Should I fix up my multifamily or just sit back and earn cashflow

Multi-Family and Apartment Investing
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Should I fix up my multifamily or just sit back and earn cashflow

Andrew Michaud
Bangor, ME · Member since 2017 · 72 posts · 19 votes

I bought a 3 unit multifamily. This is my first property EVER, I have been a landlord for a month. All long term tenants on this property that I have inherited. And hope that they stay for as long as they did with the previous owner. Property cash flows about $700/mo after the mortgage and expenses.

The property does need some work to attract better tenants in the future and to make the property look more appealing. Property needs new doors and windows, also needs to be switched from fuse system to breakers. These are the only things this property does need.

My question is this. Should I worry about replacing these windows and doors, and switching to a breaker system now or later? 1. I plan to refinance next spring as I have 20k of equity in this property. 2. The tenants are very laid back and I have ran these ideas of updates by them and they have no problem with it, especually considering they are paying for heat and this will deduct on their cost. 

PROS: 1. Updated Windows and Doors and breaker system before my refi. 2. This will also spruce up the property. 3. Will attract a better tenant in the future.

CONS: 1. More money out of pocket up front. 2. I have to live with my property looking slightly rundown with all of these old windows and doors for I take a lot of pride in what my assets look like. 3. Tenants say they don't mind but in all reality I would expect them to get a little irritable in some way with their unit under construction.

Not sure which route to take here. Should I go for it and spend the money up front then refi, or should I sit back, leave the good tenants alone, enjoy the cash flow, live with the property in my view looking slightly rundown, and wait to do any major updates after a tenant leaves.

P.S. Either way I still plan to refinance this spring.

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Marco G.
Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
9y
You should check about getting a new insurance quote for the new roof you put on there. You should see some savings from that. If you're already at top of market rent, there is absolutely no reason to make upgrades at this time. If you will be unable to maintain top of market rent at turnover, consider upgrades that will move you to that point. Look at how much it will cost, how long it will take to recoup the investment and decide if it makes sense. You could spend all that money and then have a furnace or water heater go out on you and you've got to dip into your pocket instead of your reserves. I doubt those investments would enhance refi appraisal that much. And remember, whatever Increase you get, you're still refinancing at 75 percent loan to value.
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  • Patrick C.
    Investor · Highland, CA · Member since 2017 · 28 posts · 15 votes
    9y
    What I did with my duplex. I increased the rent by 50 bucks. One of them decided that was too much. She is leaving on the 30th. I'm updating the space. Did a market search on going rents and found I am under market by 300. So my rent will go from 1100 to 1400 for that space. These are tenants I inherited from the previous owner. Bottom pays 1650 currently. And that's under market too.
    1Reply
  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Is the property under market? You said that improving it will attract better tenants, but will it attract higher paying tenants? Conversely, if you don't fix it up, will you either eventually lose tenants or not be able to keep up with the market due to its condition?

    1Reply
  • Andrew Michaud
    OP
    Bangor, ME · Member since 2017 · 72 posts · 19 votes
    9y

    There is currently good tenants in there now, but if one ever decided to leave, to get another good tenant in I would likely need to update the windows and doors. The current tenants have been in the units for years. Also the property's rents are near their peak market value.

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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Andrew Michaud

    Congratulations on your first deal.  

    The questions you are asking should have been asked and answered prior to purchasing the property. Most successful Buy and Hold investors want to maintain their rentals in good shape in order to demand Market rental rates, quality tenants, and property value. You say the property Cash Flows $700 per month. Have you been putting money aside for a reserve to cover Vacancy, CapEx, and Maintenance? If not you should be.

    You are planning to Refinance next spring.  What was your purchase price?  What is your expected appraisal value in the spring?  What is your goal with the Refi?  Are you trying to get your cash out?  If you have not made any improvements or raised rents I'm not sure you will be able to get any cash out.  You usually need to force an increase in appreciation through renovations to the property.  

