Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
Hi everyone. We just purchased a value add 6-unit in North Hollywood (CA). It is a rent control property. Currently the rents are way below the market rent and the existing tenants don't want to leave at all. We have done the following things to increase the cash flow - adding a laundry room, charging storage rent, installing energy-efficient lights and so on to cut the utility cost, renovating the unit in exchange of higher rent for the current resident.
What else could I do to increase the NOI? I am thinking about putting a covered parking space to charge parking rent? But I am not sure whether it is feasible to do so. I'd love to hear your thoughts. Thank you in advance!
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y
@Yannes Chiang
Depending on market rent vs current rent it can be worth the investment. Our average buyout is actually about double what you listed. However, consider the math. If a tenant is $1,000 per month under market you'll get an extra $12k a year in income. At a 15 GRM the value of the buyout is $180k. With that in mind 10k or 20k don't seem that bad. So it's a great value add, especially if you sell or refi and capture it. It also ups cash flow significantly.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Yannes Chiang, a rent-controlled building, huh? Why did you make that decision? I'd love to understand the rationale.
The covered parking probably won't pay off. First, your tenants have a lease and are rent control. You can't charge them more because you decide to do upgrades. Even if you could, the pay-back period is going to be a long time.
What about solar panels? CA has some good programs, right? Can you either eliminate your common electric charges or even sell power back to the grid?
Los Angeles · Member since 2018 · 5 posts · 2 votes
7y
Is parking included in their original leases? If not, draw up a second agreement just for the parking space. You can increase rent annually on the space without restrictions from LA housing. Another option could include temporary management that's skilled in turning tenants.
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Yannes Chiang are you already living in one of the units? Is one of your family members or resident manager living in one of the units? If not then you, a family member or your resident manager can definitely move into the lowest paying unit.
There is a process to this, however, if the lowest paying tenants are not willing to leave and you have the option to move in with good faith then it's legal.
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
7y
@Matthew Baltzell RUBS? Let me google it and dig into it. Pet fee is a great idea! Thank you! Since they are month-to-month lease, can I just send them 30 days notice about the pet fee?
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
7y
@Jaysen Medhurst Because I believe it is a value add one and am positive about the appreciation but still, I gotta work on the cash flow first. You are right, I need to work on the math to consider the return of the covered parking. Solar panels? I have never thought about this! I should check it out. Thank you!!
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
7y
@Mike Matthias The parking is not included into their leases but the parking areas are just open space, uncovered. Can I still charge parking rent? I have very limited knowledge about this. Temporary management that's skilled in turning tenants? Where to find these kinds of management companies?
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
7y
@Michael T. Thank you so much for your input. Unfortunately I don't have any family members will live there. A resident manager? I have never thought about this. But it is only 6 unit building, having a resident manager seems quite unnecessary or difficult to justify.
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Yannes Chiang yes a Resident Manager may not make sense, however, it starts the process of moving tenants around in the hope that additional changes occur in the future.
You could also work directly with a Property Management company to determine the best strategy that will work with hiring and using a Resident Manager.
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Yannes Chiang@Matthew Baltzell Basically what Matthew said. I don't know rent control laws well in your area but I know in other areas the rent control is typically based off of numbers of rooms or square footage. If it is based off of rooms, can you change the layouts to for example go from a one bedroom to a two bedroom?
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y
@Yannes Chiang
Depending on market rent vs current rent it can be worth the investment. Our average buyout is actually about double what you listed. However, consider the math. If a tenant is $1,000 per month under market you'll get an extra $12k a year in income. At a 15 GRM the value of the buyout is $180k. With that in mind 10k or 20k don't seem that bad. So it's a great value add, especially if you sell or refi and capture it. It also ups cash flow significantly.
Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
7y
Buyouts are the way to go. There are people that specialize in them.
When you get the unit vacant you can renovate it to get it back on the market at peak rents. It's also a good time to look at reconfiguring the floor plan to add an extra bedroom.
Don't make the place too comfortable because you only want the tenants to stay for a few years.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y
@Seth Borman
Totally agree. We just did one on a tenant paying 1200 a Mo on a 1-bed. Turning it into a 2 bed and will get 2350/mo. Now there is some good value add!
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
7y
@Charles Kao LA actually favors the tenants so much so we only allow to have around 3% rent increase every year regardless of the floorpan and so on for multifamily. And it is very difficult and costly to evict tenants as well....Well, it is California. Stories here are very different from other states. sigh
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
7y
@Seth Borman@Lee Ripma You are right. After doing the calculations, it makes great financial sense. One half of the tenants are paying 50% of the market rent and they have lived there for years. One low-paid tenant actually telling me he may move out in two years since he is ready to buy a SFH in two years. Although not sure whether he will finally move out voluntary, I am in dilemma whether to offer cash for key to other tenants before he moves out. How do you think?
Rental Property Investor · AZ · Member since 2018 · 212 posts · 183 votes
7y
I’m clueless about the law but I’d look into parking/pent rent. Since they’re month to month raise it monthly and aggressively until they sign a new lease at market $ or move out.
If that’s a legal option that’s what I’d be doing. Maybe even supplement with a cheap cash for keys.
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Yannes Chiang
I really don't feel bad for you ;-) It's coming from a mile away and the tenants expect a 3 percent raise every year so rarely hassle you on it. It's just more reason to make sure you buy right. Having lived in NorCal I can tell you I used to envy the cap rates people get in midwest. and then now that I've moved to the Midwest I envy all the appreciation people in California can take advantage of.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes
7y
Offer a cash for keys deal and get the tenants out asap; you'll make your money back pretty quickly. Also, if you're interested in selling your property in the near future, your property's value will increase because you no longer have long-term, low rent tenants; getting rid of long term tenants is a value-add method in itself. Also, look into getting separate water meters if you don't have them already so you don't have to pay the tenant's water bills.
@Seth Borman@Lee Ripma You are right. After doing the calculations, it makes great financial sense. One half of the tenants are paying 50% of the market rent and they have lived there for years. One low-paid tenant actually telling me he may move out in two years since he is ready to buy a SFH in two years. Although not sure whether he will finally move out voluntary, I am in dilemma whether to offer cash for key to other tenants before he moves out. How do you think?
When you do your DD on the building you need to go into every apartment and talk to every tenant. Do they look like they would be willing to move? How clean is the place. Have they done work on it to fix it up? Do they have pictures on the wall from their kids Naval Academy graduation (saw that in Boyle Heights).
If you think they can be moved, decide how much it will cost. I've heard of people taking six figures. Where I was doing this we budgeted $3,000-$10,000. Sometimes you will be right and sometimes wrong. One building we bought with two vacancies (of ten) and a tenant passed the day prior to closing. Other buildings had tenants that refused to even talk about leaving.
Investor · Los Angeles, CA · Member since 2015 · 213 posts · 162 votes
7y
I'm not a rent control investor, but the most common situation even for smaller assets (like your 6-unit building) is tenant buyouts. Most firms I've discussed this with will budget between $18,000-$25,000 per tenant. Per @Lee Ripma 's post, there's a huge ROI on this, because even if you get half the building from 50% BMR to full market rents, you've added subtantial value and can flip the asset.