New investor with 25 year tenant

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New investor with 25 year tenant

Ryan O'Hara
Real Estate Broker 路 Milwaukee, WI 路 Member since 2021 路 10 posts 路 11 votes

Hello! My wife and I are currently in the process of closing on our first duplex in Milwaukee, WI. We are planning on house hacking, and the lower unit currently has a tenant who has been in the place for the last 25 years. Her current rent is $975 MTM for a 3 bedroom 1 bath place. She has taken incredible care for the place considering how long she has been there. However, the market rent is right around $1,500 for the place with the location and size of the unit. We have been trying to figure out the plan to make the numbers work while not making her want to leave. Our current idea is meeting in the middle at $1250-1,300. That said, what is advice do you have for increasing rent while keeping the tenant happy/understanding?

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Philip Williams
Rental Property Investor 路 Rockford, IL 路 Member since 2014 路 385 posts 路 702 votes
4y

Call me in the minority here but you don't have to buy this particular deal. I found a great 8 plex with all old tenants like this, some had health issues all were on fixed incomes. I couldn't make the numbers work without kicking them out so I simply didn't buy it. Another 8 unit I bought had 1 lady who has been there since before I was born, I could make the numbers work without getting her rent to market so that's what I did. All this it's a business is well and good but if we are supposed to be the best of the best I'm sure we can find a way to build a portfolio without kicking seniors on fixed incomes out right??

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  • Satyam Mistry
    Investor 路 Omaha, NE 路 Member since 2019 路 130 posts 路 139 votes
    4y

    @Ryan O'Hara I would first introduce yourself with a letter informing them of the new management if they have not already been introduced to you. I would then follow up either with a letter, phone call, or conversation that you want to keep them as a tenant of the property, but there will be some upcoming changes. You will need to inform and educate them of where the current market rents are at. They have been far below market rents and may not even be aware of this so educating them is important. You can then offer meeting in the middle and that this rental amount will start effective 30 to 60 days out. This gives them some time for the adjustment as well as a minimum 30 day notice is usually required for a month to month tenant for any changes to the lease. If they accept this then sign a new lease with them. Also ask if there are any repairs or non functional items within their unit and if they are urgent fix them to give them confidence in your management style. Items that are not in good order such as an appliance or a faucet will likely need to be addressed even if a new tenant occupies. Remember that if the tenant moves out of the property you will likely be spending thousands of dollars on cosmetic updates to be able to capture the higher market rents so it may be a worthwhile option to meet on this middle ground value for rent and keep them on a month to month so you can get a sense of the quality of tenant they are.

    5Reply
  • Greg ScottPro Member
    Rental Property Investor 路 SE Michigan 路 Member since 2014 路 4k+ posts 路 6k+ votes
    4y

    Unfortunately, there is often not a "fair" or correct solution.  Trying to get her half way to market rates won't do any good if she can't afford even $100 more in rent.  Many would consider raising her rent to market rate as unfair, and if you were forced to keep her rent the same forever, that would be unfair to you too.

    Ultimately, I lean on making a business decision.  A "business decision" does not mean get maximum rents possible.  If the resident has been good, as in this case, there is a lot of value to me to retain good residents and not to have to turn the unit.  Based on the needs of the business, I would make a proposal to the resident.  If we can reach an agreement, that is great.  If we cannot reach an agreement, we move on.

    4Reply
  • Patrick FitzgeraldPro Member
    Investor 路 Member since 2019 路 19 posts 路 16 votes
    4y

    Communicate your plans, Explain that you will be raising the rent to market.

    Maybe creep it up in a few increments, make sure check local laws and document / follow through.

    2Reply
  • Brandon RushPro Member
    Real Estate Agent 路 Portland, CT 路 Member since 2019 路 761 posts 路 849 votes
    4y

    Hey Ryan,

    I think you need to make a business decision here. That difference in rent is pretty significant. Move her close to market or ask her to leave. As you begin to pick up more rentals, you will need to become hardened to this stuff.  

    Good Luck!

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    3Reply
  • Colleen F.Pro Member
    Investor 路 Narragansett, RI 路 Member since 2013 路 8k+ posts 路 4k+ votes
    4y

    @Ryan O'Hara  as you realize you have to move her closer to market, the shock of market rent is something she is going to experience sooner or later unless you are willing to supplement her long term. I would show her comparable unit rents and let her know that while you appreciate her long tenancy the market and your financial obligations require that you increase the rent. (you will likely have a bigger mortgage obligation then the previous owner), Sometimes low rent keeps people in places that are more than they need.   If this is the case with her she will move on when you raise the rent and you can pick a tenant that meets your requirements. Give lots of notice but be clear and specific in your numbers.  It will only get harder to move her out as the years go on if you keep rent well below market. 

