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The following article includes notes taken from an EIC Club Conversations event, “Improving Underperforming Assets and Exit Strategies with Kristina Travis” held on 6/1/22. This event was recorded, and you can access the recording by clicking here.

Improving underperforming assets

We’re focused on helping investors realize the true value of their portfolio. Today we covered a few topics and questions about improving underperforming assets.

What’s the most important thing when improving an underperforming asset? Have a plan and a timeline for your asset. What are your goals? What is your exit strategy? How quickly do you want to accomplish these things?

The best time to put together a plan is when you’re purchasing the property. You can always adjust the plan over time but you want to go into the acquisiton with a clear plan on how you will improve the income and decrease the expenses.

How will the plan change if you want to hold the property for a shorter time versus a longer time? If it’s a flip, maximize that asset as quickly as possible. If you’re looking to hold onto it, you have more opportunity to make those adjustments to your plan and can focus on cash flow while improving the property.

Look at the rent roll and figure out how far you are away from market, what can you improve to increase those leases, and how much capital is on hand to bring them up to market rent levels.

Be strategic in how quickly you post notice if you want to evict tenants to turn over units. See when their lease terms are up, so you can determine how quickly you can bring the property’s units up to market.

If you have enough money to sustain improvements on the property, do all units at the same time. Much of your decision on what to improve depends on how much capital you have and want to put toward those improvements. Some investors stagger the changes with a few tenants at a time. Others do it all at the same time or remove each tenant at the end of their lease.

Staggering can retain more operating cash flow. There’s something to be said about keeping 50% occupancy. Another choice is to let the whole building out of their leases if you want to do it all at the same time.

Raising rents when you’re talking about bringing up the rents to market - how do you know what market really is? Base your market on average comps of what’s recently sold/rented in the general locality. See what’s on the MLS and what’s being rented elsewhere and study the competition.

We are very competitive with our rents. We hold a lot of the market, but we are competitive in pricing as well. Some people are priced way out of their league and the units sit for a very long time. You can tell how well priced it is by how quickly something is rented.

You could list higher, but you’ll get less people through the door to apply. If you price it right in the middle, you’ll get applications, but select applications that have the credentials to indicate they’ll be a long-term tenant. Be aggressive with price, but not to price yourself out of the market.

The most activity on a new listing will be in the first two weeks. You need activity on your listing immediately otherwise the consumer will start to think there is something wrong with the unit. Lease quickly as every day costs money on vacancy.

Control the turnover costs. Understand what the market can withstand and consider if it makes sense to improve the units after those tenants leave. What will it cost and how much time will it take before they move out.

Talk to the tenant that is under market to see if they have the credentials to stay in that unit. They may just stay, which is a best-case scenario.

One example we experienced was where a tenant was paying $650/month, month-to-month and paid no utilities. The landlord wanted to increase rent, and asked to increase to $1100/month with the tenant paying the utilities. We decided to ask the tenant before just assuming they could not afford it. To our surprise, they agreed and signed a 12-month lease. The tenant has been paying regularly. This saved a significant amount in turnover costs. If a tenant has been in a unit for an extended period of time, expect the turnover costs will be higher.

Supply and demand often drives the ability to increase rents. Always try with existing tenants first. The inventory will dictate potential increases with existing tenants.

How much should you spend on the turnovers? If the tenant is in, pre-leasing it, should your turnover plan change? Yes, because the condition was acceptable to the person that pre-leased. In this case you should scale back your renovation plan. Be more conservative when pre-leasing as you’re showing the unit in as-is condition. If you want to push the rent higher, you can increase the budget after the unit is vacant.

You want to know if your existing tenants are the best fit for your building. Ask questions such as, are they easy to get along with? Are they causing issues? Those conditions will impact good tenants. Get rid of the rotten eggs! How well they keep the property, if there’s damages, trash, people living in the property that are not on the lease, it may be time to get rid of those tenants. It’s very important to have the right tenants in your buildings. You want tenants that care about your property like you do.

When you are factoring expenses and cash flow in your plan to improve your property, build in a 5% vacancy factor. Plan for things to happen in the future even with new leases at higher rents. Have reserves set aside for the “what-if’s.”

When preparing for the acquisition of a property, and while you’re working with the agent, have a plan and share it. When closing day happens, revisit that plan immediately and revisit monthly or even more often.

While you’re giving notice to tenants, stagger the lease dates so you don’t have a mass exodus of all units. Try setting up 14-, 15- or 16-month leases so they are not on the same end date. End in spring and summer when people are more likely to rent. Stagger a month or two months apart.

Make sure you’re maximizing all of the utility benefits such as sub-metering or ratio billing. Sub-metering is on each utility, heat, oil, gas - there’s a separate submeter for each apartment. For ratio billing, it’s based on occupancy and square footage cost calculation. Ratio billing stays in the owner’s name, and in some states other than PA it may be illegal to ratio bill. Sub-metering requires installation of a meter which can be costly but the usage charges can be billed back to the tenant. Ratio billing is not an exact science. Submetering on the other hand, clearly defines usage.

Exit strategies, increasing rents and reducing expenses

Make sure your finances are allocated accurately. Make sure that all leases are current with renewal plans in place when applicable. It may make more sense to make sure the deferred maintenance is completed and certificate of occupancy is completed to eliminate those expenses.

One of the worst deterrents is to drive up to the property and the appearance shows that the building is not cared for. Curb appeal matters when marketing new leases or selling the building. If the building looks like a complete mess on the outside, they will assume the inside is a mess too. Make your property look nice on the outside. (Here is a recent article on increasing the curb appeal of an older investment properties)

When you plan for capital improvements, a lot depends on what you want to list the property for and how quickly you want to sell it for if that capital improvement makes sense to do before you sell. The general consensus is that people don’t want a ton of deferred maintenance on a property. Take care of the major issues like heating, roof, etc. and make the property as ready-to-rent as possible.