Need inputs on phasing renovations.

6 Replies

My partner and I purchased a 6 unit complex in Shreveport, La. roughly 8 months ago. The property is in a less than attractive neighborhood however Shreveport is very block by block and sometimes home by home. After observing the properties performance we have noticed three major deficiencies which need our attention for the property to perform much better -  1.) Better tenants 2.) Less Vacancies 2.) utilities.

Let me elaborate. The property needs updates. It is structurally sound, however the interiors attract lower end tenants who pay low rents and have high turn-overs (Vacancies).  One thing I have learned about lower class units is that the tenants willing to live in these conditions typically have bad credit and little income. These tenants are screened by the utilities departments and typically are required to pay a deposit to have utilities turned on in their name. The property used to be a 4-plex and the upstairs was divided into 4 units making it a 6 unit without individually metering the units. For these reasons, currently, the utilities are included in the rent for all units.

Here are a few pictures to give you an example:

My partner and I currently have a vacancy and decided to put some capitol into the unit to attract working class tenants and reduce turnovers. We also want to attract a class of tenant who will not have an issue placing utilities in their name. 

We have received a $10,000 increase in loan amount from the bank for repairs and renovations. This required no money down as they just increase the amount on the mortgage and wrote us a check. We are discussing the best use of our funds in order to ensure we increase the rent enough to cover the increased mortgage, as well as add at-least $10,000 in equity to the property. 

Here are our concerns:

1.) We want to individually meter the electric (Estimated $3,000) and make the tenants responsible for this expense. With electricity included, tenants have no since of conservation for use. 

- Concern* - If we individually meter the units, and switch the utilities over to the tenants all at once (All are on month to month leases), we fear we may loose the majority of the tenants all at once. This will force us to use some of the $10k towards mortgage as the rental income would likely no longer cover debt services. 

*** if we loose the majority of the tenants, it may be a blessing in disguise as we can renovate multiple units at once bettering our economy of motion (saving time and money with repairs) and quickly change the tenant class (it is hard to convince one working class tenant to live amongst majority low class tenants).

2.) We recently renovated the unit pictured above and want to occupy it immediately. 

-Concern* - If we place a working class tenant now, how do we explain that utilities will not be included once the meters are split. Should we simply lease the unit to not include electricity and explain that we are in the process of splitting the meters and will inform them of when to have the utilities switched?

3.) There is currently a covered parking area which is an eye sore, as well as a junk collection point. There is no off street parking because the covered area is filled with workout equipment, non operable cars, and metal waist. We intend to remove this covered area because it promotes junk storage. Additionally, working class tenants need a place to park the vehicle they take to work each day.

- Concern* - Nothing - we are doing this regardless if one of the tenants looses his home gym.

Here are some pictures to show the level of renovations we are performing. These are the "After" photos of the above efficiency (The fridge is coming soon) Nothing special, and all cosmetic. (Fresh paint on all walls, doors, trim, cabinets. New countertops and sink. New appliances. New flooring in kitchen. Refinished Hardwoods. Changed out toilette and vanity in bathroom.) $2,000. Expected rental increase is $100 p/month and utilities in tenants name ($75 p/month). Total $175.


Phases of operation: (Please, this is the part in which I want you to make recommendations and adjustments)

Phase 1: 

- Lease renovated unit without including utilities

- Post 30 day notices to all current tenants that utilities will be switched into their names (expect to lose 2 of 5 remaining tenants)

- Begin exterior updates in preparation of attracting new tenants, as well as electrical to separate meters.

- Separate meters ($3000)

- Repair/paint soffits and facia boards ($250)

- Remove covered parking, clear waste, and replace with designated parking spots via railroad ties ($500)

- Repair broken fence ($150)

- Add attractive, low maintenance landscaping to front of building. Trim trees and remove weeds ($200)

- Repair handrails ($100)

- Paint common area stair wells ($500 labor/materials)

Estimated 20 days / $4700


Once Phase 1 is complete, if everything goes as planned (as it will not) we should have the recently renovated unit occupied at $600 per month, and $550 of electricity expenses out of our name.  I expect the two tenants on the bottom floor will stay even after changing electricity into their name. They have larger units and rent is already inexpensive. 


