Inherited tenants: Keep the 20-30 yr tenant hoarders?
Real Estate Broker · Asheville, NC · Member since 2016 · 27 posts · 12 votes
BPers!
I'm closing on a 4 plex in a C neighborhood. Two of the tenants have fairly maintained their units but the other two have trashed theirs (hoarders). Both of these tenants have been in the units for 20-30 years and don't pay late and never ask for maintenance.
Goal: Exterior Remodel, increase rents 15% ,Cash out refi (BRRR) in 1-2 years
Option 1: Not renew leases and give 30 day notice upon closing. Rehab and re-rent both units.
Option 2: All new year leases. Rehab only exterior and save cash for rehab if/when they move out.
I really do appreciate your input!
Best,
Keoki
A tenant that has paid on time for 20-30 years and has not asked for maintenance is hard to come by. Obviously you don't want damage done to the property but maybe I am naive in asking "What damage are they going to do now that they haven't already done?"
I would run the numbers on cost of rehab and the time it takes to recoup those costs in rent versus what you are receiving status quo. Additionally, a conversation always goes a long way. They maybe open to a small rent increase in exchange for coming in and doing some small or preventative maintenance. Best of luck
Great inputs guys, to expound
If I don't reno the interior, the plan is to increase rent to market (~15%). If I do reno the interior the rent increase will garner around 25-30% increase in rents.
Love the input about keeping the dirty tenants on month to month if we decide to keep them. I'm wondering if reno'ing the interior is even necessary to do the cash out refi, what percentage of appraisers walk the units?
Thanks again Amy and Peter, awesome stuff.
-Keoki
A tenant that has paid on time for 20-30 years and has not asked for maintenance is hard to come by. Obviously you don't want damage done to the property but maybe I am naive in asking "What damage are they going to do now that they haven't already done?"
I would run the numbers on cost of rehab and the time it takes to recoup those costs in rent versus what you are receiving status quo. Additionally, a conversation always goes a long way. They maybe open to a small rent increase in exchange for coming in and doing some small or preventative maintenance. Best of luck
@Keoki Kimzin I've been in your shoes so many times, and it is a tough decision to make.
In my experience, it is better to "rip the band-aid off" and get those hoarder tenants out sooner than later. While you could go a few years with no issues, when they eventually do move on you could have an even bigger mess on your hands.
Think of all the issues that come with hoarders, and how much damage leaving those units in that condition could be causing to the entire building. What if you start to have issues with bed bugs, I've found almost all hoarder units have mold growth somewhere, imagine if you're building showed up on the hoarder tv show... I know... I'm exaggerating and going worse case scenario here but there are some serious issues that can and will get worse over time allowing those tenants to continue on.
I use to LOVE my long term tenants who went years with no maintenance requests, until I realized that it made for a more expensive rehab later anyway. So either you pay now, or pay later and paying later could cost more based on additional damage.
Just my two cents... I think @Peter B. also brings up a valid point that if you're wanting to do a refinance better to get those people out.
Great inputs guys, to expound
If I don't reno the interior, the plan is to increase rent to market (~15%). If I do reno the interior the rent increase will garner around 25-30% increase in rents.
Love the input about keeping the dirty tenants on month to month if we decide to keep them. I'm wondering if reno'ing the interior is even necessary to do the cash out refi, what percentage of appraisers walk the units?
Thanks again Amy and Peter, awesome stuff.
-Keoki
Raise the rent on them by 25-30% without renovating and see what happens. I bought an apartment with 3 tenants that paid $350/month. I raised rent on all 3 to $495/month and 2 of the 3 stayed. I did not renovate units. It is now a year later and they are paying the new rent every month on time
When you think you've thought it through, leaving to fellow BPers to blow your mind with some pro tips! We've decided on doing a combination of things. We plan on raising rents 20% to meet market comps and renovate the exterior. If they leave we gut and renovate, if they want to stay, my PM will do a walk through with the tenant and give them 7 days to fix the issues or vacate. Renovated units will be relisted at a 35-40% increase to try and hit top third of market comps. End goal is to rehab two units over the next two years and refi to 75% LTV.
I really do appreciate the input. Newbies like me really rely on sound advice from pros like you!
We finally closed on this property in December. We were able to increase rents 25% in two units and decided to serve two of the tenants (said hoarders) with a 30 day notice. We thought it would come down to cash for keys or an all out eviction, but we just got notified 1 Mar that the tenants had vacated the premises with no issue. We have just secured a GC for the exterior renovation and will also be renovating the vacant units to release by May.
End goal is to do a 75% LTV cash out refi by 1 Jan 2019 and pull out our downpayment. Thanks for the input on my situation, you really helped me with my decision making process.
