My manager is advising against repositioning my new multi.

OP

Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes

10y

Thanks guys, I appreciate your time. I can imagine in the beginning it will be tough to have 10 unit of lower income people and then trying to fill the first, nice, renovated unit with a higher class tenant. It should only get easier after that!

Tim Lindstrom

Investor · Douglasville, GA · Member since 2014 · 313 posts · 181 votes

10y

I personally would start with the exterior, and common areas for renovations. Fixing up a unit to try and attract a better class of tenant might not work if they have to walk up to an aging exterior, through a run down entry, past unsecured beat up mailboxes.

The appearance of the building is as important as the individual units to attract better tenants.

2 Reply

Jean BolgerPro Member

Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes

10y

That's an interesting dynamic. If the PM is the former owner, and an old-timer to boot, I can imagine he'd be resistant to change. By proposing changes you are, in effect, saying to him "you could have done this better..." Awkward.

I have no idea whether he's right about the futility of repositioning or if you are right with your vision. But I would have doubts about you ever being able to fully get him on board to try your plan.

Nancy Curran

Real Estate Investor · Chicago, IL · Member since 2014 · 286 posts · 159 votes

10y

I've done what you are trying to do and it works well. Especially younger people who want a safe, nice b area at lower prices. I would do all kinds of little things. When an appliance broke, I would buy a used stainless appliance. Once I found a close out on marble tiles and put them in a bathroom. I found a mother of pearl framed bathroom mirror. I was able to raise the rent a bit that attracted better tenants. Then I did it again for the next turnover. And again.

OP

Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes

10y

Originally posted by @Nancy Curran:

I've done what you are trying to do and it works well. Especially younger people who want a safe, nice b area at lower prices. I would do all kinds of little things. When an appliance broke, I would buy a used stainless appliance. Once I found a close out on marble tiles and put them in a bathroom. I found a mother of pearl framed bathroom mirror. I was able to raise the rent a bit that attracted better tenants. Then I did it again for the next turnover. And again.

Exactly!! Great tip about the younger folks.

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

10y

At $800/unit to get $100/mo rent increase is a no-brainer. You could spend $8,000/unit and it would still be worthwhile. $100/mo x 12 months x 11 units = $13,200 / 7% cap (for illustration) = $189,000 increase in the value of the property (less the $8,800 in rehab cost gives you your profit). As @Deshawn Lewis mentioned, you can test the market with a unit and go from there.

As others have mentioned, the PM's reluctance is problematic (or the PM is correct). A $100 gap between you and the PM on market rates is rather large though...comps, rentometer, zillow, etc...use the facts rather than opinions to reduce this gap.

Congrats on finding such a value-add...this is an absolute home run! Keep us posted.

Jameson Sullivan

Real Estate Broker · Tacoma, WA · Member since 2016 · 545 posts · 252 votes

10y

Ive Never repositioned a building but I like what @Jean Bolger said about it basically feeling like youre tellling your PM that he could have done it better all those years and it being awkward to move forward but it seems like you do know what the right thing to do is. Better to be wrong with your own choice than to let someone else choose!

Zach Quick

Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes

10y

I would agree with someone who posted previously. You need to do the exterior and common areas first to attract a higher quality of tenant.

In terms of the actual location, maybe call a competing PM and get their opinion on the level of rehab and rent rate you could expect. Can't hurt to have another local opinion.

OP

Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes

10y

Luckily it hasn't gotten awkward (at least yet). He is a numbers guy and I presented numbers to him very similar to what @Mike Dymski mentioned. He understands why I would do it, but he is content leaving the building the way it is. He got rid of the basement storage in his buildings to avoid the headaches where I want to build them in mine for income. Just two different priorities.

It's looking like we will do this first vacant unit and see how it goes.

Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

10y

Originally posted by @Eric Hathway:

I recently acquired an 11 unit building on the edge of a "C" area that is next to a "B" area. My property manager has been in real estate in this city for 50 years and he is even the previous owner of the building I just bought. He is content with low rent, poor tenant quality, and low turnover.

I plan on this being a long term buy and hold. I shared with my PM my vision of repositioning the property with renovations to the exterior, common areas, and each unit-as the tenants turnover. I would like to renovate 3-4 units per year using only the current cash flow. If no tenants move out one month, I'll paint to entryway, change mailboxes, etc. By my estimation, roughly $800 in light renovations would yield about $100/mo increase in rent per unit.

He doesn't think it is wise and recommended against it primarily based on the location and the clients it attracts. He thinks the tenants will ruin any new renovations and I'll be doing them again in a year or two. For example, he had locking mailboxes and the tenants would break the door rather than calling for a new key that they had lost. He had basement storage, but tenants would fill them with tires, paint, and electronics and leave them there after move out. Those items need to be taken to the city dump and there is a fee.

PM says, "These people only need the basics- meat and potatoes."

It is mostly 1BR units so that would likely mean more transient people also.

