Inherited long term tenant: What would you do?

19 Replies

So what would you do?

I purchased a value-add, 4 unit in Columbus Ohio last year. The building was completely occupied with rents way below market. A few months after buying the property we submetered all the utilities charging them back to the tenants. My thoughts were to do light rehab and raise the rents as people moved out which is what I have done so far, however..... I have a tenant that has lived in the building 40 years !!! Market rents are 700 per month and the tenant is paying 485. The tenant pays a week early every month, picks up trash around the building, shovels the snow in the winter and never has any maintenance request. Obviously, I don't want the tenant to move, but their rent is really low.  Do I try to gradually get him to $700 a month with a 3-5% increase each year? This could take 10+ years. Or do I hit them with maybe a $50 increase each year? I have already increased the tenants cost 50-70 per month by charging back the utilities.

Thoughts????

Thanks!!

Adam

If you not raise the rent on this one tenant then you lose 215 a month times 12 mo = 2580. Is that what you want? 

Keep in mind if you do raise the rent every tenants needs to raise the same amount, otherwise you may get sue for discrimination.

With a four-plex, you probably need someone acting as a de facto PM, even if you're nearby.  Something like that is worth at least $100.00/month. Seems like he's doing it already, so if the market rent is $700, rent concession for PM duties would bring the rent to $600 already, roughly $100.00 more than what he's paying.

I really value tenants that handle their own maintenance, and that's worth something as well. 

BTW, I used a elderly neighbor keeping an eye on a triplex for some small compensation, and over the long run, things that he notices because he's on site that I can't would save on fines, lawsuits over slips and falls etc. I lived next to a triplex that the landlord expects tenants to handle snow, garbage etc.  and I see garbage pails rolling around for days after garbage pickup, and snow not cleared for a whole week. Sooner or later, there'll be a slip and fall, and could be expensive.

@Adam Fansler how old is this tenant? If there elderly I’d just let them keep living there and incrementally increase it. Good tenants are hard to find and I wouldn’t lose sleep over a hundred a month or whatever (after slight increase )

Here’s what I’d likely do
Send him a letter Explain to him everyone else pays far more in rent and your expenses( taxes insurance water garbage repairs etc . Amount to a lot for a big apartment like his . It all needs to be paid with the rents in order to keep the property going and out of foreclosure
tell him that you are raising his rent by a hundred bucks in two stages over two years . Assure him he’s important to you that he has an important role ( we all want to feel important) and how you appreciate him overseeing the property so well all this time . Assure him after the increases he is still paying 20% less than he should be . After that If he leaves then it was never meant to be . Remember Your doing this to make money not run a 501c

@Adam Fansler I’d raise rent some, see if they want to be the onsite de facto PM type person like mentioned.  When they don’t live there anymore just rehab it and put it to market rent.  It’s doubtful they’ll do any more damage that hasn’t been done at this point 

@Adam Fansler excellent question and I think also kind of a personal one. A lot depends on your goals and what you need to accomplish with the property. I personally think a good long-term tenant is an asset and if you can you should bend-over backward to keep them. 

I would not keep him at $485 but I would sit down with him and tell him the other tenants were paying $200+/month more and he needed to pay at least a bit more in rent or services each year.

Maybe go up $30/year and get him to help out with some more maintenance tasks or something. That's an example but something in the middle ground that works for both of you.

I'm a bit non-plussed with some of the large multi-family syndicators who like to talk about how they can force rents up for lower income people and in almost the same breath talk about how they help the same people with their charity...

I think, like everything else there is a productive middle-ground where you can earn good returns and not force people into bad situations.

Originally posted by @Adam Fansler :

So what would you do?

I purchased a value-add, 4 unit in Columbus Ohio last year. The building was completely occupied with rents way below market. A few months after buying the property we submetered all the utilities charging them back to the tenants. My thoughts were to do light rehab and raise the rents as people moved out which is what I have done so far, however..... I have a tenant that has lived in the building 40 years !!! Market rents are 700 per month and the tenant is paying 485. The tenant pays a week early every month, picks up trash around the building, shovels the snow in the winter and never has any maintenance request. Obviously, I don't want the tenant to move, but their rent is really low.  Do I try to gradually get him to $700 a month with a 3-5% increase each year? This could take 10+ years. Or do I hit them with maybe a $50 increase each year? I have already increased the tenants cost 50-70 per month by charging back the utilities.

