Cash for keys deal worth it?
Hi all,
Would love your thoughts on this. The Building is in Los Angeles, CA. Subject to rent control.
TLDR: Own an apartment building. Should I spend around $28,000 to get an additional $550 a month in rent (conservatively) by doing a cash for keys deal? The $28,000 includes all costs associated with paying the tenant to leave as well as the cost to renovate the unit so it can command market rent.
Detailed Version: I have a 4 unit apartment building in Los Angeles. The building is subject to rent control. I inherited all the tenants when I bought the building. One of my units has a long term tenant who pays below market rent.
The below-market tenant is an ok tenant - They are a bit messy but pay their rent on time and to my knowledge, don't really cause any problems.
If I did a cash for keys deal with the existing tenant and renovated the unit, I think market rent for a good, creditworthy tenant would conservatively be $550 /month higher than current rent.
Including the attorneys fees, paying the tenant, vacancy during renovation and cost of renovation, the project will cost between $28,000-30,000.
I do have the cash on hand, it generates maybe 1% at the moment as I have a fair amount of liquid cash sitting in the bank.
It would take about 4.54 years to recoup, basically a 2.2% CAP on the $30,000 investment. Not that exciting but more than it is currently generating (and of course not factoring that rent will still increase each year).
I plan to hold onto the property, but, comparable buildings in my area trade at around a 5 CAP. So from a value-add standpoint, the $30,000 investment could add $132,000 in value at a 5 CAP.
Would appreciate any thoughts. I'm not blown away by the numbers but they are not terrible so I am conflicted.
Thank you!