Buying My 1st Multi-Unit With Tenants Already In Place. Advice Welcome!

7 Replies

Hello, I'm going to put an offer in on a duplex, but they have tenants in both units.  Do you have any tips on how I can protect myself from getting deadbeat tenants?  Or any tips at all on buying duplexes?  This is my 1st one.  Thanks!

I'm in the same position and am wondering if someone can post a reply. Thanks in advance to someone who can chime in.

You're bound by the existing leases.  So you definitely want copies of those.  Try to also get estopple letters signed by the tenants.  These reiterate key lease terms and are intended to avoid "yeah, the lease says $1000 a month but we were really only paying $800."  

The other thing is to be sure to get a credit from the seller for the security deposits and partial month rents.

But there's no magic here.  The tenants come with the unit.  You can't just kick them out, do your own screening, or put them on a new lease.  If they violate the lease terms you can evict.  When the leases expire you can choose to terminate or renew and put them on your lease.

Thanks Jon!  I really appreciate it..

The current lease will dictate most of what you need to know. I would get copies of those, hopefully there is a lease in place, and read through it. I'm not sure on the wording, but I know my leases have something that says if I sell, I can evict with 30 days notice. You can always try to get the tenants to sign your lease after closing that would say any previous leases are void. Tenants may see it as a formality if you keep rent amount the same. They could also refuse to sign. Good luck, and ask the seller if he has background check on the current tenants, you may have the greatest tenants in the world and nothing to worry about. 

Thanks for the info Eric!

@Jon Holdman   has probably given the best answer for your current situation. This is typically how the process is handled and I agree.

@Chris S.  When I started investing several years ago I bought a duplex next to a property I had just purchased, a triplex. I wanted the property so I could add to my portfolio and it was adjoining property to my recent triplex purchase. I wanted to clean it up (to make my property look better and rent faster) and the current owner of the duplex rented to anyone he could. Upon discussing purchasing the property from him I stated I would rather buy the property vacant so I could rehab it and get my own renters. He was glad to oblige if I purchased the property and so he did. I told him I would purchase it only if vacant and if he handled the process with his tenants at his cost. If I recall we didnt put this in writing. I did include in my contract that the property had to be in the same condition the day of closing as the day I made my offer, just for good measures in case they destroyed the place. I am not sure what he told his tenants but he sold me an empty duplex. He might have even rented them another property or offered cash for keys, not sure? 

I wasn't aware of any laws at the time of my purchase that would have made this illegal in any way. I had read that sometimes buildings are purchased this was for rehab projects.

It is probably best that you do take the existing tenants as Jon suggested and have them sign your lease and move forward from there. If the tenants work out good for you then its a bonus. If they do not you can upgrade your units between tenants. I would be sure to get a copy of the rental history payment books from the seller and/or any other documentation such as bank deposit records to prove the income etc.

Good luck :)

First if you can land a quad that might be better than a duplex.

We have a metric in the business called " breakeven occupancy ".

For instance in a duplex if one side goes vacant you have 50% occupancy. In a quad you have 75% occupancy.

So it takes more units to go down to get to a point where you are below breakeven occupancy and have to come out of pocket or reserves to pay the mortgage.

Most quads are the same for unit mix but if they were different you would have to factor another metric in that which one goes vacant affects rent more and total sq ft of the building.

When my clients are buying retail strip centers this comes into play. For example if a strip center has 10 1,500 sq ft spaces the per sq ft rate will usually be close to the same although more per sq ft rate might be given to an end cap location or the middle unit.

If the mix of tenants is unequal say out of 10 units one is 5,000 sq ft then that has more ramifications if it goes dark.

Say you look at buying a quad but they are all one units and have high turnover and not as much demand as the 2 units. In that case there would be more risk and a compensating factor to buying one bed units for the area. So do not just think of it in terms of what you can afford. Think about what the market wants and try to buy that product.

Look at for tenants what we call the "loyalty factor". A tenant that has been there say 3 years and paid on time has a high loyalty factor than a new tenant that has just been there for 2 to 3 months. The new tenant is like a newly minted mortgage note as you have a short seasoning history of how they will perform in your property. Also look at the interior condition of the units with current tenants on inspection. When you analyze the rents on the lease and they are verified with the estoppel see how far off the leases are with the market rates. If the rents are just slightly under market and the unit needs work to get top market rent the goal is to push the rent up slightly each year to keep the long term tenant to stay.

Some investors make the mistake of trying top market rent and increasing 70 bucks for example right away on the tenant. Tenant gets mad and says I pay this rent because the condition of the unit.  If you charge this money I will leave for a newer place. Then you get them out and lose two months rent for say 1,600 total and you now need to repair the place to make new for a future tenant at the higher price. Say that comes to 3,000 because the tenant has been there for many years and worn it down.

At 70 bucks a month that is 840 gross gain on rent a year. Each year you will push rent more so let's say it takes just 5 years instead of the projected 5 and 1/2 to get your money back for lost rent 2 months and 3k repairs.

Even if we get that down further it is easy to see why reducing turnover is so much more important than pushing rents to the very top. I have seen buyers before go in and do all these repairs to make new and get current tenants out. Then they put to market and do not get 100 more than thought and only 25 extra. Now it will take them a really long time to recoup their cost and be at breakeven.

The investors I know that have 75,150 unit buildings etc. keep rents below market and occupancy up and turnover low. They still raise the rent about 3% a year but their rent prices are still some of the best in town keeping a waiting list for the occasional turnover. Since the rent is so low already the new tenants just want a clean place and everything doesn't have to be brand new etc. which keeps re-tenanting costs down.

Look also at the tenant leases and ask how the landlord qualified the tenants for income etc.

You do not want to be stuck with deadbeat tenants that have nothing to lose and will cost you a lot of cash flow right out of the gate.  

   

   

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