Rehabbing the 2nd Unit In Our 7 Unit Building -Action Economics

In August we purchased a 7 unit commercial building that was in need of A LOT of love. Every unit will need a significant rehab. The current configuration is there are 3 2 bedroom apartments upstairs, 3 mirrored commercial units downstairs (can’t be apartments due to window height), and 1 large commercial unit on the main level, with a basement underneath it. The clearest route to increasing income in this property was first through the apartment units upstairs. When we purchased the property all 3 were occupied, with 2 paying $400 per month rent and 1 not paying at all.

Earlier this year we rehabbed the first unit after the non paying tenant left and now have it rented out at $850/mo. One of the other tenants just moved out so it was time to get this one moving.

Getting The Unit Empty:

When we purchased the building this unit was rented out at $400 per month, and the unit did not have a shower. Previously the unit had been used as a printing office, then was vacant for some time. The previous owner gave the tenant a greatly reduced rent amount if he removed all the junk out of the unit. This apartment does not have a shower, just a toilet and sink. The tenant told me he would normally pay to go take a shower at the truck stop every few days. Since one of the lower units was vacant and had a shower I gave him a key to that unit so he would have access to a shower.

He ended up having some challenges economically. He paid his first month’s rent to us on time, then the 2nd month was substantially late. He then did not pay for 3 months. This was compounded by the fact that this apartment has the electricity in the owners name, and passes the bill on to the tenant, so in addition to not paying his rent, he was also not paying his electric bill.

Normally we do not file for eviction right away. We try to work with people and sometimes, like in this scenario it bites us. The tenant stopped communicating with us and made no payments, despite originally telling us he would. He was 5 weeks behind when we filed for eviction (normally landlords file 5 days from missed payment). The court date was set for 6 weeks from when we filed, and there is always a good chance the court date will push out eviction further.

I offered the tenant a deal where if he moved out willingly, we would stop the eviction proceedings, so an eviction wouldn’t be on his record, not go after him for the nearly $2,500 he owed us, and I would give him $250 cash. HIs phone was broken, so I also bought him a burner phone and loaded a monthly card on it for him as part of the deal. Originally he was going to be out on the 2nd, but pushed it out 2 days. This still worked out well and he moved out on January 4th, allowing us to stop the court process and take possession of the unit.

The Apartment:

The Apartment has 2 official bedrooms, and a 3rd room that could be a bedroom if we add an egress window in the future. The living room is really split into 2 sections with a door and a pass through window. This would have been the waiting room and receptionist area when this unit was a medical office years ago. There is a skinny kitchen with a sink, a tiny toilet and sink bathroom, and a sink at the end of a narrow hall.

One of the bedrooms has a large built in closet. Overall the apartment is roughly 670 square feet. The market rate for an apartment like this is around $850/mo. In the future we will install an egress window to make this a 3 bedroom unit, which could get the rents up another $100 to $150 a month. Then we may look into the Section 8 program because it is highly advantageous for apartments over single family houses, upping the rent further.

We provide water, sewer, trash, and hot water. The tenant pays electric and the heat is an electric heat pump. All of the units also have central air.

The Rehab:

We took possession on the 4th and within a week we had completed all of the stuff that we could do with the exception of the 2 tasks we needed to hire out: Installing the shower and installing carpet.

Lighting: This unit had tons of fluorescent lighting. Each fixture had 4 40W bulbs. I removed a total of 6 fixtures. The remaining fixtures I installed 2 20W LED replacement bulbs in. This greatly reduced the potential electric usage of the apartment. Previously if all 16 fixtures were on they would us 2,560 watts total. Now the 10 fixtures combined would use 400 watts, this is an 85% reduction in cost. This wasn’t quite as good as in the last unit because I decided to leave a couple more light fixtures. I then cleaned all the diffusers. I have several left over bulbs I can use in other units.

Carpet removal: Two of the rooms had carpet, which was likely installed in the 80s. This carpet reached the end of its useful life many years ago. The previous tenant smoked heavily in this unit and the carpet absorbed smells. The carpet was easy enough to rip out, but the padding was pain. It was a green Styrofoam that had mostly disintegrated.

