Purchasing 4 plex, getting new tenants, and renovation advice.

9 Replies

Hello everyone,

I've got a 4 plex that we are about to close on October 1st and the rents are way under market rents.  It's my goal to renovate each unit and get each one up to market rents as soon as possible.

Currently I am trying to strategize the best way to make this happen.

I am pretty worried the current tenants are just not going to pay on the turnover or say that the rent is less than what the owner has provided us in expired lease agreements.  They are all on month to month tenancies and have been for over a year.  Oregon law states that we have to give 60 days notice for no cause for tenancies over a year, but it also states that we can give 30 days notice if the property is being sold and we are moving into the unit.  I could imagine living there during the renovations and then moving out once we have each unit ready, but I am not interested in living in the building long term.

Anyone have experience with a turnover like this?  Any recommendations on a lawyer?

Thanks!

Also the 4 plex is in Portland Oregon.  Well actually Beaverton Oregon, Washington county.

Cheers!

Hey Chris,

I'm not sure how popular this opinion is on this site, but I think talking to your tenants and being honest is the best way to go. 

I bought a 7-plex in Portland earlier this year in a similar type of situation (rents way below market, MTM leases, needed lots of work, unsure about the tenants etc etc.)

We talked to each tenant individually, and found out that many were planning on moving out already in the upcoming months. We basically made a renovation schedule, based on when they were planning on moving, and everything went smoothly. 

When we did need to get into a unit to renovate it, and the tenant was not planning on moving, we talked with them and came to an agreement that worked for everybody. 

I think having a good lawyer on your side is definitely essential in doing real estate, but it is time consuming, messy, and can be expensive, so should be used as more of a last resort in these type of situations. On top of that, you are dealing with someone's home. 

I think talking with the tenants will save you time, money, and maybe most importantly, your peace of mind. 

Congrats on the 4-plex, that is very exciting. If you ever wanna meet up and talk shop, give me call. I promise I'm not always such a softie. 

I would just  give 60 day notice that you are going to raise the rent, they either pay it or move.   You may create some vacancies by this so you can work on one unit at a time but if it is incremental increases rather then one large one chances are you will still retain tenants.  We had to honour in places lease rates and expiries with a one year lease but you don't so decide do I want to raise the rent and take a chance on vacancies or do I want steady income.  Not sure if you can raise differently based on length of tenancy.  In our experiences lots of vacancies at the same time aren't the best situation and you might want to think about if you want to push apartments to be vacant in the winter.

If they say the rent is less that would be fraud by the current owner who would be claiming higher rents. It can happen but unlikely.  Did you get the rent roll, whether they are current and dates of payment?  Anyway I would try to keep some occupancy even if it keeps you under market for a bit longer.

Hey @Chris Shepard  - congrats on the purchase!  Buying distressed or underrented property is a great way to build equity and cashflow.

I was in a similar situation with a 6-plex a few years back.  It was a bit different because I had leases in place that I had to honor, so one came up every couple months or so the first year.  In every case I was planning to do remodeling to attract better, higher paying tenants.  For example, rents were at $500, market (for apt in crummy shape) was $600 and after renovation it'd go for $700.  I told the existing tenant something like "Market rent for this type of apartment is $700, but if you are really set on staying I'd be willing to sign a one year lease for $650.  I understand if that doesn't work for you and if you need additional time to find another place, you're welcome to stay on at $700 month-to-month until you find something that fits your needs."

This way, you put the ball in their court...if they want to pay the rent you want to receive, then they can stay.  If they don't, then let them move and get a new tenant in there at market rent.

If you have lease agreements that have expired they hopefully specify that the terms change to month-to-month upon the expiration of the lease term. If that's the case then you don't have to worry about any funny claims about lesser rent from the tenants, so check that. 

Now, this is a technicality that I am not 100% on, but when the law says "tenancy of more than a year" they may not be talking about how long the renters have been living there. A "tenancy" is a legal term for the type of lease (e.g. "periodic tenancy" 'tenancy at will" etc.) In Colorado law l believe 10 days notice of termination is required for a month to month lease - it may be different where you are. You should be able to get this info from a professional property manager or a lawyer.