    2Reply
  • Allan C.
    Rental Property Investor 路 Member since 2018 路 826 posts 路 810 votes
    4y

    @Ryan O'Hara does market rent reflect current condition of your unit or a newly renovated one? What do you expect renovation costs to be, if required, to match your comps?

    4Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant 路 San Diego / Phoenix 路 Member since 2021 路 12k+ posts 路 15k+ votes
    4y

    I'm going to default to my usual advice here......It's a business, you have to run it like one or don't get into this game at all. Having said that, I agree with @Greg Scott.....you certainly don't have to hit her with it all at once.

    But I would be clear that a) you are heading in that (market) direction, b) you really appreciate her value as a great tenant, c) you owe it to your business and family to operate a thriving business that makes a fair profit....

    2Reply
  • Fikret Sivac
    Chicago, IL 路 Member since 2017 路 25 posts 路 24 votes
    4y

    @Ryan O'Hara I had a family that I inherited that was here for 29 years. The husband was the only one working and the rents $450 below what should have been paying. I kept them for 2 years thinking when to let them go and why. COVID hit so they stayed another year. Like the others are saying this is a business. People's employment, family dynamic and money situation changes over time. I wouldn't be a landlord if things didn't change for me. It's sounds harsh reading this but sometimes people need a push to change their own situation ( you change your situation and they change their situation with your action).

    5Reply
  • Danish Jawaid
    Member since 2019 路 7 posts 路 5 votes
    4y

    Ah thats a rough one. Good luck!

    1Reply
  • Philip Williams
    Rental Property Investor 路 Rockford, IL 路 Member since 2014 路 385 posts 路 702 votes
    4y

    Call me in the minority here but you don't have to buy this particular deal. I found a great 8 plex with all old tenants like this, some had health issues all were on fixed incomes. I couldn't make the numbers work without kicking them out so I simply didn't buy it. Another 8 unit I bought had 1 lady who has been there since before I was born, I could make the numbers work without getting her rent to market so that's what I did. All this it's a business is well and good but if we are supposed to be the best of the best I'm sure we can find a way to build a portfolio without kicking seniors on fixed incomes out right??

    9Reply
  • R. Elle Berry
    Real Estate Broker 路 Cleveland, OH 路 Member since 2016 路 146 posts 路 110 votes
    4y

    @Ryan O'Hara Hello! Definitely a in-person conversation. Bring comps, average rent costs along with you. I would even bring available units on the market that may not measure up to your property or the lack there of (low rental inventory) in hopes the tenant remain in the property. I agree not increasing from $975 to $1500 but also consider a gradual increase $1100 first year, 1250 second etc. Good luck!

    1Reply
  • Khari F.
    Kissimmee, FL 路 Member since 2018 路 150 posts 路 27 votes
    4y

    house hacking meaning you are required to live there for a year as requirement for the loan? do you plan on moving out after a year? if so will you hire a PM to manage property? are you saving up for down payment on another property? how confident are you that you can fill vacancy fast at high end of market rent? will you base your vacancy costs at $975 or $1500? will you be doing a upgrade and repairs to get unit up to standard of market rent units? have you tried market testing your rental you see what type of renter are responding to your listing at market and below market?

    1Reply
  • Account Closed
    Member since 2020 路 984 posts 路 1k+ votes
    4y
    Originally posted by @Greg Scott:

    Unfortunately, there is often not a "fair" or correct solution.  Trying to get her half way to market rates won't do any good if she can't afford even $100 more in rent.  Many would consider raising her rent to market rate as unfair, and if you were forced to keep her rent the same forever, that would be unfair to you too.

    Ultimately, I lean on making a business decision.  A "business decision" does not mean get maximum rents possible.  If the resident has been good, as in this case, there is a lot of value to me to retain good residents and not to have to turn the unit.  Based on the needs of the business, I would make a proposal to the resident.  If we can reach an agreement, that is great.  If we cannot reach an agreement, we move on.

    Do you really manage properties for investors and landlords?

    The rental business is the same as every other business when it comes to maximizing profits like every business does. There is no such word as 'unfair' when it comes to increasing charges to maximizing profits.

    Think of running your business like you are only the property manager (a good one) and the owner of the property lives lives in another state. As the property manager, would you send this letter to your boss?

    "Dear Boss:

    Your profits for the 10 past years are about $60,000 less than what they could have been because even though I knew you could have been getting $1500 per month for your your rental unit I wanted to be 'fair' and I split the difference ($1500 - $975 = $525 / 2 = $262.60 x 120 months = $31,500) and reduced the gross income by only $31,500 plus since I did increase your 'great and fair' tenant's rent by $262.60 per month when I took over your property I was afraid to raise the rents the following years because your tenants told me they had no more money and I wanted to be 'fair'. So, while you gave up only about $60,000 during the past 10 years your tenant was very happy, but they gave me a notice to vacate the unit in 30 days.

