Would you keep a tenant when buying a property?

Question

Looking at a property with a tenant already in place, has been there for 8 years.  They're paying $700/month currently, market rent looks more like $900-950, possible more if it's fixed up nicer.

Would you consider keeping the tenant?

Cash flow doesn't really work at the current rent, but would it be smart to say this is what the new rent will be if you want to stay?

Joe Splitrock · Answer

I probably would keep the tenant and push a moderate rent increase. It depends on the numbers, so do the math. Let's say it costs you $3000 to rehab the unit and get $900 per month. Let's assume the rehab means three months of vacancy @$700 that is $2400 plus $300 for utilities. So the total cost to increase rents to $900 in this example is $5700. Divide that by $200 and it will take you 28.5 months to break even on the rehab. Another option is raise rent $50 or $100. If the tenant moves out, you can still rehab and raise to $900 or $950. I have done similar comparisons over time and gone both ways. Just think through what is best financially for you. That $5700 rehab money may be better spent on acquiring another property.

Matt Slease · Answer

Thank you for the input, that's an excellent, logical way to think of it.

If I can get it for the right price to where it cashflows with a $50-100/month increase, that might be a win-win as the tenant wants to stay.

Matt Slease · Answer

Funny enough I just listened to this episode yesterday and got to thinking about that!  I plan to use that method if I go this route.

Chris Davidson · Answer

@Matt Slease I would checkBP episode 448 and the end of it has a really good idea on how to get the tenant to raise the rents. However, if you want new tenants I would just get them to move out, fix the place up, and bring the rents to market rate