This is part three in a five-part series about increasing your income as an income property owner. Bob Nelson, real estate investment broker, with Pacwest Real Estate Investments, and René Nelson, commercial broker and owner of Pacwest Commercial Real Estate in Eugene, look at the opportunity to raise rent by doing a value-add on units renting below the market rate.
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In part two of this series we used the example of an 18-unit building and the value of putting some money into it because its units are renting below market. There is much to consider. Sometimes it’s best to just do a modest rent increase and stay where you’re at, but you need to look closely and evaluate. With a one bedroom, one bath that’s renting at $200 below market, it could make sense to spend about $150,000 and gradually do a modest rent increase. See how many tenants are going to move. In this scenario, maybe they get three or four units that go vacant, and they go in and they rehab those.
One of the critical issues to evaluate in these situations is how close the property owner is to retirement. If they are nearing retirement, they want to avoid taking on debt.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
Anytime property investors have money in pocket, it’s nice to keep it in pocket. You become increasingly conservative with age. It would make an improvement if it really produced a return, but otherwise you might say, “Let’s just allow this to cook along and support us through a graceful retirement.” As always you want to evaluate your investment and potential return alongside your goals.
Let’s imagine these investors are living off of the rental income now, so if they could take $150,000 and put it into these units and see more passive income on a monthly basis, then it’s worthwhile for them. I’ve seen investors who prefer to invest their money to pay off now because they’d prefer not to leave too much to their millennial kids, who they fear will blow through the money. Those investors would rather put money into their buildings and raise rents.
If an investor were to put in $8,000 to $8,500 per unit in upgrades, then that would allow them to do all the carpet, new fixtures and sinks in the bathrooms, and all new countertops and cabinets in the kitchen. That could make a lot of sense. The key is to look at whether the rent increase holds because you want to make sure there are enough tenants that can pay the $200 additional rent each month. I have developed a spreadsheet that helps evaluate the variables in these decisions. If you need help, contact me at 541-485-8100.
Increasing Your Income through Value-Add is from Bob Nelson and René Nelson on the “Real Estate Today ” Eugene, Oregon, radio show, which airs at 5:30 daily on KPNW.