We’re launching a five-part series about increasing your income as an income property owner. Bob Nelson, Eugene commercial real estate broker, with Pacwest Real Estate Investments, and René Nelson, commercial broker and owner of Pacwest Commercial Real Estate in Eugene, look at value-add with units renting below the market rate.
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Let’s look at a possible scenario. Say I own 18 apartment units in Eugene, and they’re professionally managed. Suppose my property manager is doing a great job, but I want to figure out how can I raise rents, because I’ve been dawdling and haven’t kept current. Over the last five years I haven’t done big rent increases, so I’m thinking about doing value-add. At what point does it pay off to go in and almost gut the interior of the units and put money into it?
This is an interesting scenario, because first of all, the property has value as it stands on the hoof. If you are under-rented, your tenants probably aren’t going to move at all. They’re going to love it, and they’ll stay there until they no longer live in an apartment complex.
There is also the question of whether other properties are increasing their rents and accomplishing those rent increases. If the market is accepting a higher rent and you don’t, it’s a touchy situation. Suppose an owner if $175 to $200 of market rent per month on one bedroom units, and most of the tenants have lived there for the last 10 years. Their rents are low because nobody has moved.
Of course, this also means the units have the same carpet, same countertops, same bathrooms, that they have had for a long time. If you want to attempt to cover the spread of $200, the tenants are not going to stand that. If you give them a $200 rent increase, then they are going to move out. They’re going to boycott you because your rents are too high. Of course, they’ll discover that as they move to another one, they’re going to be paying those higher rents, if that’s all that is available.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
“For this reason, it may be wise to try a rent increase that is substantial, but not necessarily the full $200. And when the increase does cause some vacancy, now you have the opportunity to go in and upgrade that unit.”
The Increasing Your Income Through Value-Add series is from Bob Nelson and Marcia Edwards “Real Estate Today ” Eugene, Oregon, radio show, which airs at 5:30 daily on KPNW.