I don't question his motives, I just think he is at a different point in his real estate career than I am. I think it is possible to get this building included in the neighboring "B" class and get nicer tenants that will pay on time, appreciate nice things, and have pride living there. Am I naïve?

Any opinions? How about you, @Brandon Turner?

That don't sound like a B area, more like a D... However, PM's are like employees. Don't hire ones that don't vibe with your style. Yes your going to have issues with people dumping tires in basements or something. So be smart and lock them doors so they can't. In the D areas, tenants love to steal HVAC units and sell them, so investors had their PM's build privacy fences around units to keep people from doing that. In the process it made the place look nice and insured the stuff did not get stolen. We have done the same with ceramic tile and hardwood floors. It's a nice upgrade, and it's hard to abuse.

Your going to be doing an roll up, so do the improvements, but make sure it's able to handle the abuse that could be coming. It take a lot of time to move from low class tenants to middle or even upper. Plan to have continued cost and repairs, then just keep pushing till you reach your goal.

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Brandon TurnerPro Member

Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes

10y

I don't like the idea that only crappy people will be attracted anyway, so let's cater to them. I take the philosophy, instead, that there are good and bad people in every income level - and I want the good ones in a bad area. So I go the opposite route - I tend to over-improve my properties in marginal areas, and I get good tenants. That said - I also rehab them knowing they will be harder on the property - so every bit of material I use takes that into consideration (vinyl floor instead of carpet, semigloss paint everwhere (one color), etc)

2 Reply

Tom Lafferty

Plano, TX · Member since 2013 · 226 posts · 156 votes

10y

Absolutely agree with most that are recommending exterior first, then upgrading interiors, possibly replacing the PM. He sounds like a poor fit for your goals, but if he's willing to change, then great. The problem is that if he is not on board, that is likely to come across to potential customers. You absolutely want the person leasing your units to be excited about them, and selling the upgrades. This person can make all the difference in the world. If he's been doing it 50 years, its going to be tough to completely change his mindset. We see things like this all the time, and people always ask why we think we can do things that the current owner isn't doing. I am a key principal and investor in an apartment complex purchased a few month ago, and rents were increased $125 day one without ANY renovations. I attended a networking event at the property yesterday, and the number one question was, "Why wasn't the previous owner doing this?" Because he didn't know any better and had poor management!!

On 11 units, your options may be limited as far as management goes, but if the comps support doing upgrades and increasing rents, DO IT!!! I also think rebranding is a great idea. Depends on the reputation of the property, and how much you're going to change it, but its not hard or expensive. If you're truly on the edge of an area thats better than yours, maybe you can dramatically improve the reputation and image, therefore getting better tenants. Good Luck, hope you crush it!

3 Reply

Tom Lafferty

Plano, TX · Member since 2013 · 226 posts · 156 votes

10y

Forgot to add...... If you are talking about only $800 to gain $100 that is not even worth a seconds hesitation. I spend $3000-$4000 to upgrade a unit to get $50-$100 in rent!! Thats new flooring, two tone paint, new lighting and plumbing fixtures, and these are C class properties. Its being done all over the place. $800 is nothing. See if other properties in the area are doing even more, and see if you can get even more rent with additional improvements. Obviously you don't want to go crazy, but definitely worth a half a day to go visit and talk with the comps

OP

Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes

10y

Wow, such great help everyone. I really feel comfortable about moving forward with my goals. It just came quick that one tenant moved out before I could do the basics to the exterior and entry. I did put up a new address plaque, replaced an exterior light, and repainted the front door. I bought new mailboxes that I'll have installed after the entry hallway is painted. I also got a plastic sign printed with the new name of the building and "welcome home". Hopefully all that will be updated by the time the vacant unit is renovated and ready for showing.

Thank you everyone for taking the time and giving such great advice.

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Gino BarbaroPro Member

Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes

10y

@Eric Hathway

If it is in a B neighborhood, then with you reposition plan you will be able to attract better clients. I own various C properties and tenants don't rip off doors. If they do, they pay. The old owner had no set of rules and let the convicts run wild.

Your plan is sound and I would find a management company that could help you. Just make sure it is in a B area

Gino

OP

Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes

10y

Thanks Gino, I just ordered your book on Amazon this morning.

Robert Smith

Real Estate Consultant · Knoxville TN · Member since 2011 · 112 posts · 81 votes

10y

Congrats on the acquisition of the building. From experience I know how hard it can be to take over management or ownership of a building with previous tenants. The first thing you need to let them know is that there is a new owner and that things will not be handled the same way. Everyone has their own style and ideas. With the PM being the previous owner and having issues my suggestion would be to get a new PM and get all new leases. Sometimes tenants see what they can get away with and if everyone else did it before that will not break the cycle. If you are adding your time and money in the unit the first place I would start is with a fresh vision and perspective. What was done before is unacceptable. If they move out then you now get to decide who moves in. One of the easiest ways to keep tenant turn over low is to make them happy. Ask them what needs to be done to each unit when you personally go and speak with each tenant or have a list of questions drawn up for your new PM to ask each tenant I.E. what can we change that would make things better, if you had a nicer unit would you be willing to pay more, if I do these upgrades will you resign a new lease or pay more, things of that nature. If they don't want to cooperate don't touch their unit. Reward good behavior and on time rents and wash their minds and activities of how things used to be. I don't know your market or know what the units look like, but I always strive to buy the worst house on the street and make it the best house on the street. Watch what larger, seasoned owners in the B units are doing and match or top them. Flat paint and commercial vinyl tile goes a long way instead of carpets or wood. Start outside and work in, and when they sign new leases make sure you CYA (cover your assets) with addendum and check lists and hold them financially responsible. You may have to make an example out of one, but that is the business.

