By Mike Heayn

So you finally did it, you purchased a rental property! If you purchased one in Los Angeles County, you know that you can not simply evict tenants because you want to increase the rents. However, other strategies exist to increase income while properly safeguarding tenants’ rights.

All strategies are from experienced investors, but you should check with the appropriate city department for any laws and regulations before moving forward with any of these strategies. (Please note, the following is purely informational.)

The strategies are tenant buyout, unit upgrades and unit rehab.

As an apartment owner in Los Angeles, except for certain incorporated cities, such as Inglewood and Long Beach, you can offer tenants a buyout agreement. Simply put, an owner, in accordance with city laws, pays the tenant a minimum amount of money somewhere in the neighborhood of $8,000 to $12,000, depending on the tenants’ age and dependents’’ in exchange for the tenant moving. The tenant must come to an agreement with the owner and the amount offered must meet the city’s minimum. Most owners will offer a flat rate, which exceeds the minimum and request that the tenant sign a voluntary lease termination agreement. However, this is subject to the tenant’s approval and not all cities allow this type of buyout.

The benefits to buying out a tenant include the availability of the unit, if need be, rehab work, which in turn increases cash flow, thus increasing your potential return on investment through increased rents. This allows the owner to recapture the buyout amount within a shorter time period. If the tenant is paying $500 a month and it costs the owner $15,000 for the buyout, but the unit can rent for $1,200 at market levels, the owner would recapture that difference within 22 months. In less than two years, the owner would regain the $15,000 for the buyout and begin making an increased profit on the unit.

One of the most successful real estate investors I know uses creative methods to rent units for higher dollars. He offers unit upgrades to new tenants. After the investor acquires a property, he goes through the vacant units and sees what types of upgrading needs to be done. After he analyzes the unit and figures out what has to be upgraded versus what can be upgraded, he begins the ‘what has to be done’ process.

Right before the unit is complete he begins showing the unit to prospective tenants and offers them simple ‘added’ upgrades like ceiling fans, granite counter tops, stainless steel appliances and hardwood floors for a small increase in rent. For example, if a tenant decided they wanted a hardwood floor for an additional $50 a month along with a ceiling fan in the dining area for $30 a month, plus a granite counter for $10 and stainless steel appliances for $40 a month, the unit’s rent would go from the market rent of $1,500 to $1,630 with upgrades. Over the course of two years, those upgrades would bring in an additional $3,120 in rental income. After three and half years, the upgrades will have paid for themselves and increased the value of the property. The beauty of this system is that it is a win/win situation. The tenant gets a nice, up-to-date living space, while the owner gets a unit which will rent for higher than market rent levels.

Can the two strategies be combined? Another successful investor believes they can be. This investor buys large properties with many units. The investor first legally evicts tenants not paying rent. Then she goes to other tenants and offers them a fully upgraded apartment for a few hundred dollars more than they are currently paying. The investor rehabs the units where the evicted tenants used to live and moves the other tenants from the same building into those units and repeats the process with other tenants in the building. Most tenants are willing to pay a little more for a much nicer place, where all they may have to do is move from one floor to the next, while the investor has a great pool of tenants without having to go through all of the trouble of the application process.

Perception is reality. The tenants believe they are getting a good deal, which they are, while the investor is improving the cash flow on the property.

The benefits to these strategies are that the investor increases rental income, thus increasing cash flow, which increases the return on investment, but also increases the value of the property through a combination of capital improvement and increased income.

Mike Heayn is a Washington Mutual multi-family loan consultant. He can be reached at (310) 428-1342 or michael.heayn@wamu.net.