Thoughts????

Thanks!!

Adam

 Starting with the numbers you need to quantify how much he is actually saving you.  How much would the snow removal cost you?  How much did you save by him making sure the area clean avoiding tickets?  What is the value of hassle free tenant?

@Adam Fansler if  you want him to pay fair market rent, then pay him fair market for the work he does. Or you can go shovel and pick up trash yourself, then decide how much it is worth. 

Another thing to consider is the quality of comparable properties is. Maybe you see other properties advertised for $700 but they probably have newer carpet, paint and appliances. If the guy has been there 40 years, who knows what condition the unit is in. If you are going to raise him up to $700, then make sure his unit is at similar quality to other $700 units in town. 

Reading through the comments here, the two things you have to consider is the de facto PM function this guy performs, and the condition of the apartment. Some years back, I compensated the neighbor around $100.00/month, and that didn't include snow cleaning which I had a tenant do. The neighbor picks up garbage off the sidewalks, sweep it daily, pull garbage pails in, change bulbs in the common areas, and advise me if snow cleaning is performed.

Given he's been there for 40 years, the condition of his apartment if you don't plan on upgrading is another $50 to $100. Subtract this from $700, and you're at $550.00

So just to give the message that rents would increase, I would do it in $25 dollar increments, and get to $550 in two to three years. If I were in your shoes, I'll be glad someone retired is doing this. I got a ticket for garbage on the sidewalk once, and my neighbor manager called me right away when it happened. He told me he could go with me to court to fight it because the garbage actually fell off the garbage truck when they collected garbage, and the garbage collector noticed it but was too lazy to pick it up. He was going to get to it, but the inspector got there 10 minutes later, before he could, and called me right away. Now I noticed garbage inspectors follow garbage trucks here in NYC, so what he tells me has a ring of truth. Now he sits by the front window most days watching, and where else would I find someone watching the place 24 hours, and tell me how a piece of garbage got on the sidewalk, and I'm informed in 15 minutes. He wanted to know if the ticket the inspector left should be mailed to me, or if he should hold it for me. Then his son tackled someone trying to break in the back of the rental late at night once.  I just can't find anyone doing this for the price, and neither can you. Compare this to absentee landlords that has no idea what's going on.

I agree with @Jeff Kehl . Try to find the middle ground. People are right in that you aren't running a charity, but I think having a little compassion can go a long way as well. When I did PM, we had an elderly tenant who's rent hadn't been raised in probably 25 years. He'd been in the same building/apartment nearly 40 years and had never asked for a single thing. No new carpet, no paint, never had any maintenance issues, etc. He would also keep an eye on the property for us. I don't think you're "losing" the $200 a month, it's more that you're "paying" him $200/month as a PM/handyman.

I think you should raise it a little but be happy you have a tenant that loves where they are and takes care of the place. I purchased a 2 family 3 years ago, the one side the tenant had been there for 30 years, i was not going to displace them from their home, which they were worried about. they were paying $800 / m which is below what i could get for the property, but they loved living there, they take care of the property and look after it. after talking with them I did raise their rent right away to $1000 and they understood, but have not raised it since then. there is some value in having some tenants there that love to live there and look after the place, even though i have a PM that manages the property, it is worth that peace of mind to me, especially since the property is 3 hrs away from me.

we inherited a 'long termer' who paid late & bitched about everything. So we raised to rent $100/month to $575 hoping she'd leave. BUT she paid it & on time from that time on. Then we finally evicted her when the hoarding became a serious fire hazard. So we upgraded the living room carpets & then redid the kitchen with my daughters old cabinets & immediately got $775/month.

we inherited two older women who paid $425/month so we got them a new stove that worked, a new gas dryer that actually worked & then because of their high heating bills we upgraded the furnace, threw in a couple of gallons of paint so they could paint the kitchen & bathroom. We then raised the rent (it's now $825/month). No complaints & they are going on 16 years in the same home. 