Chris,

I was just recently in your exact same situation - 4 plex with existing tenants, way undervalued rents, in Beaverton, OR. Here's a couple bullets points of advice I'd give from my experience, in no particular order.

- If you feel confident that you can pump the rents with a little updating (or even without), do this as soon as possible. The sooner you renovate and pump rents, the sooner you can get quality tenants and start getting a better return on your investment. It hardly ever makes sense to drag the process out unless you flat out don't have the money to do so.

- Ask yourself whether or not you are really willing to live in a construction zone and move several times (even though it is next door). This is a huge pain. I live in one unit of my fourplex and renovated mine while I did some of the others. I would hate to rinse and repeat 3 times.

- Odds are, the reason your tenants live where they do is because they rent is a steal of a deal. I wouldn't be overly concerned with making the tenants happy or worry about retaining them through the remodel and rent hike. Certainly go out of your way to treat them with respect, but there thousands of new fish in the pond that would love to rent your newly renovated unit. I jacked my rents 50% and rented them no problem. Don't let fear stand in your way. I caution you to not let the tenants control you. You own the building. If you have a verbal commitment that falls through, you have nothing. If you communicate in writing (perhaps after verbal conversations) and follow the law, you will have infinitely more leverage.

- One thing you might want to consider is offering tenants something to get them to move out early. If you have a verbal conversation with each one telling them you have to remodel and hike rents, they won't be thrilled and will probably hop on Craigslist that night to see what else is out there. If you issue them a 60 notice on October 1 when you close, you'll be pushing their move out date to Christmas/School break. It probably won't take much to get them to consider moving out much earlier. It might be as simple as offering a full security deposit refund if they move out in the month of October. I also offered one tenant $200 to allow me to perform renovations while they were occupying the unit. This allowed me to show the unit while they were still living there (in a much more presentable condition) and reduce my turnover time to zero.

Hope this sparks an idea or two. Good luck, and let me know if there's anything you need, contacts, etc. I currently do not have a lawyer.

Chris, congrats!!! Fun stuff. You're correct that in Oregon, if they've lived in the unit for over a year you have to give them 60 days notice to vacate. @Lucas Bennett is right on. Communication with your tenants is a better way to go than just coming up with an idea in your head (based on your perspective) and then implementing a plan. You may find that your tenants know their rent is way under leased and are willing to take a rent increase in exchange for a new lease. I had that scenario this year where the tenant was at $900 and wanted comfort in knowing she could stay for the next school year. We initiated a new one year lease at $1,100, with pet rent and more demands on her for upkeep of the property. $200 may not be a lot to an investor, but it definitely is to a tenant. In our Portland market that $800 on a 4plex, assuming a GRM of 150, creates an additional value of $120,000 (or $192,000 based on a 5 cap) so even small increases can greatly affect market value of the property.

I know I hate to move so moving just to get earlier occupancy seems like a lot of hassle to justify higher rent in 60 days versus 90 days. 

A great investor attorney for Portland is Gary Kahn @ Kahn, Reeves and Hennessey. Their office is on SE 52nd Ave.

Hope this helps,

Mike

Figured I'd give you all an update on what happened with this property.

We had some legal trouble with one old tenants, but eventually it died down.  Fortunately we didn't have to go to court to get them out.  It took a really really long time to get all the tenants out of the building.  Next time we'll just issue 60 day notices and move on them immediately no questions asked.

We took the building from $2800 to $5000 in revenue with about an 80k investment.

All in all, it was a great deal.

@Jon Wesner This is a great example of exactly what we would be dealing with on this triplex. I see lots of potential especially with the lower than market rents, which is a huge upside, there will always be a few issues that arise with any purchase but these would definitely be doable. CA tenant leases continue with the new ownership as well but that's not necessarily bad if we renovated the exterior and one vacant unit while the other 2 tenants are still paying rent which reduces the holding costs. Other possibilities are paying cash for keys and getting the tenants to walk on their own with a little incentive, or getting them to move into one of the units that has been renovated in order to renovate theirs. Lots of great comments in this post! Thanks for the tips guys! Endless options, that's what keeps this game so interesting! 

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