Just put an offer on duplex with tenants, how should I prepare?
Realtor · Jacksonville, FL · Member since 2013 · 227 posts · 35 votes
@Jonathan Perez Make sure to have the tenants and current owner/seller sign an estoppel certificate before closing. All the best!
If this is your first property and you live on one side, why use a property manager and not introduce yourself as the owner? Talk to your tax preparer about a business account and LLC. Best of luck with this investment.
I'm currently in the process of buying a multifamily with tenants. For my rental income and expenses I'm going to setup a new account at the bank just for that. Honestly, I think that's a good idea as you can keep easy tabs on your business finances. Since this is my first deal I'm not looking to form an LLC just yet as I'd like to keep everything as simple as possible. However, once I'm in a position where I can get a second place I will. House hacking is great just make sure the place is financially viable with one unit (yours) not paying rent to you. Also, once your offer is accepted there is still tons to do, inspection, contractors, appraisal... Finally, it will definitely be a good idea to add a contingency to your contract specifying that the eviction process is complete and the unit is vacant upon closing.
I put in an offer on a duplex. And there are tenants on both sides. One of the tenants are being evicted. The other side is on a year lease....there is a property manager already in place which I may consider keeping..
IF my offer is accepted, how should I prepare to enter this. Should I introduce myself to the tenants? Should I not? Should I set up a business account for the rental income? Should I set up an LLC? What are some systems I can put in place?
I was planning on house hacking it, so I'll be living in the side where the other tenant is being evicted from.
Congratulations on getting your first deal. Now letting the tenants know you're the new owner can go down 1 of 2 ways:
1. They nag you constantly about things that are not really emergencies, little things they can handle themselves like changing light bulbs or expect you to fix the sink on the spot yourself just because you live there. Regardless of whether you are handy with plumbing or not. They may or may not be on time or pay the rent but that can happen with a PM too if the PM is ineffective.
2. They like having the landlord around and give you your space and only contact you with necessary things, or urgent things, and pay the rent on time.
it's up to you also if you even want the hassle of self managing, cause the PM already has the contracts, and RE lawyers etc ready to go, and think about if you really want them to know who you are.
Personally, if the PM is good I'd keep them, its 1 less thing you'll have to do as a newbie LL. I wouldn't want the tenants to know who I am-but that's my POV.
I would talk with the PM about how they handle evictions, how fast, repairs, do they do basic book-keeping, etc. and ask them if they can get the current tenant in the other unit a month to month lease-so if that tenant turns out bad you've already got them on a month to month and it's easier to get them out and get a new tenant in.
I think the LLC could work, I guess if you want it to be a business and not have the tenants writing checks to you personally, then they'd know who you are eventually anyway. you'll need an LLC to get a business bank account where the checks or ACH debit will be deposited. But maybe the PM can help you with that with a RE attorney referral if you want to be incognito and get the benefits of an LLC. To collect you can look at ACH debit straight out of the tenants checking acocunt, and pay near me its a cash payment option at locations all over America it's linked to Appfolio and there's a electronic confirmation/payment trail, tenant gets a receipt too. Maybe some of the more experienced REI can chime in.
@Jonathan Perez The LLc is a bad idea. there is no need for it with one or two propertys. I imagine you are buying using conventional financing, and deeding to an LLC will trip the due on sale clause. LLC's are not cheap. they require some extra paper work at tax time and the are not a tax advantage. they protect your asset, and since you wont have any equity you wont have anything much to protect. @Kathia L. is correct about the how the tenants may perceive you. I would let the PM manage it for a while. that's common mistake people make. you just spent more money on that property than you probably ever spent before. managing it yourself is like buying a leer jet and trying to fly it yourself. let the pm manage it for a while and learn from them. then if you want to do it you can self manage. If you self manage you will get your check from the PM. the tenant will pay the PM the rent. set up a bank account for the rental. some states even require you to keep those funds separate. you should get monthly and yearly statements from the PM company. you can just give them to your tax people at tax time. makes your tax prep a lot easier.
RR
@Jonathan Perez, normally I am a big fan of LLCs. In this case if you live in it there are many advantages ranging from the type of loan you can get to the tax free capital gains on the sale of it if it has been your primary residence 2 out of the last 5 years. I think you are on to something. Best of luck and congratulations.
P.S. Get lots of liability insurance, and DEFINITELY use a separate bank account for the rental. It will save your butt at tax time on figuring expenses.
