Good CoC but inherenting bad tenants

5 Replies

Guys I need some advice. I am under contract for a 4plex. CoC (taking into account vacancy/cap ex and maintenance) is 16%. It is a class B or C. Schools are 9 and 10s.

One out of the 4 units is being renovated and we will choose the tenant. One unit is being leased out to section 8 and she has lived there for 5 years without problems. The 3rd unit is being leased out to a veteran. The previous owners allowed him to forgo paying rent for a few months when he first moved in “to get him back on his feet.” Now they are collecting an extra $200/month in rent from him. He will have that paid off in 8 months. The 4th unit the tenant pays late every month and has accrued a lot in late fees (previously owners charging $5/day in late charges). But they don’t hold her accountable for the late feedback so she has never paid them (according to the ledger).

My questions:

1. Should we buy this property given the fact that we may need to evict tenants?The previous landlords have let a lot of things slide

2. The previous owners want to make the veteran sign a new lease that includes paying them their $200/month OR want to keep the security deposits to account for this

Any advice?

Thanks!  

If the deal makes sense and meets your goals (CoC, cash flow, etc...) you should make the purchase. You should ask for the leases and read them to see what exactly you are inheriting to better understand what you are on the hook for.

As far as the past due rent, not sure why the owners think that you should be on the hook for them not enforcing a lease agreement properly, but maybe you can make a deal with them that passes on the $200 per month as long as he pays it. 

If you do re-sign this tenant with the $200 as part of the terms of the lease - this will be reflected as a loss of $200 per income each month when fully repaid on your books. Anyone looking at your books might want to know why you suddenly decreased that units rent by $200 per month. 

Either way -- I suggest you read the individual leases (not just one as they may be substantially different) to see how you can be in a position to get rid of the chronically past due if needed as well as frame for a future need of getting rid of the gentleman who is "getting back on his feet" in the event that he stumbles again.

Good luck!

I'm in agreement with Joe Gamatoria as far as completing the purchase if it meets your goals.

As for the two tenant problems:

1) The veteran. I have nothing more to add to what you already know or Joe has said except that I wouldn't let sellers dip into the security deposit for two reasons: First, you now have an unsecured unit and even if (s)he's a model tenant, when (s)he moves out you're going to eat a cost that you could/should have been able to pass on. Second, I can't imagine the deposit covers the outstanding $1600 so the problem doesn't go away by giving up the deposit, the figure just gets smaller.

2) The late payer. Get the lease and nail down terms and conditions. Once you've closed and they are your problem, make an appointment and sit down with them to re-educate them as to the terms of their lease. Make it clear that there is a new sheriff in town and they will be held accountable, rents are due on this date every month, late fees are whatever they are, non-payment will result in a legal posting on such-and-such a date. Then follow through, no slack. Hopefully, the first time you post them, they'll figure it out. If they don't, you have three other rented units paying the bills while you give these folks the heave-ho.

I wouldn't let either of these deter you from the purchase if the numbers work for you, and of the two I actually see the veteran as the stickier problem because it's a three way negotiation without clear guidelines.

Cheers,

@Victoria S.

When fully rented out does the property meet at least the one percent rule?   

Section 8 tenant sounds like good guaranteed income

The unit being rented out by the veteran is NONE of their business once they close on the property. They are selling the property so they have no right to make you suffer for their past mistakes with the veteran or the late paying tenant. You do not need to put the tenant in that predicament. Let them know that you're not going to play that game because they no longer will  own the property. 

As for the consistently late paying tenant...HAve ALL tenants fill out an estoppel.....and have ALL tenants sign YOUR new lease and include the late fees. Put in bold letters something on there about late fees, etc. Then, when she is late on her rent....."Drop the hammer". Kansas is a VERY Landlord Friendly State.....Whatever your local laws are abide by them....3 day notice, etc.   When she sees you mean business and is about to be evicted she will play ball or she will find a different place to live. That''s what I have done on my rentals in Cleveland.

I disagree with the new Sherrif in town mentality on the late paying tenant. I paid rent late pretty often too in my 10 years of renting before home ownership and now investor isn low income sfhs. I always could find the money, it’s just sometimes the bar sounded like more fun and I knew I would get the landlord money on the next paycheck. I rewarded a cool landlord by staying multiple years. 

I do think a tactic would be to negotiate as fast as you can to raise the rent a fairly good amount on the late payer and let the tenant negotiate you down a bit, so then they think they are a good negotiator (because you are abviously tough).  And then you two might respect each other and get a long great for a while.

I like the deal. I'd buy 16% COC all day long. Best of luck.