I would see exactly what things they do around the building and see if the rent vs tasks are balancing out.  I don't like to get in the habit of trading rent for property work but if they have been actually doing it for 40 years they have a case to listen to.

Originally posted by @Frank Chin :

Reading through the comments here, the two things you have to consider is the de facto PM function this guy performs, and the condition of the apartment. Some years back, I compensated the neighbor around $100.00/month, and that didn't include snow cleaning which I had a tenant do. The neighbor picks up garbage off the sidewalks, sweep it daily, pull garbage pails in, change bulbs in the common areas, and advise me if snow cleaning is performed.

Given he's been there for 40 years, the condition of his apartment if you don't plan on upgrading is another $50 to $100. Subtract this from $700, and you're at $550.00

So just to give the message that rents would increase, I would do it in $25 dollar increments, and get to $550 in two to three years. If I were in your shoes, I'll be glad someone retired is doing this. I got a ticket for garbage on the sidewalk once, and my neighbor manager called me right away when it happened. He told me he could go with me to court to fight it because the garbage actually fell off the garbage truck when they collected garbage, and the garbage collector noticed it but was too lazy to pick it up. He was going to get to it, but the inspector got there 10 minutes later, before he could, and called me right away. Now I noticed garbage inspectors follow garbage trucks here in NYC, so what he tells me has a ring of truth. Now he sits by the front window most days watching, and where else would I find someone watching the place 24 hours, and tell me how a piece of garbage got on the sidewalk, and I'm informed in 15 minutes. He wanted to know if the ticket the inspector left should be mailed to me, or if he should hold it for me. Then his son tackled someone trying to break in the back of the rental late at night once.  I just can't find anyone doing this for the price, and neither can you. Compare this to absentee landlords that has no idea what's going on.

 How long will it take to renovate the apartment?  If the apartment is down for 2-3 months then add the cost of renovation how long will it take to recoup your money?  On the investor side we add a dollar value to everything we provide we need to add a dollar value to everything that a tenant does as well.  I do hope more investors take in what you discussed @Frank Chin.  How many people actually lost money in trying to get $100 more?

Sorry if people mentioned the following already....

Can you change his lease and "pay" him to do the work he's already paying? New rent, but lowered to say $500 for the work, and deduct that as an expense on your taxes? I'm no CPA, so I'm not sure. 

Also, I love the idea of just sitting down with him and telling him what market rents are, and see what he says. Maybe he volunteers that he can afford another $50 a month. Maybe he says he's broke on social security. But I'd let him know that you value his work and you value the way he pays  his rent ahead of time. 

A big question is; are you prepared to spend the money to update his apartment asap if he moves? And are  you prepared for the vacancy while you do that? 

Originally posted by @Anthony Wick :

Sorry if people mentioned the following already....

Can you change his lease and "pay" him to do the work he's already paying? New rent, but lowered to say $500 for the work, and deduct that as an expense on your taxes? I'm no CPA, so I'm not sure. 

Also, I love the idea of just sitting down with him and telling him what market rents are, and see what he says. Maybe he volunteers that he can afford another $50 a month. Maybe he says he's broke on social security. But I'd let him know that you value his work and you value the way he pays  his rent ahead of time. 

A big question is; are you prepared to spend the money to update his apartment asap if he moves? And are  you prepared for the vacancy while you do that? 

 I thought about this through the years.

If I up the rent to market, and then pay him for the work, while I get another $100/month in expenses, I receive another $100 in rental income, the two will cancel out, netting you zero. You then would have to start issuing 1099's as the annual compensation  as it would exceed the IRS threshold of $600.00 for reporting.

On the tenant side, if he's on social security, he probably do OK. For those tenants not retired, with income, doing it this way will expose them to added taxes. In that case, they might tell you "forget about it." If he forgets to include it on his taxes, he'll be asked by the IRS why he omitted the income, and I received these notices when 1099's issued to me are in error. I would waste half a day on it as they would ask you about it  years later. So if you think about it, overall, it's totally unnecessary make work all around, for you and the tenant, a total PITA.