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  • Andrew Michaud
    OP
    Bangor, ME · Member since 2017 · 72 posts · 19 votes
    9y

    Thanks for the response @John Leavelle, so I bought this 3 plex for 60k and put 20% down, 15 year mortgage, appraisal came back at 78k. I have since put a new roof on the property. I plan to refi in the spring with a reasonable expected appraisal value to come back around 82k without doing any additional upgrades. Would like a cash out refi which in this case I see pulling my down payment and a little extra out of the deal. 

    What would you do? Good tenants currently, units are full. Should I leave the property alone, get my ROI, and worry about windows and doors after tenants leave at some point which could be next year and could also be 3 years from now. Or should I do the work now with hopes my refi comes back more, but have to put more money into the place up front before I have a chance to build up the capital from this property?

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  • Matt Vezina
    Rental Property Investor · Bennington, VT · Member since 2017 · 79 posts · 60 votes
    9y

    Have you checked with the insurance company about an improvement to your rate if the fuse box is swapped out?  That could offset some of your cost on that front. If a fuse blows and a spare isn't readily available it's all too easy for a tenant to stick something like a penny or piece of pipe in the panel and create a fire hazard. I have no idea what kind of change to expect in the rate but I would be surprised if there was none. 

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  • Kurt Jones
    Investor · Longwood, FL · Member since 2017 · 108 posts · 78 votes
    9y

    Don't know what a fuse systems, thankfully. But my approach would be to treat it like crabs in a pot of water. Turn up the heat slowly. Bump rents a bit and see if one of them bails. If so, then update the unit and increase the rent again. It allows you to stage the rehabs while also increasing the rent and thus your NOI.

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  • John Lenhart
    Rental Property Investor · Cincinnati, OH · Member since 2017 · 258 posts · 207 votes
    9y

    @Andrew Michaud I would focus your spend on what will generate the most income for you either through increase rents or reduced expenses. The fuse box is nice to change out, but does the tenant really look at that when they are renting? I had a duplex at one time with a fuse box and to be honest, that was not something the tenant ever paid attention to nor did it really reduce expenses. New windows definitely have more of an appeal to the tenant because they offer a fresh look and will reduce your energy expenses.  I would first focus on items that are going to get an instant return and then take care of other upgrades that while important do add value to the tenant or reduce your expenses.

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    Breaker panel will not increase rents, but could decrease insurance costs, so check w/your agent. Can you fix up the windows without replacing them? New windows don't really add much value unless you pay heat. If you can make the windows look nice without replacing them, I would consider that. Be sure to look at the cost difference - if it is close, then go w/new. For doors, that could add value if they are plain or dented. If you can keep them and paint them, consider that as well. 

    I am usually a replace things to get higher rent and better tenants and to keep them happy, but the things you're talking about doing aren't big ROI items

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  • Marco G.
    Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
    9y
    You should check about getting a new insurance quote for the new roof you put on there. You should see some savings from that. If you're already at top of market rent, there is absolutely no reason to make upgrades at this time. If you will be unable to maintain top of market rent at turnover, consider upgrades that will move you to that point. Look at how much it will cost, how long it will take to recoup the investment and decide if it makes sense. You could spend all that money and then have a furnace or water heater go out on you and you've got to dip into your pocket instead of your reserves. I doubt those investments would enhance refi appraisal that much. And remember, whatever Increase you get, you're still refinancing at 75 percent loan to value.
    2Reply
  • Marco G.
    Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
    9y

    Also, congratulations, it sounds like you did a fantastic job landing a phenomenal deal! Welcome!

    1Reply
  • Robin Boyer
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    Also looking into buying my first multiple family thinking of having 50k in reserves?

    0Reply
  • Drew Shirley
    Attorney / Multifamily Investor · Houston, TX · Member since 2009 · 173 posts · 136 votes
    9y

    Look at it through the idea of return on investment. If you spend money but that money doesn't allow you to raise rents or lower expenses, then you're just spending it to spend it. 

    On the other hand, if you spend $5,000 per unit and increase the rent by $100 per month, that's a 24% return on your money and that's hard to beat. ($1,200/$5,000 = 24%).

    Similarly, if spending money increases the appraised value of your property for the refinance, that might be worth it. Remember, though, that 3 units will be valued based on comps, not the net operating income, so you won't necessarily have a more valuable property just because you spend money on it. 

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