Wall Removal: I wanted to do the least amount of work as possible, but Mrs. C. insisted that the wall separating the living room needed to go. This wall was constructed well with lots of nails and the thickest paneling I have ever seen. I spent about 2 hours deconstructing the wall, then another 2 hours removing and capping off the electricity that was in it. I had to rewire one of the lights to work with the light switch from the entrance to the living room, instead of the switch that was in this wall. I have to say, Mrs. C. was right. Opening up the room makes the apartment feel much larger, and it is much more functional. I patched the dips in the concrete from where the nails were, and installed new tiles to make the seam. It doesn’t matter that they don’t match, this room is getting carpeting.

After removing the wall there was a lot of clean up needed. I ended up stepping on a board with a nail in it and put a nail through my foot, not a good ending to the day!

Electrical: In order to install a shower some electricity in the wall needed to be moved. There is already an overhead light, but the switch was located where the shower wall will be. I moved the switch into the ceiling temporarily, for reinstallation after the shower was installed. I installed 2 GFCIs where required by code. Later I moved the light to the left hand side of the door.

The electrical box is a pushmatic, so the breakers are more difficult to find and of course more expensive. I added a 50 Amp breaker for a stove plug, and bought metal jacketed wire so I could run the plug on the exterior of the wall. I’m thankful that the breaker box is in the kitchen. It would have been better to have gone UP from the breaker box, but there were no more slots left on the top of the box. I had to drill through the 2X4 on the side of the box and patch the wall.

Insulation: This commercial building has several 4′ wide strips that go along the sides of the buildings. This is where the windows are installed. Above and below the windows rather than brick there is solid metal plates. This metal has no insulation. We bought foam insulation and cut it to fit above and below the windows, then painted to match the rooms. This has significantly improved the heat retention of the rooms and we plan to do this in the other apartments when they flip next.

I also added insulation to all the new ceiling tiles that I put in place of removed light fixtures. The apartment ceiling has around 3″ to 4″ of blown insulation. I added batt insulation to these tiles to make it easier to reinstall.

Deep cleaning: We deep cleaned all the walls and floors. Then painted all the rooms. We cheated on painting by getting paint color match done. This was the best result we have ever got from a paint color match and we skipped cutting in this time and only needed to roll 1 coat. I also did not paint the ceilings. The ceilings in this unit weren’t as bad as the last one and honestly, I really didn’t want to do it. We bought a 5 gallon and only needed about 2 gallons so I have plenty leftover for other units.

Plumbing Repair: The kitchen faucet had a leak so we replaced it. I bought several kitchen faucets from Lowes on clearance for $9 each. In 1 of the bedrooms there is a capped off drain and water line…Well the water line isn’t capped off, it has a valve on it and of course will spray water if turned. I found the plumbing in the ceiling of the unit below, cut the water line and capped it off. This cost $10 for a shark bite fitting.

Shower Install: We hired the shower install out to the same plumber who did the last one for us. This shower itself was more expensive because we couldn’t buy a solid piece like last time, this one was a piece together. We spent $750 on the shower and $1,800 on the install. They needed to knock a hole through the concrete to run the pipes for the shower, thankfully the lower unit is vacant and not rehabbed yet.

Carpet Install: This is the 3rd project we have hired Lowes to install carpet on. I know most people hate dealing with them for install, but we have had good luck with it so far. We needed carpet in 4 rooms. All 4 rooms are less than 12′ wide and 2 of them already had tack strip from the previous carpet. We paid just under $3,000 for the carpet install. Normally I don’t like to put carpet in rentals, and I know we will need to replace in the future. The IRS says carpet should depreciate over 5 years, which would mean the yearly cost of the carpet is $600, or $50 per month. In my personal house we had the same carpet for 10 years that was installed roughly 20 years before we bought it. For a rental though a 5 year lifespan is reasonable.

Cabinet install: This unit lacked cabinet space. I added a 36″ upper cabinet and a 12″ upper cabinet.

Cost breakdown.:

We spent a total of $9,210 rehabbing this apartment. The shower install and carpet install were of course the largest expenses. This is more than I would like to spend on flipping a unit, but this is more than a normal flip. We paid $36,000 for the building and without subtracting out value for the parking lots or stuff left behind that is $5,142 per unit. Spending $9,200 on this rehab puts us at just over $14,000 all in for this apartment. I would pay $14K for an asset any day that I can rent out for $850/mo. In general $9,200 is a lot more than I want to spend on a unit.