@Keoki Kimzin Good for you man awesome when things work out. One tip - do not 'over reno' -- rents cap based on your neighborhood usually.
Am currently analyzing a property with 2 sets of 'hoarder tenants' -- sucks but in a market like this every house on the MLS has 'a story'
Keep us posted on your reno process!
Jim
@Keoki Kimzin The issues with hoarders are serious.
- Vermin like to nest in and among the junk. You'll probably find dead rodents in there too. It's a health hazard to them and to your other tenants.
- Mold will grow in the areas that are buried. That mold will spread and again, will be a health hazard to the hoarder and other tenants too. It will also require remediation when you renovate.
- Appraisal. When you refinance, the hoarders may have a negative impact on the appraised value. I'm just guessing, but I can see an appraiser taking the hoarding into account and reducing the property's value. Your lender may offer an opinion on this.
- Building Structure. Depending on what kinds of things they hoard, they can be overloading the structure of the building, causing anything from sagging of floors to failure of the homes framing.
http://time.com/2880968/connecticut-hoarder-beverl...
- Mental Health of the Tenants. Hoarding is a very real mental illness. It's not just a matter of people unwilling to clean. Hoarders treasure every single thing that they hoard. The tenants need professional psychiatric help - and it's going to be traumatic for them. Compassion should be given in very large quantities, while sticking to your goals and timelines.
Good luck. I think you'll need it.
Thanks for your concerns and encouragement everyone. It surely doesn't go unnoticed and it gets me amped up!
Getting quotes on our full reno for our economy units (2bd/1ba ~800 sq ft.) and we are getting quotes that run from 8000-11000. Per your point @Jim Sestito, really don't want to over reno and we plan on just making it clean, functional with vinyl flooring and a budget kitchen. Do these numbers seem high?
-replace sink and shower pan
- repair drywall and repaint interior
- replace cabinets with a home depot special
- replace countertops, new sink, dishwasher
- replace all flooring with vinyl planks or cheap tile
- install ceiling fan in living room
I've been researching where to go cheap and where to spend money but I'd appreciate your thoughts!
@Keoki Kimzin I often go back to my first reno where we used the least expensive product home depot had to offer for everything.
Three years later here is my take. (its a rental so I still own and monitor the property)
Kitchen::
Appliances: Go Cheap - we used the lowest priced stainless appliances with decent online reviews and they are kicking along just fine. Haven't had a call on appliances.
Counter tops: Formica is still looking just fine.
Cabinets: Went cheap - these are holding up OK but showing signs a wear - looking back I would bump up to middle grade here.
Sink and faucet: Had a hook in this department and went away from the depot - Middle end stainless and still working great.
Bathroom:
Vanity - wish I spent a little more. While still functional the vanity is starting to show chipping and signs of wear and tear.
Toilet: Medium - good here.
Shower pan - Medium - good here.
Shower Head - went cheap and had to replace too before we went high end - good ever since.
Tile floor - cheap - good here.
Make sure you have a ceiling light / fan combo - steam from shower will beat on paint.
Other items -
Insulation - sort have been doing it in pieces. Wish we just had someone blow it out and took advantage of energy efficiency rebates. More energy efficient homes are just better for everyone. You, the planet, the tenants.
Best of luck and keep us posted!
@Jim Sestito thanks for the inputs. We are done with renovations and now and waiting on some appliances and cleaning to post the units ready for rentals. We more or less followed your suggestions with one exception. We paid 3250 for each unit to get the swamp removed and replaced with AC using the existing ducting. My AC vendor said that with the multiple bedrooms that mini splits couldn't pick up the necessary load to cool the house, so we went with a central unit per apartment. Got to get some tenants and then looking to refi in Aug !!
Hope to see some photos, @Keoki Kimzin!
We are in the process of a refi for cash out now, and I guarantee you that the appraiser/bank etc will walk through the units. My 2 cents worth is as follows: Notify the tenants that you are going to do an inspection. Take a real inspector who can take samples for presence of mold, bugs etc. I have had a hoarder once who forgot about the cats they owned and we found the cats and kittens dead in a cupboard. They had been there for quite awhile...Yuk!!. (These tenants were asked to leave because they refused to clean up the property. It was big bill for the cleanup. )
After the inspection, give them notice to clean up with specific detail and tell them when you will be reinspecting the property. I recommend that you also include in the notice that eviction is possible if the refuse to cooperate. Now hold them to the time line for this notice and show up for the followup inspection. If they clean up, raise the rent as you wish and put them on month to month with monthly inspections to be sure that they maintain the unit as needed. And the incentive can be that inspection frequency goes down if they have good inspections every time. If they do not comply either give them notice to move out or raise the rent so high that they will not stay. If you find mold and bugs, rotten floors, ruined carpets, broken walls etc, it is justifiably tenant caused. I would order it cleaned and debugged and charge them for the repairs. They may need to vacate for mold amelioration. In my opinion, you would not be responsible for their housing in this case because the damage was caused by the hoarder. If you acquiesce and allow them to violate cleanliness terms in the lease, you will be seen by any judge as being complicit with their uncleanliness. I would also make them sign a new month to month lease that specifically states that hoarding (or however you wish to describe the condition where things pile up so that there are only trails from the kitchen to the arm chair toilet and bed) will not be tolerated.