    Incidentally, I had a plumber look at the sewer system and he said the property needs new drains and a sewer pipe to the street. He quoted a price for $60,000 for the entire job and I think I could have gotten a 10% discount, but I want to be 'fair' and give the plumber the amount he quoted. Can you send me a check for $60,000 plus another $10,000 to cover your overdrawn account.

    Sincerely,

    Mr. Fair Guy"

    Don't be a woosie!!! Raise the rent to $1500 and the very best thing that can happen is the tenant moves out. Then, clean the place up and put an ad on zillow for $1700 per month and you might get lucky and get a tenant who is willing to pay $200 per month more than the market that you only think is the maximum for the area because some fool wants to live in your rental unit because it looks cleaner.

    $1700 - $975 = $715 x 120 months = $87,000 more for rents in 10 years and that does not include annual rent increases that look like the following chart. Who do you want to be your property manager, now!!!

    The first chart show raising the rent to $1700 per month with annual rent increases and the 2nd chart shows how a 'fair' woosie discounts the rent and is afraid to increase rents, annually.

    Whether you agree with the numbers does not matter. What does matter is that you do the math like a person running a business should and increase your profits to the max. Otherwise, be the type person willing to tell your family you could have paid for some of the things they needed, but you don't have the cash because you wanted to be 'fair'. 

    You are fired and can never work in my town again!!!

    Merry Christmas!!!

    Signed by Scrooge

    4Reply
  • Christopher Reeder
    Rental Property Investor 路 Auburndale, FL 路 Member since 2018 路 58 posts 路 68 votes
    4y

    @Ryan O'Hara

    As part of researching properties to buy, you must have been doing financial analysis on each one to consider if it would pencil out or not. During this analysis, I presume you knew the current rents of the tenant and what your business plan required to support your purchase decision.

    You are now at the point of closing on the property and are rethinking your financial business plan. If you selected this property with an intent to increase rents, execute your business plan. It is hard and it is not a fun first step to property management, but it is one you will need to learn, get comfortable with and have a clear strategy as part of your acquisition criteria or your next property (or this one) could turn into a cash drain which is not the reason to be a landlord.

    3Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker 路 Cody, WY 路 Member since 2010 路 28k+ posts 路 41k+ votes
    4y

    I'm with @Account Closed on this one. I hear the same question all the time and people often recommend small increases over long periods of time to prevent the "great tenant" from leaving. That's terrible advice. The majority of my tenants are really good and they pay market rent. It's not an either/or scenario.

    Give the current renter a written notice of your intent to raise to market rates. Give her the choice to accept market rates and sign a new lease, or respond with written notice to vacate within 60 days. If she chooses to stay, your notice should also state that you'll require verifiable proof of income to demonstrate she can afford the increase.

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    2Reply
  • Bud Gaffney
    Rental Property Investor 路 Boston, MA 路 Member since 2019 路 2k+ posts 路 1k+ votes
    4y

    @Ryan O'Hara great Ryan! Congrats to you! I think your approach is perfect. I鈥檝e had to do similar things. Make sure you set the expectation that every year you will be raising to get to market rate. It鈥檚 a business and you have many bills to pay.

    1Reply
  • Greg ScottPro Member
    Rental Property Investor 路 SE Michigan 路 Member since 2014 路 4k+ posts 路 6k+ votes
    4y
    Originally posted by @Account Closed:
    Originally posted by @Greg Scott:

    Unfortunately, there is often not a "fair" or correct solution.  Trying to get her half way to market rates won't do any good if she can't afford even $100 more in rent.  Many would consider raising her rent to market rate as unfair, and if you were forced to keep her rent the same forever, that would be unfair to you too.

    If you read my post more carefully, you would notice that I was advocating against trying to be "fair". 

    Our actual approach is quite similar, although I disagree that all units should go to 100% of market rates every lease renewal.  There is a true and high cost to turning units that must be factored in.  Good operators with a stabilized property often try to push resident retention to reduce turnover costs.

    4Reply
  • Kathryn Casna
    New to Real Estate 路 Salt Lake City, UT 路 Member since 2021 路 2 posts 路 2 votes
    4y

    @Ryan O'Hara how about finding ways to add value to the property for the tenant you want to keep (and communicating that value to her)? In one of the Rookie Real Estate podcast episodes (I don't remember which one), someone talked about adding a washer, dryer, and a few other goodies to some units with existing tenants. They explained the value of these improvements and even showed what comps were going for.