Good luck.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

10y

Eric I haven't seen mentioned the underwriting on the current tenants and leases.

How strong are these tenants for income and credit? What is the length of seasoning on the property with each tenant and pay history?

For lower income tenants an extra 1,200 a year or 100 a month is A LOT. That can rock their world to the core.

Do you have cash TODAY to weather most of the tenants leaving, having downtime of little to no income coming in, and the money now to put into rehabbing the properties? If they have lived there awhile you could be putting in thousands per unit.

What is the area like around this complex? If you have junkier buildings around yours owned by other investors it might be hard to land the tenants you want even with your newer building. One option might be to approach those owners and see if they would sell to own the whole block so you can own an area versus a building. It can make the tenants feel safer.

Nothing wrong with what you want to do but if you are planning on tenants paying like clockwork to fund your turn around the plan might not go as perfectly as you think. These types of things can be a long,hard grind for yield over time.

Good luck.

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Eric Kizak

Engineer · Manchester, NH · Member since 2015 · 8 posts · 5 votes

10y

I am looking at a similar deal, also in Manchester. Send me a pm, let's compare notes.

Chris V.

Rental Property Investor · SF Bay Area · Member since 2015 · 154 posts · 179 votes

10y

Originally posted by @Eric Hathway:

My property manager has been in real estate in this city for 50 years and he is even the previous owner of the building I just bought. He is content with low rent, poor tenant quality, and low turnover.

Hi Eric, congrats on making this step! Now to your question: you just bought an under-performing property (which is great because there is room for improvement). However the part I don't get is that you are listening to advise from the very person who was making it under perform! Think about it!:))

Keep this in mind:

What you want: Performing properties that get the most rent. (for example $100 per month more)

What property mangers want: properties that are little or no work. They don't care about 8% of $100 if that means that they will have to deal with tenant questions, people moving in moving out, contractors running around, etc.

The property management company I (still) work with mainly is exactly like that. And from their perspective I 'get' it. Why not try to keep things as they are and collect almost the same amount of money?

Finally, having 50 years of experience is nice, but it also means that, unless you are that one flexible rainbow sparkle unicorn, over the years you probably build up some biases and callouses which might not necessarily be in tune with 2016. Just today my property management company tried to tell me that there is no tenant desire for online payments. And they are right; when they got started in the 1960's I am sure there was no need for that:).

Anyway, of course you want to listen to all sides of the argument, but what you are proposing sounds like pretty low impact, and non-committal (as you are doing it piecemeal you can pull the plug at any time) so I would definitely try it if I were you! If you make sure you have a bit of a $ buffer,what do you have to loose!

If you haven't yet, listen to the Jake and Gino podcasts, Wheelbarrow profits gateway 1,2,3&4. One of those is called "Manage Right" that is what you want to listen to first.

Again congrats, and good luck!

Account Closed

Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes

10y

I am all for creating value through rent increase combined with delivering value to your tenants. Your PM is probably right that you current tenant profile may not deem your renovations a value and hence rent increases may be difficult. If you seriously want to re-position the property, you should plan on having a complete tenant change. There are ways to do this efficiently but doing only a couple of units per year usually does not work.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

10y

I generally find when someone advertises that is selling that rents can be increased by 50 a door etc. that it is misleading.

The reason is if it was so easy the seller would have already done it. If rents were 200 a door below market then you can push closer to market by say 100 or 125 a door but if you want to max the market the property will have to be flawless.

There are some markets where supply is so constrained that you hardly have to do anything at all but those markets seem to be few and far between on a national scale.

The owners I know that have owned apartments for decades each one being close to 100 units or more do this. If market rents for a 2 bed is 700 to 800 they stay at about 700. They do not want to be cheapest in town or the highest. By still being a good deal but going up on rent each year they keep up with inflation. They keep high occupancy without over improving it trying to get top market rents. People stay there in older units because the rent is good. You can collect higher top market rents but if tenants are constantly rolling out with rehabbing the units and paying a lease up fee each time you might not be getting ahead as much as you think.

These owners are already very wealthy so they like things to run smoothly and will not work for another 2 or 3% yield. Pushing vacancy for 2 to 3% is okay for rent rates. if vacancy is increasing then it's either a property issue, a location and access issue, or a management issue.

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Brian Garlington

Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes

5y

Lots of great info here Eric. How did it work out for you?