We are looking @ purchasing an 8-unit townhouse. It is going to be a value add property. The rents appear to be on the lower side and can be raised over time about $100. One of the units has been renovated with a new kitchen/dish washer, new flooring, carpet and it get $733. Atleast 4 of the units have long term tenants, 7yrs or more. My question is how do you renovate the units and keep the long term tenants living there? It appears from the units we got to view that the people are somewhat of pack rats. How do you put in new carpet, flooring and kitchen cabinets, etc with these people living there and then increase the rent to make up for investing all the extra money in the units? The tenants we talked to are already complaining that their rent has increased $20/mo. since the current owner took over.
Are you planning to sell it quickly?
If you are planning to keep it as a buy and hold I wouldn't renovate the apartments that have renters already. I would just keep increasing the rents and they will eventually move and at that point you can renovate the apartment.
Ya, we are thinking it's better as a more long term hold. There may be some things we have to renovate, but yes we could probably hold off on doing the carpet, flooring, kitchen work that would disrupt someone's living space. Thanks for the insight @Austin Youmans You are right....the tenants have kept living there regardless for as long as they have anyway.
Carefully... not sure I would put new carpet ect in a packrat place. For anything common go ahead and upgrade the areas as you see fit and giving them notice of your plans along the way. Then make your rent increases and link them to the work you are doing. If they leave you have an empty apartment to upgrade. For tenants that are not pack rats and you want to keep I have been successful in asking when they are going on vacation and scheduling the floor replacement then. For appliances you can just notify them you want to replace their stove etc. and when to expect delivery. Don't assume the upgrade that will make them happy is the one you would do. My one tenant asked for a quieter fridge, I would not have thought of that. Their fridge was older but okay even so we replaced and it bought us alot of good will. Thier floor was a mess but they wanted a quieter fridge not sure this always make sense but it did in this case.
I agree with the 'don't rehab until they move out' philosophy. Has worked very well for me in a number of cases. And the new tenants don't know what the rent used to be or whether they were paying utilities or not.
Also as a bonus, your rehab costs are spread out over time and you can absorb more of it out of the cash flow and don't have to come out of pocket.
My only caveats to this are, make sure it works financially on the current rents in case the tenants decide to hang out another 7 years. And don't plan to sell or refinance until a full year after the rehab is all done because the financials will look best when your rents are raised and you're no longer investing in the property.
I agree with @Austin Youmans , mostly. The cost of finding a new tenant is high. If they will stay there when their current lease is up, I wouldn't just start raising their rent to get them to leave. You can rehab the units as they become available, and raise their rent only to the point of market rent at their current condition. They aren't likely to leave a place they have lived in for 7 years if they can't find any other place cheaper. And the longer you put off rehabbing a unit, the longer that money has to grow or be used for other things.
Good luck. This seems like a win-win situation to me.