All landlords have the right to require regular inspections and should give notices to comply if this kind of problem starts or restarts. In my opinion it is part of good property management. By doing this you can have a win win. You get the units cleaned up and you get to keep tenants who pay regularly and do not call for repairs. Who knows, they may even thank you for the push to live in a clean home. Good luck!!
Never even thought of this @Timmi Ryerson! Great idea, this would definitely set up our appraisal for success. Thanks!
Alright guys here’s my pre-refi report on how this project went along with my lessons learned. It's a lot to read but you can learn for free from my mistakes. Pics to follow.
Purchase Price = $160K
Monthly Rents= $1980
Rehab
Preclosing repairs= $6500
Postclosing repairs= $35000
New Rents= $2620
Goal is to refi > $215K for a final CoC of 23% post refi and a 10 Cap property
Lessons Learned
Searching for properties
oBring in craigslist more for 2-4 multiunit buildings
oThere are certain realtors that specialize in these multiunit properties, get on their mailing list
Analysis
oAdd 50% to all rehab costs…..and get a better contractor
Picking team
oRealtor
Realtor with experience in multifamily properties and also invests there
oProp Manager
Pay for the system not the person
Get them in the loop earlier during due diligence to determine better proforma rents
Use their expertise in legal matters to develop your tenant/lease situation and way forward
oContractor
Getting the work done in a timely fashion could be more valuable than shopping for contractors for months.
We had a long closing timeline that we could’ve have set our team better and poised them with good gameplan
oLender
Present a professional document compilation
Look into mortgage brokers for future flexibility
Lending package
oLoan documents
oPersonal finance limfacs
Very clear guidelines between partners concerning capital requirements by certain dates
oInclude gameplan for the property for your lender with appropriate numbers
Making an offer
oPrice options (all in same offer, give them choices)
Conventional with discount
Seller finance less discount
Cash offer significant discount
oOther Clauses
Due diligence doesn’t start until you get all of your required documents
Closing Timeline
oRepairs
Lean forward on your contractor and book their time,
oDocumentation
Save before/after pics, invoices, tenant notice documentation
oTransitioning property to LLC
Get you lender in the loop asap to determine their specific protocol
oMoving money for closing
Ensure that if you’re working out of state, that you can do online wire transfers!!!!
Ensure your POA or alternate closing office gameplan is set asap
Post Closing Gameplan
oRepairs/CapEx gameplan
Add 50% to your expected rehab costs during early calcs
oTenant gameplan
If they are a bad tenant that pays on time, kick them out. It’s not worth it
Your gameplan begins on closing day!
Awesome info Keoki- looking forward to hearing about the refi!
3/4 units rented waiting on the other. Its priced right at market with good placement on zillow, hotpads, but it has been on the market 3 weeks. My direct competition is larger apartments that offer discounted move in rates, coinop laundry center, and have a pool. Thinking about adding an in unit washer and dryer to up the interest. Any other thoughts on how to give yourself an edge in a low income market? I'd really like to not decrease rent. Thanks!
@Keoki Kimzin I haven't had good luck with washer/dryer in my units and eventually removed them but if your competition has them you might be forced to include them in your unit. Keep in mind that if you install W/D in (1) unit you will need to install W/D in ALL units… for many reasons, not the least of which is to avoid the implication of discrimination.
Good call @Wren Martin! My direct competition for a similar unit are larger complexes. Still trying to figure out my competitive advantage; I believe that your own washer/dryer would be very rare for this price point but I see your point regarding maintenance. Gotta love the struggle!
Update, refi complete!
Overall, what a great property to learn on from rehabbing trashed units, working with contractors, re-renting, to the entire refi process!
Numbers recap:
Original Purchase Price: 160K Original Loan (75% LTV): 120K
Rehab: 55K, raised rents around 35%
New Appraisal: 260K New Loan (@70% LTV-local limitation?): 182K
End state: cash flowing property and cashed out for our rehab costs (~55-60K). Ready for another property. Next up 8-12 unit seller finance deal while adding another partner, fingers crossed. Thanks for the input everyone, saved me a ton of time, energy, and especially money!