Phase 2: (repairing newly vacated units - estimated two)

- Same renovations as above $2000 per unit / ($4000 total).

Rental increase of $100 p/month  - performance increase = $200

Total performance increase

$300 for increased rent

$550 electricity savings

$850 total 


Phase 3: 

- With a stabilized, cashing flowing property, phase three will be spread out over a period of 6-8 months. We will set aside $600 of cashflow per month until we have $2000. After we have saved $2000 we will increase the rents on the existing tenants expecting a turnover. Once a unit becomes vacant, we will renovate and repeat. 

- Exterior updates in Phase 3.   -  Fill parking spaces with gravel - They are currently very uneven, broken concrete ($800)   -  repair retaining wall ($450) 

Final performance increase should be as follows:

- Rental increases = $600 per month

- Electricity Savings = $550 Per month

total performance increase = $1150 per month / $13,800 annual

Total renovation expenses = $16,700

Time = 8-9 months

ROI = 82%

Please let me know if there are any adjustments to this plan you think we should consider.

Respectfully,

Ramsey

I think you are underestimating the cost for the adding of separate electric meters .  If each unit does not have a electrical panel dedicated to that unit,  you will be rewiring the units . Then if you think a remodeled place will draw a better tenant , you are half way right . You need good tenants in the other units to attract good tenants . 

$10 grand isnt going to go far . When you start removing the bad tenants 1 at a time to remodel it wont take long for the remaining tenants to figure out whats going on , they will leave quickly .  Prepare to do the WHOLE place at one time .  make it a place where tenants WANT to live 

Originally posted by @Matthew Paul :

I think you are underestimating the cost for the adding of separate electric meters .  If each unit does not have a electrical panel dedicated to that unit,  you will be rewiring the units . Then if you think a remodeled place will draw a better tenant , you are half way right . You need good tenants in the other units to attract good tenants . 

$10 grand isnt going to go far . When you start removing the bad tenants 1 at a time to remodel it wont take long for the remaining tenants to figure out whats going on , they will leave quickly .  Prepare to do the WHOLE place at one time .  make it a place where tenants WANT to live 

 The $3,000 is based on an estimate from the previous owners who had an electrician quote the cost (I understand that this is unreliable information). We are having an electrician provide an updated quote this week. There are currently 4 meters because the place was originally built as a quadplex. The top floor has since been converted from 2 units into 4 units. The reason I believe it will not be extremely expensive is because we will only be adding two meters and rewiring 2 units.

Also, I have experience renovating one unit at a time. You are right, some tenants will leave. I have accounted for 50% of them to leave at once.  If they all leave at one time, it will expedite the renovations and bring the end goal home sooner than expected. We will have to come out of pocket (something we do not want to do) however the expedited completion date will begin regaining the expended income sooner rather than later. 

We are prepared to make those adjustments if need be, however not plan A.

Thanks!

Whether you will be able to attract a better clientele depends a great deal on where your units are.  Shreveport can go from desirable to undesirable in the space of two blocks.  

You also have to be very selective in choosing your property management company.  I have heard and experienced some very bad situations with some of them. 

I can recommend some Honest people to do some of the work if you would like 

Best of luck to you 

@Karen Johnson , please do.

Our property is in the Highlands area. As stated in the OP, Shreveport can be block by block and sometimes building by building. We are aware of this. Our property is nothing exceptional and we do not intend on making it the best property on the street. We are simply doing cosmetic renovations that will attract better tenants that the current layout. We want to divorce it from tenants who get by on government subsidy, and attract the working, lower middle class tenant. We have no disillusions of these units being luxury condos - however clean, affordable housing is the end goal.

The one thing I would say is out of order is getting a new tenant. I would remove the carport storage prior to filling the new unit. If it looks like trash that is what you will attract. Also you can advertise thier dedicated parking space. That unit looks nice imagine when they drive up,if it looks bad they'll just keep going.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.