First potential deal needs expensive value adds

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First potential deal needs expensive value adds

Darius Lipsey
South Bend, IN · Member since 2016 · 50 posts · 6 votes
Any advice on adding value to a multi family that's technically move in ready, but being underutilized? Considering house hacking a small multifamily that is currently fully occupied with month to month tenants. Financing is already in place and with very conservative numbers it cash flows, even buying at asking price. The current tenants in place are fairly low quality, but have been there consistently for some time and don't want to immediately leave. The rents are at market for what the place is, but I think there is a lot of value that could be added over time to change attract better quality tenants while increasing rents. The value adds would cost quite a bit of capital in time, effort, and cash. Considering I'm a new investor undertaking this seems really huge and I'm being told by other locals that it's very risky. I don't want to bite off more than I can chew, but at the same time I'm very ambitious and I'm not really scared to dive in head first. I still don't want to do anything stupid that could potentially take me out of the game before I even get started. The property is in a pretty desirable area I'd say a low B quality area and currently a C property mostly because of age lack of amenities. Thoughts?
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  • Chris Jensen
    Rental Property Investor · Bettendorf, IA · Member since 2017 · 187 posts · 256 votes
    9y
    One approach would be to decide what type of renter you want and let that drive your decisions. If your ideal renter is willing to pay more for certain features or upgrades, then those upgrades would be the focus (as much as feasible). Even if it takes a bit of time, having your ideal tenant at your preferred rent should pay off long term. - Chris.
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  • Sam Bates
    Rental Property Investor · Dallas, TX · Member since 2011 · 62 posts · 77 votes
    9y

    @Darius LipseyThere are many ways you can add value to multifamily, but I would need more information to give you the best plan to implement. However, one of the easiest ways is to update the units and increase rent. You mentioned it is a C class property in a B area. I would think be upgrading the units you could increase rent. You mention the tenants are low quality. Why are they low quality if they have been paying consistently? Typically, when I inherit a property I’d rather put my own tenants in the property because I know my screening process. If you renovate the property and the tenants can’t stay because the rent is too high it could save you future headaches.

    Again, I don't know all the details, but if the property cash flows after all expenses (capex, maintenance, PITI, property management, etc) are taken into consideration I wouldn't consider it super risky. The two concerns I would have is if you feel like rents are softening or will soften in your area and can't cash flow with lower rents. The second concern is not being under capitalized and not having either reserves or capex built into your budget. When this happens you have to take the cash flow and use it for R&M or capex and this kills your return.

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  • Darius Lipsey
    OP
    South Bend, IN · Member since 2016 · 50 posts · 6 votes
    9y
    @Chris Jensen Thanks for the input. My ideal tenant would be college students and young professionals. Preferably ones that care about their credit. I'd definitely focus on those upgrades first. Some other upgrades I have in mind aren't "necessary" but would make it so much more appealing even to tenants outside the target market.
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  • Darius Lipsey
    OP
    South Bend, IN · Member since 2016 · 50 posts · 6 votes
    9y
    Sam Bates One tenant I met is filthy to the point it concerns me and there may be a drug problem. I have an idea of the tenant I would like for that particular building mainly college students and/or young professionals. I do have maintenance repairs and cap ex built into the budget estimates at conservative numbers. Although I don't have a ton of on hand capital and reserves I do have decent and consistent income coming in from my job which I intend to keep and put towards the investment. Also I'm willing to do a lot of the work myself within reason to save on large contracting bills. The current rents for the property are about as low as they can be considering what's being offered and the state of the place and it cash flows. Overall rents in the area have been climbing. I would raise rents eventually, but gradually and only after putting into place value adds and upgrades. Considering it cash flows on the low end I think there's plenty room for market fluctuations. My biggest concern is that due to inexperience I'm underestimating how much it'll cost and how long it will take to upgrade the property.
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