Carpet and Install: $2,984
Shower and Install: $2,739
Stove, Fridge, and accessories: $1,054
Door and Trim for Shower room: $707
Ceiling Tiles and Insulation: $350
Kitchen Cabinets: $340
LED Light Bulbs: $248
Paint and paint supplies: $237
Cleaning Supplies: $181
Drain Opening: $150
Trim and Cove Base: $112
Misc: $108

Final Pictures:

Getting Rented:

We listed the apartment on Facebook, and with it being a bit rough got some snide comments. We also received fewer applications than we are used to. Part of this is seasonality, most people do not want to move in Michigan in February. We only had 4 applicants fill out applications and only one of them qualified. We thought about dropping the price to get more applicants, but since the one applicant qualified we decided to go with this applicant and reduce the price for her anyways. The market rate for this unit might be $850, but likely only in the summer. We signed a lease that started March 1st for $800/mo.

A big part of this is now the electricity is in the tenant’s name. Going forward all Leases will require the electric to be in the tenants name, rather then being a pass through. The final one will be Unit 6 which is on a long term lease through Jan 2026.

Current status of the building:

All In Cost to date: $55,459

Major Costs:

Acquisition: $38,102
Electric Deposits: Approx $2,000
Rehab U2: $9,210
Rehab U3: $4,181
Rehab U1 (In Progress, 95% complete): $1,337
Building Cameras: $233
Roof Leaks: $135
Flooring patch: $107
Misc: $154

Excluding these repairs, the property has been cash flow positive since we purchased it. What is really important here is that I STILL am all in at less total investment than what the property was listed for. The property was originally listed at $120,000 then was dropped to $100,000 for several months, then to $60,000 about 2 weeks before we bought it. You make money on the buy.

U1: Vacant, In progress of renovation, 95% ready.
U2: rented $800/mo
U3 rented $850/mo
U4: Rented $500/mo. Increases to $600/mo in July. (Original tenant, working on slowly increasing rent rate)
U5: Vacant
U6: Rented $350/mo. Legacy tenant with long term lease. Expires Jan 2026.
U7: Vacant
Basement: EMPTY!

Total Rent Roll: $2,500

There are many investors who will preach the 1% rule, that total rents need to equal 1% of the cost of the building. For this building at this stage, that would mean rents of just $550 total. This building is almost 5 times that and we are just getting started. We have 3 vacant units, 2 units that are under market rate, and a full basement that will all start generating revenue during this year.

Up next is Unit 1. Unit 1 is the large commercial space at the front of the building. We have hired out a lot of the work on this one. I fixed the roof leaks, and then we have paid to have the unit painted, the windows and floors deep cleaned, and the ceiling tiles replaced. My goal is to have this unit rented out around April. Currently I am shooting for around $900/mo for this commercial lease with the tenant having electric in their name and being responsible for any of their maintenance.

After Unit 1 we will be working on 5 and 7, with the current plan to turn these units into storage. It looks like we will end up with around 6 or 7 storage units in each of these units.

Upgrades on the next turn:

Windows: The next time we turn this unit I want to replace the windows with all large egress windows. This will allow this to be a legal 3 bedroom. This will be hired out and will be expensive.

Ceiling paint: I did not paint the ceilings this time, perhaps on the next turn I will.

Remove paneling: Two of the rooms have solid wood paneling. When I can I like to reduce fire loading. Replacing the walls in these 2 rooms with drywall will make it more fire resistant. Currently there is around 750 square feet of paneling, which at 1.5 pounds per sq. ft is around 1,100 pounds of wood! The paneling is also on the shared wall between this unit and the next one. I would like to add another layer of insulation here to improve sound dampening if I have the wallboard off anyways.

Replace doors with exterior doors: All of these doors are hollow core wood doors. I would like to replace them with steel exterior doors. This will once again reduce fire risk, but also be more secure and reduce noise traveling.

Overall Building Upgrades:

The next upgrade for the building as a whole will be the water heater system. It currently is working fine, but it is a 50 gallon tank water heater. Long term I would like to replace this with an on demand tankless system like in our other apartment building.

After that I would like to add heat to the common hallways. The hallways originally had heat with the original boiler system, but when the property was split up into the 7 units each got an electric heat pump, but there is no heat for the common areas now. I would certainly want this to be gas. I don’t plan to set it really high, but enough so the hall isn’t super cold in the winter. Probably would keep it around 55 to 60.