Flipping the 3rd Apartment in Our 7 Unit Building -Action Economics

Last summer we purchased a 7 unit commercial building for just $36,100. The 3 upstairs units were set up as residential, with the lower 3 units and the 1 street level unit as commercial. Only 3 of the units were rented out at the time of purchase, with this being one of those units.

Since purchasing the building we have rehabbed 2 of the 3 residential units (First unit, and Second unit) as well performing a lot of work on the other units and the building as a whole. The previous tenant in this apartment moved out in April and we just got this property flipped to the next tenant in a 6 week period of time.

Previous Tenant:

When we purchased the property this unit was rented out at $400 per month with water, hot water, sewer, and trash included in the rent on a month to month lease. This is under half of market rate rent. A large apartment complex near us publishes its rates and I typically go off of that for market rate rent for apartments. Currently they are charging $800/mo for 1 bedroom apartments and $970 for 2 bedroom apartments. The unit in my building is a large 2 bedroom unit with roughly 33% more total square footage than the unit advertised by this apartment complex.

The previous tenant lived in the apartment part time and consistently paid his rent late from the start. He was friendly and a genuinely good person, but was not an ideal tenant. In addition to paying his rent late he also smoked in the building.

In October we sent out a notice that stated smoking would need to cease in the building and that we would be sending out a new lease in December. This letter also included a schedule for rent increases, with it increasing to $500/mo in January of 2025 then to $600/mo in June of 2025. In the new lease we also increased the late fee from $20 to $100. I figured that slowly increasing the rent would be the right thing to do, rather than either instantly increasing it to market rate or ending all the month to month tenants leases.

We tried to work with this tenant, however he kept getting further and further behind and did not make any partial payments. He paid his December rent and did not make any payments after that. We offered to end his tenancy and erase the back rent he owed us, but he decided he would rather go through court. This prolonged his stay and we ended up winning a judgment that he will in theory eventually have to pay. We got possession of the property in late April.

Condition Of The Unit:

The tenant chose to leave behind a lot of heavy, bulky items including 2 large mattresses and box springs, a couch, and a large dining room table. We initially moved these to another vacant unit we have and will be working on getting these disposed of using our onsite dumpster. Honestly it was in better condition than I expected. We have had tenants leave behind mountains of stuff in the past.

This unit has been painted completely black. Why???? Not only that it was painted without a lot of care for staying in the lines so the ceiling tiles and doors have black paint on them. EVERY room was painted black.

The flooring is sticky back tiles on concrete. These are at the end of their useful life.

This unit has 2 bedrooms with a large kitchen and a large living room. It also has a small bonus room which is around 60 square feet. This room could be a good office or a great walk in closet. The bathroom setup is a little odd. The toilet and sink are in a small bathroom off the living room and the shower is in a large room between the 2 bedrooms. This goes back to the fact that this was originally setup as doctor’s offices, so a shower was not needed in the original bathroom and 1 was later added into what would have been a storage space.

Goal:

Rather than completely redoing this unit, our goal was to quickly turn this around to being safe and functional. We had a medium term tenant in a 1 bedroom Airbnb unit of ours paying almost $1,500 a month in rent for a 1 bedroom who was anxious to be able to move into his own long term rental situation. He was happy to find a place that would rent for $800/mo and was OK with cosmetic issues existing if he could move in sooner. Normally we would have done more, such as replacing the flooring, cleaning all the paint off the doors, and replacing more ceiling tiles. On the next turn around we will go for a more thorough flip. To create a better situation for our tenant, we only addressed the major issues needed before handing over the keys.

Rehabbing The Unit:

We hired out the majority of the labor hours for this project. A family member of ours has been doing some other work for us in the building and we had him focus on this unit. The main project he completed was deep cleaning all the walls, then painting all the walls. Everything needed cleaned twice, then primed, then 2 coats of paint to cover up the black paint. This was well worth hiring out, as our focus needed to be on the house by us that we are rehabbing. For paint, paint supplies, and labor we paid out $2,160.

Work I needed to do:

Electrical work falls squarely on me. This unit did not have a stove or a stove plug, so I needed to run a new breaker for a stove plug. This was quite the adventure. I thought it would be easy because of the suspended ceiling, but when the electrical box was installed it was recessed into a brick wall which made it almost impossible to run any new wires. I had to remove the wall paneling in order to run my wires. This project took most of a day to complete. $373
Lighting: I removed 10 2X4 fluorescent light fixtures from this unit and replaced the bulbs in all the remaining fixtures with LED bulbs, greatly reducing the electricity usage. This unit originally had 23 fixtures and now has 13. 23 fixtures with 4 40W fluorescent bulbs adds up to 3,680 watts total with all lights on. Now with 13 fixtures with 2 18W LEDs each the total watts with all lights on is 468. This is an 87% reduction in lighting cost.: $135
Broken outlets: I had to replace 3 broken outlets and 1 broken light switch: $5
Appliances: I replaced the stove and the fridge with a stove and fridge I already had that had been taken out of other units for repairs. Now they are in working order and being put back to use. $75 (cost for a new stove cord and 1 new burner)
Sink removal: All of the units in this building used to be doctors offices. In one of the bedrooms there was an installed corner sink. I removed this and capped off all the lines to it. $15
Smoke detectors: Since the previous tenant smoked, all of the smoke detectors had been removed. I installed 10 year sealed battery smoke detectors. $120
Door knobs: Mrs. C. replaced all of the door knobs. The original ones were all locking doors with keys. We replaced with standard bedroom door knobs. $40

End Result:

We had the apartment rented out by Mid June with minimal effort on our part. The apartment is rented at $800/mo which is on the low end of 2 bedroom apartments rented in this city. We spent right at $3,000 on this turn around. When added to the per unit price of the acquisition of the property, we are at a total cost of $8,157 on this apartment.

Work for the next turn:

Replace majority of ceiling tiles: $500
Replace all flooring: 800 square feet at $4/sq ft: $3,200
Install permanent storage cabinets in the shower room: $500

Future Income:

Increased Rents: The nice thing about having a building with rents towards the bottom of the spectrum is that there is room for rent increases in the future. The lower end of rentals tends to get pushed up over time, even in recessions. I Plan to stay at least $100 less than the large apartment complex near me.

Increased Bedrooms: This unit lends itself to being turned into a 3 bedroom apartment fairly easily. This could add $200 a month to the rental rate. I’m not sold yet on if I want to go this route, but it is an option. I would move the kitchen into the bonus room, making the kitchen a lot smaller. The current kitchen would then become a bedroom. I could tap into the sink plumbing for the bathroom for the sink plumbing for the new kitchen and moving the stove plug I ran would be easy.

Storage: I plan to setup some storage options in the basement that could be offered to tenants of the property. I can’t run a commercial storage business, but I should not be prohibited from providing storage for my tenants in my building. This could add $50/mo per tenant.

Laundry: I also am planning to add a small laundry room by “stealing” a room from one of my vacant commercial units. This will allow us to either A: put in coin laundry, B: put in laundry at an extra monthly cost for the tenants who want to use it, or C. Increase the rents across the board due to having the laundry available.

Pets: Allowing pets is a great way to be able to increase rents. VERY FEW places rent to people with pets. People with pets in general love their pets and see them as family. Barking dogs and cats that don’t litter box can certainly become a problem, but a responsible pet owner will often pay a good premium to be able to rent at a place that will allow their pet. For a unit where the floors are already shot it certainly makes sense.

What do you think about this apartment? How much are lower end 2 bedroom apartments where you live?