I am only one step ahead of you in the process. My offer was accepted so I'm going through inspections next week. I am planning on a separate bank account at least, and not going with the LLC until later.
I will have to notify the tenant I have that is on a M2M lease that they won't be able to renew their lease after Feb. Unfortunately, I am stuck with the other tenant until July. I'm hoping that goes smoothly and I can move in within a month of closing.
I'm running into all kinds of interesting problems like my insurance company may not cover the property since it is distressed. I'm hoping I can find a way to get something until I can complete the exterior renovation.
Best of luck, @Jonathan Perez!
@Chris Walters Chris a part of due dilligance is always PM. If the property won't support management than you don't buy it. Why would you spend $100,000 dollars on something than manage it for free?? If the property isn't making enough to pay a manager and you are self managing than you are working for free right? You can't build wealth that way. RR
Strange but no one ever seems to mention that you now own a business and have a responsibility to learn your state landlord tenant regulations. This one item is by far more important that any advice any one can give a new investor. If you have already learned your state codes congratulations you are in the 1% group of knowledgeable new investors.
If you have not learned the codes governing you business get a copy, read it over study till you know it by heart, keep it with you at all times for reference and learn from experienced landlords how the codes are applied.
Do that and you will be less likely to be on her posting questions as to how to deal with tenant issues in the future.
Establish policies to deal with every possible tenant situation and you will never be at a loss as to what to do. How to determine what tenant issue there are is simply, read through all the landlord requests for help on the forum and you will know it all. Generally there are about half a dozen basic issues. Most have the same policy procedure....give notice.
@Jonathan Perez Make sure to have the tenants and current owner/seller sign an estoppel certificate before closing. All the best!
Strange but no one ever seems to mention that you now own a business and have a responsibility to learn your state landlord tenant regulations. This one item is by far more important that any advice any one can give a new investor. If you have already learned your state codes congratulations you are in the 1% group of knowledgeable new investors.
If you have not learned the codes governing you business get a copy, read it over study till you know it by heart, keep it with you at all times for reference and learn from experienced landlords how the codes are applied.
Do that and you will be less likely to be on her posting questions as to how to deal with tenant issues in the future.
Establish policies to deal with every possible tenant situation and you will never be at a loss as to what to do. How to determine what tenant issue there are is simply, read through all the landlord requests for help on the forum and you will know it all. Generally there are about half a dozen basic issues. Most have the same policy procedure....give notice.
That is GREAT advice man! I just put that on my to-do list! Appreciate that very much.
@Jonathan Perez Make sure to have the tenants and current owner/seller sign an estoppel certificate before closing. All the best!
An estoppel certificate? since I'm using an agent and so is the seller, how can I ask for that? just tell my agent?
I put in an offer on a duplex. And there are tenants on both sides. One of the tenants are being evicted. The other side is on a year lease....there is a property manager already in place which I may consider keeping..
IF my offer is accepted, how should I prepare to enter this. Should I introduce myself to the tenants? Should I not? Should I set up a business account for the rental income? Should I set up an LLC? What are some systems I can put in place?
I was planning on house hacking it, so I'll be living in the side where the other tenant is being evicted from.
Do nothing with the property or tenants till you are closed. Yes you need your LLC and banks setup, assuming you are 100% solid with financing with the bank and a LLC, but beyond that don't be talking to tenants till after you close, you could tank your own deal.
@Jonathan Perez Our procedure is to send the estoppel certificate once offer is accepted - during our due diligence period/inspection period, and of course your agent sends it to the listing agent for execution by the tenants and there is a section on the form that the current landlord/seller must sign. And our purchase contract would have a language in the additional provisions section that estoppel certificate will be part of our due diligence.
Google "estoppel certificate" or "estoppel agreement" and let your agent know that you would like to have one signed before closing. The estoppel certificate will save you from misunderstanding with the inherited tenants regarding ownership of appliances or other personal properties in the units, as well as misunderstandings regarding amounts of security deposits or other he said- she said that may come up after closing when the current landlord is out of the picture.
