Rehab With Existing Tenants

[Nicholas Q.]

I have a 2 bd 1 ba SFR in Seattle. The basement is partially finished, but I plan to spend ~$35K to put in another bedroom and bathroom in the basement. I figure I could increase rents by $500/month (17% Cash on Cash Return).

The problem is that I just signed a year long lease agreement that doesn't expire until next April.  Is there any way I can remodel and raise the rents before then or do I need to wait until the lease is up?  Seattle seems to have a process for terminating a lease early due to rehab, but it is a 6 month process and may ultimately require me to pay the tenants a $1,600 fee for relocation benefits and I can't start the rehab until the property is vacant.

They are amazing tenants, so even though I'm excited about increasing value and cash flow ASAP, I think it might be worth keeping them through the year.  At this point, I'm wondering if I can wait until early next year to start the rehab, give the current tenants a discounted rent to stay through the rehab, and then asses a rent increase when the lease expires.

[Shaun M.]

We had a similar situation and simply approached the tenants with the idea of living through a remodel. 

To our surprise they were excited about the idea of having the extra space. The agreement was: remodel happens while they are living there, once completed they get to use the new extra space for free until the end of their lease term.

They got extra space for free.

We got to complete a remodel without losing any rent.

Win-win (and you'll be ready to lease at the new, higher rate come next April).