Commercial Real Estate

How to Seamlessly Transition Rentals From Previous Landlords to Your Management

Expertise: Landlording & Rental Properties
24 Articles Written

The day has finally come! There is nothing more exciting than taking possession of your most recent acquisition. But hold on. Did you perform the proper due diligence and review every lease? This article will address what steps you need to take when assuming ownership of a property and how to audit current leases. I will include a letter that we give to our tenants notifying them of the ownership change and what they should expect from us.

Every investor has to realize that when they purchase a property, all of the current leases with the tenants are contracts. They are binding and have to be honored. The same can be said for most contracts with vendors, such as laundry contracts, cable contracts, and elevator contracts. It is vital to review all contracts with vendors to see if they’re fair or if there is a way for you to break the contract if need be.

In our market, it seems as if most mom and pop operators utilize Waste Management as their trash collector. They are by far the most expensive vendor in the market. Read the terms of the contract to make sure you have the option to cancel it.

Audit Your Leases

Let’s move onto the leases. When we are performing our due diligence, we request a copy of every lease and create a schedule that looks like this:

Read each lease thoroughly and confirm the monthly rent, the unit type, the individuals on the lease, the security deposit, the lease expiration, and any utility bill back. As you can see, Uncle Joey is getting a sweet deal. He’s only paying $200 per month and the lease expires in December of 2018. If you don’t catch this, you will be stuck with Uncle Joey for the next two years at a ridiculously low rent.

What can you do if you come across a lease like this? You can either ask the owner to renegotiate the lease with the tenant, or you can ask for a price concession, since this below market lease will affect the value of the property.

The lease audit is a powerful tool that will be able to verify the monthly rental income that the seller provided to you, along with when the leases come up for renewal. Landlords need to be wary of too many leases coming up for renewal at the same time. The objective is to stagger lease renewals, and the audit will give you the answer to what months the leases expire. It does take an inordinate amount of time to examine each lease, but it is much better to be safe than sorry!

The time right after you take over the property is hectic for your staff and for your tenants. Tenants fear that rents are going to be increased and are always uncomfortable with any changes. We try to reassure them with a letter, while encouraging them to visit the office and to call us with any concerns or issues.

Below, I have included a letter that we distribute to all of the tenants right after we assume ownership:

Dear [New Tenant],

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The property that you are living in has been sold and is now under new management.

Although most things will stay the same, there are certain items that you need to be aware of.

You rent payments, in the form of a check or money order, from this point forward should be endorsed and mailed to: 

ABC Company

123 Main Street

Anytown, USA

Do not make any future payments to the previous owner. Your rent is due within five days of the due date. Early payment is always appreciated.

A representative from Management will be visiting you within the next few days to inspect the property for any repairs to be made and to gather some additional information from you.

If you have a maintenance problem that needs immediate attention, please call the office at 555-555-5555.

In the meantime, please fill out the enclosed forms and send it back to our office with the enclosed addressed and stamped envelope.

We look forward meeting you.

Finally, reassure the tenants that their current lease will be enforced and nothing will change in the lease until it expires. 

Your Task

Gather all of the leases and contracts when performing due diligence. Examine each lease thoroughly and create a lease audit. Verify all of the information to be accurate, and point out any inconsistencies to the seller. When the closing has taken place, send out the tenant letter with instructions for the tenants.

What does your lease audit process look like? Any questions about transitioning management?

Let me know with a comment!

Gino Barbaro is a father of six and the co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing. He has grown his portfolio to 674 units in three years and is the best-selling author of "Wheelbarrow Profits".

