Buying a Rental: Tenant Occupancy Status

6 Replies

Hello there,

I am currently in the process of acquiring my first property, a rental property. My goal (3 options in descending order) is to acquire a local 2-4 unit to house hack, a 2-4 unit outside my desired living area, or a SFR.

I'm looking first and foremost at properties needing TLC/fixer uppers/BRRRR eligible. 0. I want to get a deal to reduce cash outlay and increase cash flow 1. I want to force appreciation 2. I want to raise/charge a solid rent to increase cash flow and get with the times (for example, I spoke with one landlord who never raised his tenants rent in almost 3 decades...WAY below market rate, costing him 10s of thousands of dollars in lost earnings, not to mention he trashed the place) 3. For my own personal satisfaction, I would like updated properties to rent out, not old ugly ones (plus it will help when it's time to sell one day) ;)

Regardless, but especially in the case of properties with below average rent or that are outdated, I'm wondering what to make of these situations:

1. Unoccupied/vacant (seems ideal for fixer uppers/BRRRR)

2. Tenant occupied (one or more units) (seems more "hopeful" for an outdated property you want to fix up as they may leave when their existing lease ends) (also provides income towards the loan I believe)

3. Long term tenant occupied (seems very inconvenient/problematic for an outdated property you want to fix up)

All in all, I'm thinking that if I want to BRRRR, unoccupied is best, occupied is okay/has potential, and long term occupied is not good. I'm not sure what options are for eviction in PA and as of 6/16/2021, but I would like to avoid that (especially with long term tenants #guilt), first and foremost because I'll feel bad, but secondly because it sounds messy.

What occupancy status do YOU prefer for

A) Rentals in general

B) Updated rentals

C) Outdated rentals (you want to rehab/BRRRR)

Any other related comments or advice on this topic?

Do I just need to take a tough pill and consider units with long term tenants that would need to be evicted in order to BRRRR?

Outdated properties with long term tenants are ideal. You get to update for free while doing changeover allowing for future rent increases. As opposed to  tenant turnover on your recently updated property is only back to as-was condition after you’re done. In today’s market you may be amazed that the outdated property rents for almost as much as the one you update. 

I just had a 5+ year tenant move out (the 2nd tenant in 10 years) with no updates done. Took 2 days to get tenant paying more than 30% rent increase.   The rental market is INSANE. 

Originally posted by @Bill Brandt :

Outdated properties with long term tenants are ideal. You get to update for free while doing changeover allowing for future rent increases. As opposed to  tenant turnover on your recently updated property is only back to as-was condition after you’re done. In today’s market you may be amazed that the outdated property rents for almost as much as the one you update. 

I just had a 5+ year tenant move out (the 2nd tenant in 10 years) with no updates done. Took 2 days to get tenant paying more than 30% rent increase.   The rental market is INSANE. 

Hello. Thank you for taking the time to reply. What do you mean by "update for free"?

 

I mean you’re going to have to replace certain things anyway after 10 years. Paint, flooring, maybe an appliance or two. Now the next tenant has new stuff. And you only had to throw away and replace old stuff. Not recently replaced stuff.   So 2-3 years rom now when that long term tenant moves out you’ll have new stuff. The person who remodeled just to remodel now has 2-3 year old stuff after throwing away still usable stuff. 

If my over use of stuff is too much. Since it could mean replaceable stuff or fixed stuff. :-)

Originally posted by @Bill Brandt :

I mean you’re going to have to replace certain things anyway after 10 years. Paint, flooring, maybe an appliance or two. Now the next tenant has new stuff. And you only had to throw away and replace old stuff. Not recently replaced stuff.   So 2-3 years rom now when that long term tenant moves out you’ll have new stuff. The person who remodeled just to remodel now has 2-3 year old stuff after throwing away still usable stuff. 

If my over use of stuff is too much. Since it could mean replaceable stuff or fixed stuff. :-)

Are you suggesting then that I attempt to remodel/upgrade WITH the current tenant in place? Or that I simply wait for them to leave? I've heard of tenants staying decades in one place, and if they've already been there several years, that makes me think it will go that direction. 

Don’t upgrade while they’re there. Let them stay and upgrade when they leave. Turnover is where all your expenses are. Having someone stay 2 extra years is probably worth more than a 10% rent increase. Imagine 10 turnovers in 10 years versus 1 or 2. Not to mention 2-4 weeks of vacancy times 10 turn overs. 

We buy value-add properties that cashflow at the purchase price. It takes us about a year to stabilize a property. Usually in the first two years we expect to turn and renovate 50% of the units. We have been able to significantly force appreciation due to renovations and then use the renovated properties as collateral instead of using cash for our down payments. With our small renovation team, especially while we are still buying, we really don't want more attrition than what is normal. If a paying tenant that is not causing problems wants to stay we only raise rent modestly when taxes are reassessed (every 3 years).