Renovating a leased 4-unit -- strategy?

Question

Our offer on a 4-unit brick walk-up 2-story building was just accepted. It's fully leased (month-to month, below market rents.) I would like to renovate this building, specifically in this order:

1. Delete steam heat and add new forced-air and A/C (have quote).

2. Redo electrical in basement, relocating all boxes to a single location in front basement.

3. Add two basement units in currently unfinished basement (they are already firewalled with two exits each). I can't do this until all units have new HVAC because I will have to remove the boiler completely to make room for the basement units.

4. Renovate ("freshen") the upstairs units.

The problem is I don't know when or how to go about accomplishing this since there are already tenants in the upstairs units. The prime rental season is in May/June with many single graduate students from the university about a mile away looking for apartments.

The tenants are month-to-month and their rents are below market. Should I just terminate their leases and do all the renovations at once, ready to rent in  May? Should I allow the tenants to stay while the HVAC is installed, then raise their rent in May?

I'm looking at about a $350 - $400/mo per-unit bump in rent after the renovation, which includes shifting the gas bill from landlord to tenant. I would like to have these all done at once but I also don't want to interrupt my cash flow, though I can survive if we don't rent.

What do you guys think?

Christian Carson · Answer

We haven't closed yet--there's an inspection period and I know that there are going to be issues revealed that will be points of negotiation between us and the seller.

The building is zoned 1-6 units residential, good news for us!

I think you all are right about getting it all done at once, but I'm worried that it might take longer than anticipated if any issues arise. It will be hard work to coordinate this to happen within the month or two window that we'll have before prime rental season.

Al Williamson · Answer

Chris C.Yep, I agree with Craig. There are efficiencies you gain by mobilizing, shutting off water, and knocking out your project all at once.

I'm hoping the zoning question was answered before you closed.

Craig Rismiller · Answer

Chris,  is the building currently a 4 unit and you will be adding 2 additional units to make it a 6-plex?  If so I would double check that you will be okay from a zoning perspective.

In terms of renovations, it seems that your plans will make living there extremely difficult (I.e. no electric / heat).  Since the tenants are on month-to-month leases I would give them their 30-60 day notice to vacate.  Get the building empty, renovate, and then release at the market rates which you feel are higher than your current leases.

Good luck!