Maximizing Profit: The Benefits of Keeping Units Vacant When Selling a Rent-Controlled Apartment Building
By John Swartz, Principal/Founder of True North CRE
As a commercial real estate agent in Los Angeles, I understand the challenges that apartment owners face when selling rent-control properties. With rent control policies limiting the amount of rent that an owner can charge tenants, it can be difficult to maximize the value of the property especially if you have long-term tenants in place.
In this article, I want to explore the advantages of keeping units vacant when selling a rent-control building, and how it can lead to a more competitive sales process, attract a larger pool of potential buyers, and ultimately result in a higher sale price.
Buyers Can Set Their Own Rent Rates
Buyers do not like to be stuck with long-term tenants, especially ones whose rent is well below the current market rent. One key benefit to keeping units vacant for potential buyers is the ability to let the buyer renovate the unit(s) to their liking and charge the high rents they expect.
Some sellers believe their renovations are adequate for the area and there’s no way anyone could get a higher rent than they are getting or asking. Often, this isn’t the case. Some of my clients spend more than $50,000 per unit in renovations and turn the unit into something modern with high-quality specs.
On average, these types of renovations generate more than $700 per month in incremental rent over what the seller would have received given their renovations. From a valuation standpoint, this is the equivalent of $160,000 ($700 * 12 = $8,400 (incremental annual rent) / 5.25% capitalization rate).
As listing agents, we can market the property showcasing the unit(s) at the higher rents, showing a higher capitalization rate on in-place income and lower gross rent multiplier (GRM) on existing rents in the marketing materials.
This leads to a faster return on investment and higher yields for the buyer, making the investment more appealing.
The Property Can Be Shown Without Disturbing Tenants
In addition, it lets us tour the potential buyers and buyer brokers through the unit(s) during the marketing process without disrupting the tenants and more importantly lets us explain to them how to add value and what type of renovations work for the area. Moreover, it lets buyers see the layout and condition of the building before going under contract and ultimately results in a higher sales price for the seller.
As a real estate agent and advisor, I highly recommend considering this option when selling rent control properties. All my clients who questioned this strategy at first were extremely grateful they listened in the end and couldn’t believe the outstanding results we were able to achieve during our marketing process. Missing out on a couple thousand dollars in rent paid off tremendously in the sale. If you would like to get a complementary valuation or discuss strategies on how to maximize the value, reach out to the True North CRE team at [email protected].
About the Author
John specializes in the sale of multifamily properties and development sites throughout the Los Angeles Metropolitan Area for both private and institutional clients and has successfully brokered over $360 million of transactions over the last decade. John takes great pride in achieving superior outcomes for his clients by doing it in the most ethical, professional, and refined ways possible to achieve their real estate goals. Most importantly, he listens to and understands his clients’ needs and gets to know them on a personal level resulting in long lasting and trusting relationships.