc.) needs to be renovated. And, of course, the tenants, need to be replaced as well. We have construction experience (we still plan to hire someone to do the work), however, here are some of our concerns and questions:
1. Tenants: What is the best way to clean the multi and bring in new tenants? The current tenants are month-to-month, C type tenants. There are currently 2 vacant units. I have learned here on BP that it is best to work on the common areas first. Should we then start renovating the vacant units to bring new tenants little by little? Should we raise rents right away to current tenants?
2. Distance: We are 2 hours away and will not be available to keep an eye on the day-to-day construction work. Our idea is to go check out the work every weekend, plus request pictures and updates from the contractor at least twice a week. We have no one in the area who could keep an eye on it for us. Has anyone been successful at managing work this way? Any advice?
Thanks for all your input!
This is a good one and will be very challenging due to the scope of the work. The first question is whether you plan to renovate all units at once or over the course of time. If you can afford the vacancy, have the capital, have contractors lined up, and have a market that can absorb 13 units at once, a big bang approach would be efficient and the quickest way to full profitability. With MTM leases, you would just provide proper notice and get going. You could get all the common areas done during the notice period.
The other approach is phased. You can go as fast or as slow as you like turning units in a phased approach. I'd recommend knocking out the exterior and the two vacant units right away and get those units producing income. Next, you could perform inspections and exit any non-compliant or slow paying tenants and renovate those units as your turn them. You may have some general attrition while all of this is going on as well if the existing residents know that rent is increasing beyond their budgets. As you turn vacant units, if you want to keep certain existing tenants, you can offer existing residents the option to move into the renovated unit for the new rental rate. If you reach the point where you have no vacant units and no non-compliant residents, it gets a little harder if you want to continue to turn units. At that point, I'd recommend raising rents and providing proper (and even extended notice) of the rental increase. Prior to doing this, the tenants will see the value that you are adding to the exterior and you should be very responsive to maintenance requests and any deferred maintenance in their unit. You may able to do non-construction updates to those occupied units and keep some residents, although that sounds unlikely for the scope of renovation that you mentioned.
Rod Khleif has a podcast with J Scott Scheel where he gets into creative ways to execute the value add process. It's a bit pitchy but good none-the-less. Jake and Gino have a lot of podcasts and a book on their sequence of executing the value add with C class.
Captain obvious comment, but make sure to structure the financing properly to have the appropriate capital at the appropriate time for the renovation. Lots of investors on BP pick up properties from other investors who lack the capital to properly operate or finish a value add.
Good luck and keep us posted.
Sounds like Mike D has put it out there pretty well. My husband and I have just been through this in the last year. I recommend definitely getting the 2 vacant units renovated and filled as soon as possible, then work on the common area. Pay attention to TAW who are causing issues in the building or their units and could be phased out one by one and renovate each as you change over tenants. Once you feel comfortable with the tenants you have you can raise the rents by about 10 percent and you may lose another one or two which you can then renovate and re rent. This is the process we have gone through. The walls were hideous in the common area of our 12 unit so we had this done by a tenant who was in the business and was having trouble paying his rent. He was a leased tenant so this was a perfect solution.
It's difficult to monitor when you live more than an hour away. Hopefully you can identity a tenant in the building you you can trust and speak to in a regular basis, offering some sort of compensation.
I think @Mike Dymski has a good approach to it. and i would tackle the exterior and lobby first, first impression of the place is always key. as far as the distance, do you have any kids, relatives or friends that may want/ need a part time job ? have them shoot there daily or every other day to take pictures and give updates.
Thanks everyone for your feedback!
@Mike Dymski We are leaning towards doing it all at once at the beginning. The advantage is that the construction is done in a more efficient manner, hence saving construction costs. The disadvantage is that we would need more capital and will have no rents during this time. You bring up all good points (we need to have many things lined up to avoid wasting time and money). I will make sure to listen to the podcasts you mention.
@Janette Nason How long did it take you to do all the work? What is the total size of the living area?
@Patrick Liska Great idea! I'm sure we can find someone interested in making some extra money and we can have some peace of mind.
Our next step is to make an offer. Let's see how that goes. Will keep you all posted.
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