How to handle rehabs with existing tenants

Question

If l were to buy a property with perfect tenants that l like and would not like to leave, would l have to evict them to do rehabs inside of units? If my goal is to rehab up to market standards and therefore market rent; how or is it possible to not kick out existing tenants as l am taking over as the new owner of a multifamily property?

Sean McKee · Answer

@Trevor Bond- It depends on the situation. If they are month to month, you probably don't want the entire building to go vacant at once (loss rents, increased security cost). If they have yearly leases, yes I would let them know ahead of time.

Stuff can get very dicey when buying distressed properties with tenants living there. I actually had a near disaster. One of the tenants had a "gas leak" a few days after closing and got "sick", so they weren't going to pay. Then another on the same building refused entry and refused to pay rent. This was during COVID moratorium, so with advice/help from my lawyer, I ended up paying a total of 5k for them to leave in two weeks. I budgeted around 2,200, so this was definitely not ideal, but that's the risk you take with these kinds of buildings sometimes. I doubt you will have pay this much, if anything, as you are in a landlord friendly state and the moratorium has ended.

If they still have 6 months left on leases when you take over a building, that is plenty of notice. The best way in my opinion is to be real with them and let them know the building needs a lot of work to bring it back to standard. They likely already know this and will likely accept it and move off.

If you plan on buying a distressed building with tenants on it, I would just make sure you factor in the potential for issues in your purchase price. With good interpersonal skills and the preparedness to take action should stuff go wrong (cash for keys/eviction), you should avoid any kind major disaster.

Trevor Bond · Answer

@Trevor Bond

In that situation above, lets pretend the existing tenants have 6 months left on a 12 month lease and the seller never told them he is planning to sell. I don’t want to surprise them with a “hey im the new owner and l need you to leave soon” (obviously l would be more professionally).

Trevor Bond · Answer

@Sean McKee

Thank you for your insight! That was very helpful and l appreciate you using your own experience to teach.

If the tenants did want to move out, is it up to me (the new owner) or the seller to give them a 1-2 month notice that l will need them to be gone? From what you are saying it sounds like l will have to ask them to leave. Do you have any tips on how l can do this peacefully and correctly to prevent a disaster from happening?

Sean McKee · Answer

@Trevor Bond I have done this a couple times. I think it will be unlikely you'll have perfect tenants if it is a serious rehab. Usually there is always one bad one if the properties weren't maintained.

If you were truly to get perfect tenants and they were fine with paying market rents with improvements done, a lot would depend on what kinds of improvements you are making. If you are having to do serious electric , plumbing, HVAC, or layout changes, it probably won't work out well.  If it it's more surface work, like painting, light fixtures, new cabinets, etc, you could likely accomplish it.

The more likely scenario is that you have one really bad unit that you can start on either through terminating the lease or offering the tenants some kind of move off incentive. You can then fix this unit and any exterior/common area work. You can let the remaining tenants know you plan on increasing rents and offer one of them the updated unit for higher rent. If they accept it, you can rotate them into the updated unit, and fix their old unit.

I've never had this happen, once you mention all the repairs you have to do and the rent increase, they will likely move out on their own within a few months. I've only had one person stay.  They were already paying market rent and had a year lease. I had to re-pipe their bathroom as part of broader building update. They were a constant headache despite complaining their bathroom never worked.

Lastly, a lot will depend on if they have formal year leases or just verbal month to month. If they are month to month, then you can proceed with terminating the leases if you wish. If they have year leases, you'll have to abide by the terms.