Multi Family Rehab - All units, some or just a couple
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Investor · Los Angeles, CA · Member since 2014 · 50 posts · 58 votes
12yAgree with @Joel Owens You should follow the management company's advice. I would add that, if you have multiple unit types, you should try to ensure you renovate one of each. That will give you a sense for the variation in rents and allow you to plan the next phase for optimal returns.
If all of your units are pretty much the same, here's another trick: Try varying the renovation a bit (eg different colors, flooring, etc.). You may find that one style is much more popular than the others. Then you can use that style for the rest of your renovation. We've successfully tested flooring, ceilings and appliance colors like this and it can make a surprising difference to achievable rents / leasing velocity.
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- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes12y
If the PM is local and you are not and they specialize in value add turn around properties then validate but they likely know the local market better and what absorption is. The time of year where leasing activity might be less might have you redoing too many units at once for lease up volume.
Wouldn't go up on any existing tenants rents currently. Leave that alone and start rehabbing a unit to make completely new. Existing tenants might try to get you to end the lease on their old unit and give them the new rehabbed unit. The answer to that is NO,NO,NO.
The reason Is because even if they move to pay higher rent with your newer unit you are not improving occupancy. You are just moving an existing tenant from one space to the next and not gaining anything.
When you have all the vacant units leased up at higher occupancy then you can look at upping on the older units or they get out etc.
No legal advice.
- Investor · Los Angeles, CA · Member since 2014 · 50 posts · 58 votes12y
Agree with @Joel Owens You should follow the management company's advice. I would add that, if you have multiple unit types, you should try to ensure you renovate one of each. That will give you a sense for the variation in rents and allow you to plan the next phase for optimal returns.
If all of your units are pretty much the same, here's another trick: Try varying the renovation a bit (eg different colors, flooring, etc.). You may find that one style is much more popular than the others. Then you can use that style for the rest of your renovation. We've successfully tested flooring, ceilings and appliance colors like this and it can make a surprising difference to achievable rents / leasing velocity.
- 12yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
I would say what is the point of waiting? you bought a building that you need to get occupied so the sooner you do that the sooner you cash flow. Joel has a point on the lease up market but for you for the rehab you may lose the economy of scale for a much slower unit rehab. If your PM is worried about over-improvements or if you have an issue with money to make the improvements then you could slow it down but I would be inclined to break out the number of units over time in a plan and line up the rehab that way.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes12y
It's also a point of quality versus volume. You will be fixing existing items as well while this is ongoing and the tenants have lots of issues from the previous landlord. I would rather have a crew doing quality and lease up then slamming out junk to get leased fast. If crews are pushed too fast quality goes down. Now in the lower income units it might not have to look as nice because even with the rents raised the tenants still have lower expectations for livability.
A key that is very important and I have seen developers on new projects and value add players on existing property make this mistake again and again.
They have success doing a certain type of building or reno and then want to apply doing it that way 100% to a new area they are breaking into. You are then trying to put a square peg in a round hole. The wild success they had elsewhere is now a failure.
There are commonalties in markets but you have to really analyze when you build elsewhere or to turn around value add how you will tweak things to make it work in that new market.
- 12yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@Joel Owens with 20 empty units in a 39 unit complex what would the expectation be for number of units to rehab in say a six months or a one year timeframe? I wouldn't imagine it is good to leave half the units vacant for any length of time. A cookie cutter approach to rehab may lead to poorer quality but by the same token too slow rehab isn't desirable either. Wouldn't an overall project plan try to get a good percentage with tenants over that first year period or is that unrealistic.
- 12yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Joel Owens:
Wouldn't go up on any existing tenants rents currently. Leave that alone and start rehabbing a unit to make completely new. Existing tenants might try to get you to end the lease on their old unit and give them the new rehabbed unit. The answer to that is NO,NO,NO.
The reason Is because even if they move to pay higher rent with your newer unit you are not improving occupancy. You are just moving an existing tenant from one space to the next and not gaining anything.
When you have all the vacant units leased up at higher occupancy then you can look at upping on the older units or they get out etc.
Joel:
We approached this a little differently: On every third unit rehabbed an existing tenant would have first rights to move and take out a new lease. All tenants were given the project outline before the start and were told what rents would be in the rehabbed units. They were also told that once all the rehabbed units had been filled, they would be stuck in the status quo until a vacancy occurred or they moved-out.
Only about 20% of the existing tenants rolled-up into a rehabbed unit {which was our plan}, most of them stayed with what they had, or left.
@Colleen F. - I had a chat with the PM and the absorption rate is probably no more then 1-3 per month; Less in during the winter and highest in the spring. Not an abnormal leasing pattern. Keep in mind that I do not 'just' want to fill the place but want 'quality' tenants. I can afford to be patient (up to a point). At ~50% occupancy the property is a bit below breakeven from an operational perspective. I expect breakeven to be ~65-70% occupancy so only need to fill 5-8 units. Once I hit that, it should be self funding to rehab the rest of the units.
With that being said, it will take 6 months to a year to fill empty units and turn occupied units to the new standard which will be higher then currently in place. I am finding that the difference in pricing between "bottom of the line" and "nicer" is within my budget.
@Joel Owens @Moses Kagan - My thinking, after reading your comments, is to scale back on my original plan and take your suggestion of minor variations as follows:
The building has two types of units: 1 & 2 Bedrooms with identical layout by type. All units have the same kitchens: Pass through / Galley with ~7 ft of wall on each side. On one wall you have the sink and stove with some counter space. On the facing wall you have the fridge and more counter. The wall with the fridge backs onto the living room.
I think an interesting feature / design element would be create a pass-through / breakfast island on the wall backing onto the living space. It would open up the unit and connect the kitchen to the living area / family room which has been the trend for the past decade or so.
If I do 4-6 units, split between 1 & 2 Bedroom, I can 'play' with this design element and other finishs but not get to far ahead of absorption. If there is strong demand (one way or the other), I can then accelerate the rehab on the rest to the preferred design.
@Roy N. - I agree with offering some of the newer units to existing tenants. Getting one or two to move and pay the higher rent not only improves cash flow but also helps set expectations to existing tenants (i.e. You are not going to get a better unit at the old rent).
Any other thoughts / comments?
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