When nine of eleven tenants sit under market, do you wait for turnover or push rents now

Question

Take an 11 unit building where in place rent averages 810 and comps support 1,000 to 1,050 on a turned unit. Nine of eleven are month to month, long tenured, and paying on time. Two are already at 975 because they turned last year, which is the only proof the market rent is real. Historic turnover in a building like this often runs one or two units a year, so natural vacancy alone could take four to five years to reach the rent roll a buyer is underwriting to. The case for waiting is real. No relocation cost, no vacancy loss, no reputation hit in a small submarket where the operator wants to buy again. Paying tenants are the cheapest tenants an owner will ever have, and a 1978 vintage building often needs that spare cash in the roof and the panels rather than in turns. The case for pushing is also real. Value sits in the NOI, and NOI left uncaptured is value someone else's cap rate gets to price. Serving notice on four of nine over a year and turning them near 1,000 moves gross rent by roughly 9,100 a year on those four alone. A lender sizes a refinance on trailing income, so the sooner that income is real, the sooner the refinance is real. Waiting also means paying today's rising expenses against yesterday's rents. There is a middle path: raise the nine toward 900 without turning anyone, accept that two or three leave on their own, and turn only those. That gives up the last 100 to 150 a unit but keeps the building full and spends almost nothing. Notice periods and what an owner can do with month to month tenancies vary a lot by state and sometimes by city, so the legal mechanics always need local counsel. The strategy question is worth separating from the notice form.

diane_kowalski · Answer

Before the strategy, what did your lender underwrite? If they sized the loan on 810 average and you are paying a price that only works at 1,000, the gap is being financed by your equity for however long the turns take. I would want that timeline written into the model as a cash cost, month by month, because four to five years of natural turnover at 1978 vintage expense growth is a different deal than the one on the broker's sheet.

karen_whitfield · Answer

I hold things for a long time so my bias is obvious. Nine tenants who pay on the first are an asset that does not show up in your NOI line. Every one you replace, you are trading a known payer for an unknown one, plus a turn cost, plus vacancy, and you find out in month fourteen whether the new 1,000 tenant is actually a 1,000 tenant. The compounding argument for pushing assumes the replacement performs. Sometimes it does not.

tylerbrooks9 · Answer

The middle version is the one to pick, and it is not a compromise. You get most of the money while keeping the building full, and you do not spend a year as the new owner who emptied the place. In a small submarket that reputation follows the building, and your next seller hears about it.

renee_dubois · Answer

Take @karen_whitfield's version and run it on an 8 unit as an illustration. Six tenants at roughly 180 under, two units a year turning, and after two years the owner has captured a third of the gap while taxes and insurance took the rest. The approach that tends to work is moving everyone to a lease at plus 8 percent, which sounds gentle and is not, and being ready to turn whoever walks. A typical result on six is that three stay, two leave and one negotiates, which is worth allowing. What nobody puts a price on is the owner's own capacity. Four simultaneous turns in year one on eleven units while you are also learning the boiler is a lot, and if the money is going to be spent badly it will be spent badly in month three.

When nine of eleven tenants sit under market, do you wait for turnover or push rents now

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