    In your situation, it could also be worth getting to know the tenant better. Maybe she's there because the rent's cheap. But maybe she loves the location because she can bike to work, and she'd absolutely love a shed to store her bike in. Or maybe she'd love to get a dog and would pay more if the lease allowed for that.

    You could also consider raising the rent slowly and giving the tenant plenty of heads up that this is your plan.

    Finally, maybe this person would be a valuable team member for you. If she's taken amazing care of the property, maybe she'd do some maintenance or property management for you in exchange for lower-than-market rent.

    Just a few ideas from a total newb still working on her very first deal and replying on the forums for the first time. Take these with a grain of salt! 馃檪

    1Reply
  • Anthony KingPro Member
    Investor 路 Charlotte, NC 路 Member since 2020 路 239 posts 路 247 votes
    4y

    @Ryan O'Hara lots of good advice here, but I would also recommend you listen to the BP podcast episode with Dion McNeely if it wasn't already mentioned above.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant 路 San Diego / Phoenix 路 Member since 2021 路 12k+ posts 路 15k+ votes
    4y

    @Kathryn Casna Those are some good outside the box ideas....however bear in mind that the primary mission, once again, is to make the company money. Following on some of the other thoughts...would you feel comfortable presenting your ideas to a boos if you were managing this property?

    Not to say that we need to be cutthroat about this, but most of us here on the forums are small business people and our families rely on us to make the correct decision - which is almost always the one that brings in the buck.....

    Something to remember as you embark on your journey....... :-) Being nicey nice and good to others is wonderful sentiment until it takes away from your own life and family. Then it's a really bad thing to do.

    0Reply
  • Colleen F.Pro Member
    Investor 路 Narragansett, RI 路 Member since 2013 路 8k+ posts 路 4k+ votes
    4y

    @Philip Williams whenever I see this type of question and a response like yours I think of my fixed income friend who was renting a 4bed/2bath home for her and her disabled son for well below market from the church. I had to pry her out of there. She couldn't afford the utilities and she didn't need the house or the stress of maintaining it. She was way overhoused and now that she has moved wishes she had done so sooner. Sometimes people need to move and there is senior housing that is subsidized by our taxes they should be taking advantage of.  If the OP has a senior on fixed income in a 3/1 and she can't afford market rent she may need to move to a 1 bedroom.  A little break to a long term tenant for an apartment that isn't updated is not so much an issue. However, a 66 year old tenant can be with you another 30 years. Is it reasonable to supplement someone for that long and probably well into your own retirement? 

    2Reply
  • Waldy Corniel
    Contractor 路 New York, NY 路 Member since 2021 路 14 posts 路 5 votes
    4y

    I'm looking for an investor to help me with cash for a 3 fam in Mount Vernon NY.

    Purchase price $320k

    Renovation needed $200k .

    ARV $750k.

    The property is a 6 bed 4bath

    3 , 2 beds apartment each can generate :

    $2200 each apt in the low and $2500 in the high.

    1Reply
  • Maurice D.
    Coppell, TX 路 Member since 2015 路 485 posts 路 310 votes
    4y

    First of all, It's not unfair to raise the rent.  They have had the benefit of subsidized rent for a decade or so, now they will have to pay what everybody else does.   Explain to them the rent needs to increase due to (higher mortage, insurance, costs etc) and will be 1,500.  They can stay at that price or move.  (once they shop around they will realize what a good deal they HAD, but it has come to and end.)

    Option B.  Fix up the other side first.  Tell them they can have that unit for <Market Price> or they have to leave because you need to vacate/rehab their unit.  in other words, they are getting a nicer unit, but at a price increase.   I like this scenario because it opens up the other unit for rehab, and they might stay in the nicer unit despite the bump in price.

    2Reply
  • Maurice D.
    Coppell, TX 路 Member since 2015 路 485 posts 路 310 votes
    4y

    @Waldy Corniel you might want to post your own post in a lender group, or reach out to local lenders.  this post was about is tenants.

    1Reply
  • Jonathan R McLaughlin
    Rental Property Investor 路 Boston, Massachusetts (MA) 路 Member since 2016 路 2k+ posts 路 2k+ votes
    4y

    @Ryan O'Hara well if you want to do something to ease the transition you could make her move easier: pay forsome combo of her moving expenses, security deposit and maybe even first and last.

    If her new rent is 1000 Compare that 3000 expense to the $650 difference between her rent and market and you break even in 5 months. Would cost you far less than eating that difference over The long run and you can probably expense it as a coat of the property.

    Not saying you should do this. but it might help u avoid an ugly fight and would be

    Far less expensive over the long run than your current plan.

    0Reply
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