    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 2 years ago
    Very good article. You have clearly been down this path before. Thanks for taking the time to write this.
    Aaron McCoy from Huntsville, Alabama
    Replied over 2 years ago
    I noticed in the example letter that you had a company name above the address checks should be sent to. Do you have to be involved with a company in order to own apartments, or can you just put your own name since you are the investor? Or is the “ABC Company” referring to the apartment complex’s name? Reply Report comment
    Aaron McCoy from Huntsville, Alabama
    Replied over 2 years ago
    I noticed in the example letter that you had a company name above the address checks should be sent to. Do you have to be involved with a company in order to own apartments, or can you just put your own name since you are the investor? Or is the “ABC Company” referring to the apartment complex’s name?
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    It all depends how you set up your investments. We utilize LLCS as the entity, and if you want privacy, you can put a PO box instead of your home address. If you have an office, then put the address of the office Gino
    Alex Sanfilippo from Jacksonville, Florida
    Replied over 2 years ago
    Simple and straight to the point. Thanks for this insight! Great post.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied over 2 years ago
    This is often a challenge, especially when the previous owner was a “ma and pa” type. Great post!
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    This can also be an opportunity. Most investors don’t have the patience to deal with ma and pa. Hang in there and you will be rewarded.
    Nicolas Blish from Ponchatoula, LA
    Replied over 2 years ago
    Gino, Thank you for sharing your insight! I recently purchased my first property and followed a pretty similar protocol as you lay out. When asking for leases, I also like to ask for screening information. This just gives me peace of mind to see what quality of tenants I would be inheriting. Not a deal breaker to see a bad tenant but it would affect my motivation to close if I see a lot of headache down the road until the previous leases expire. Would you offer your lease at the current rate, given it’s reasonable, to get the tenants under your terms and conditions? I currently have all of the tenants under the previous landlords terms, and thankfully he has an excellent lease so this wasn’t a concern this go around. You mention asking the current landlord to renegotiate, would that be the better option here? Also, who would you recommend for trash services? I recently renewed with Waste Management so I hate to see that called out as the worst!! They are charging me roughly $80/month for 4 cans. Thanks again for the post! Nick
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    Nick, If the tenant base is not good or if the leases are unfavorable, it may give you ammo to go back and ask for a price concession. I would offer new leases at market, if the units are in good shape and i have performed my value adds. Your garage deals sounds good. Waste is expensive when it comes to dumpsters. Find out who else is a provider in your market and request a quote Gino
    Katie
    Replied over 2 years ago
    I keep the lease at the rent the tenant is already paying. I might raise the rent later depending on several factors, but I keep it below market. The surprise and good will this policy generates with the tenants is priceless. It is not always about wringing out every possible dollar.
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    If you want to charge below market rent, that is your right. It has nothing to so with wringing out every possible dollar, it has to do with delivering a quality product to earn a profit.
    Katie
    Replied over 2 years ago
    In my town, because of the 0.5% vacancy rate, many if not most landlords charge market price while delivering a substandard product. I set myself apart from the landlord crowd. The Golden Rule is ultimately more profitable with less stress.
    Bob Norris Investor from Kennett Square, Pennsylvania
    Replied over 2 years ago
    Great practical article, thanks for your insight!
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    thanks Bob! It can be a pain, but take the time to go through EVERY lease.
    John Harris from Richmond , California
    Replied over 2 years ago
    Thanks Gino for you insightful post , I have a question about a prospective first deal. There’s a duplex that is under rented unit #1 $650/mo unit #2 $800 with market rents averaging $1300-1400 in the area . Also having long time tenants, under month to month leases. What steps do u recommend taking in order to transition into this property smoothly?
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    the reality is there is no smooth transition. the tenants have been getting the deal of the decade. Now it’s time for a wake up call. If rents are 1300 per month in the market and you want to keep the tenants, offer it at 1150 or 1200, still a discount but more in line with the market. You have a huge opportunity and need to raise the rent. It is amazing how tenants know the the $$ what rent should be. I would try to negotiate one tenant at a time, you don’t want both vacant, unless you can turn quickly and fill with new tenants. good luck! Gino
    Curtis Harvey Rental Property Investor from Buena Park, CA
    Replied over 2 years ago
    Great article.. Thanks for your insight.
    Jerome Kaidor Investor from Hayward, California
    Replied over 2 years ago
    So in your area, you have a *choice* of trash collectors? Around here, Waste Management owns the routes. There is no choice.
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    Gotta love CA. Isn’t there supposed to be free enterprise and competition?
    Katie
    Replied over 2 years ago
    The competition is between companies for the contract to serve the city. The city decides; the residents do not have a choice.
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    the residents decide who to elect to run the city.
    Powell Chee Investor from Redondo Beach, California
    Replied over 2 years ago
    Gino, Thank you for posting. I especially like the example used for your lease audit. It’s a nice way to organize all the leases in one quick look.
    Frank D. Multi-family Investor from Milton, Massachusetts
    Replied over 2 years ago
    Re: last paragraph-what forms are you sending to each tenant? I’m guessing not leases since most will stay in place under new owner.
    Gino Barbaro Rental Property Investor from St Augustine, FL
    Replied over 2 years ago
    what forms are you referring to? I said that we send out the tenant letters. Gino
    Shaun Anderson from Regina, Saskatchewan
    Replied over 2 years ago
    I am a Canadian just getting my feet wet in US multifamily investing. As far as rent payments, it sounds like in the US most rents are always paid by check, is this correct? I am wondering if it’s not an option to try and get as many on a direct deposit type setup that would automatically transfer each month from their account to my company’s. Is this not feasible?
    Andre Arancibia Property Manager from Boca Raton, Florida
    Replied over 2 years ago
    It is extremely feasible and the way of the future with rental investing. My property management company does exclusively direct deposits. It’s hard at the start to get the tenants used to a new system, but once they do, it’s easier to track, and you don’t get those pesky “my rent is late because it’s in the mail” excuses.
    Brian Fisher from Brainerd , Minnesota
    Replied over 2 years ago
    Great advise! I hope to be able to use it someday
    Katie
    Replied over 2 years ago
    I also expect a copy of the complete tenant file as part of my due diligence, not just the lease. I want to see the rental application and history of the tenancy.