@Chris Walters Chris a part of due dilligance is always PM. If the property won't support management than you don't buy it. Why would you spend $100,000 dollars on something than manage it for free?? If the property isn't making enough to pay a manager and you are self managing than you are working for free right? You can't build wealth that way. RR
@Ralph
@Ralph R. Hi Ralph, I am not sure if you misunderstood what I said or operate on a single path towards Rome. Running the property management fee in your numbers is part of your due diligence. Hiring a PM is NOT necessarily a due diligence. If you are dealing with a bad neighborhood, then I would agree with you because you will want to avoid dealing with bad tenants. In that case, I would think twice purchasing that property. If you have many properties, then having a PM might be a due diligence as you might have lots of cashflow to cover your PM cost. I am not stating that managing a property yourself is the easiest thing to do. On the other hand, will you turn down every deal simply because you will have to manage it yourself? Many people do it and it is not impossible. If he has the best tenantswho always pay on time and never give any problems, then, why pay a PM to do something he can do himself? Due diligence right now should be running his numbers, making sure everything makes sense and things meet his criteria. Things are not always easy, but neither are they impossible.
@Chris Walters Your post said "unless if Your ROI is really high and you can AFFORD the PM". I Repeat if the property won't support a PM I wouldn't buy it. I would know this before I bought the property as my due dilligence would have reveald that to me. My path to Rome is not the issue here. Maybe my Rome is different. My goal is to have as much PASSIVE income as possible. Managing property is a job not passive income. I already have a W-2 job I don't need another one. Your saying all a PM does is deal with tenants. They also track your expenses, they provide monthly and yearly statements for tax purposes, they over see repairs, one even helped me do a small rehab. they track market rents and keep your rent in line with that and provide leads on new purchases. They usually have legal services available for evictions. That same legal service keeps you out of legal trouble with local landlord tenant laws. I bet 1/2 the threads on BP have to do with some type of tenant issue. If the poster had a PM he wouldn't need to post on here he could ask his PM. I have purchased 3 properties as a result of leads from my Pm's. 2 I have never seen. My PM's found them. When I am looking to purchase in a new or different area I call a PM first. Then I call a realtor. Usually the one they recommend. You are severely limiting your opportunity to grow if you do not Learn to vet, work with and manage your PM's. wealth is measured in time not in dollars. How much wealth will you accumulate by saving 50-100 dollars a month per unit as opposed to spending your time learning real estate and then applying what you learned to find new and better deals? RR
Before you make any decisions, negotiate what the PM can offer. If you have a great tenant, you may not need a PM, if you have horrible tenants and a horrible PM then it's just a bit of a nightmare situation all around.
Definitely become familiar with your local rental/eviction laws - they vary greatly. EG: there are certain parts of NY that don't do any evictions from roughly Oct - Feb and bad tenants have learned to work the system.
May also be beneficial to use BP to find other investors in your area so you can be prepared for what's up.
1st property? Save your money because you don't need a PM or an LLC. I have a duplex in Oakland and another property in Concord that I also rent out. For the tenants you are inheriting simply havevthem sign a new lease agreement with you that spells out what is and isn't an emergency and that if it's an expense that is under $ 50.00 or month then they pay it. That way they don't call it out to change a lightbulb...etc. Also buy a home warranty .... you can get one for $35 to $40 a month so if something happens where the electrical or the plumbing goes sideways it can be covered under the warranty.
This all gives you good experience so as you acquire more and bigger properties you will know what's going on when it's actually worth it when I have a PM and an llc
@Chris Walters Your post said "unless if Your ROI is really high and you can AFFORD the PM". I Repeat if the property won't support a PM I wouldn't buy it. I would know this before I bought the property as my due dilligence would have reveald that to me. My path to Rome is not the issue here. Maybe my Rome is different. My goal is to have as much PASSIVE income as possible. Managing property is a job not passive income. I already have a W-2 job I don't need another one. Your saying all a PM does is deal with tenants. They also track your expenses, they provide monthly and yearly statements for tax purposes, they over see repairs, one even helped me do a small rehab. they track market rents and keep your rent in line with that and provide leads on new purchases. They usually have legal services available for evictions. That same legal service keeps you out of legal trouble with local landlord tenant laws. I bet 1/2 the threads on BP have to do with some type of tenant issue. If the poster had a PM he wouldn't need to post on here he could ask his PM. I have purchased 3 properties as a result of leads from my Pm's. 2 I have never seen. My PM's found them. When I am looking to purchase in a new or different area I call a PM first. Then I call a realtor. Usually the one they recommend. You are severely limiting your opportunity to grow if you do not Learn to vet, work with and manage your PM's. wealth is measured in time not in dollars. How much wealth will you accumulate by saving 50-100 dollars a month per unit as opposed to spending your time learning real estate and then applying what you learned to find new and better deals? RR
@Ralph R. Well, we have the same goal, but clearly two different mentalities. I am happy your method is working for you. Keep it up. In your case, you seem to have amazing PM's who are helping you and going above and beyond for you.