Buying duplex, inheriting tenants and how to increase rents?

Question

Hello all,

I am currently under contract for my 2nd investment property and closing at the end of the month. My question is the tenants are long term (19 years & 9 years) They take nice care of the property and the previous owner has had very little issues. I am planning on keeping them and having them sign my lease agreement ( month-to-month) I'm sitting down with them this weekend. They are aware prices are going up 200-300 a month by the previous owner because he knows he was charging to little and has had the property paid of for many years so didn't need as much to cover expenses ( it was more fun and hobby to him) The current tenants have said they do not want to leave.

How would you recommend increasing rents? Market rent is $750 Down ( 2+ bed and 1 bath) $700- Up ( 2 bed, 1 bath) Downstairs take cares of lawn and snow, all downstairs utilities. Upstairs takes care of all upstairs utilities.

The previous owner has them both paying $475 a month and has only increased it 1 time since they both have lived there ( they started paying $450)

I am planning on upping to market rents but know I need to give a 30 day notice. So my thought it to accept their payment at $475 for the first month (Oct.) and then up to market rent from there. Is that how you would take care of it or should it be done more incremental? They are both aware of the deal that they have been given for so many years but this is a business for me and I need to cover expenses and make a little. Located in WI, my break even is $1,100 a month.

I want to be nice but need to make money, Do I give them the first month at what they are currently paying because I can't give them a full 30day notice and then go full market for the following months. Or do I slowly increase each month up until market, say $100 additional each month, while not making much extra money for a few months?

The market I am in is booming (Sheboygan) and 2bed1bath are anywhere between 650-900 a month. I think 750 & 700 are fair for the property and will still allow them to stay at a deal.

I think I know what the right way to do it is and how I feel best but want to see what some more experienced investors/ landlords have done or experienced.

Thanks in advance!

Kimberly Frazier · Answer

Congrats! I just purchased my second property too (another duplex) in the Sheboygan area this spring and am currently rehabbing it. I've had my other property (upper/lower duplex) in Sheboygan for about 4 years now and current rents are $700 and $730 (no utilities included). I have done a lot of updates and know I could charge a bit more but want to give a fair deal so I think your target rents are good.

I haven't been in a situation like this, but I might consider giving 60 days notice rather than 30 so they can prepare for the impact on their budget- but that's just me. I think doing it incremental would be a bit confusing; I would just make the jump all at once.

Best of luck with everything!

Mitch Larrivee · Answer

Tier it.

Put yourself in their shoes. They likely don't have that much extra cash every month right now, so a jump like that and they'll start looking for something else, or worse they'll become terrible tenants. You're better off letting them know you need to increase to market rent but you'll gradually increase it. It will give them time to prepare. How much and how often is up to you, but you should be fair here.

Peter Falk · Answer

I completely agree that if as long term tenants don't know current market rents, would show them similar places if needed and kindly say that you have a mortgage (I assume) based on current market value you had to pay (or just say you do) and you need current market rents (or much closer to it) to cover that. I also agree if they are good tenants, it is worth a little back and forth on maybe settling at a much higher, but still discounted rent. Good luck

Matthew Irvine · Answer

I have had several situations very similar to yours, I have taken the following approach for the following reasons. Offer tenants 2 options: 3 month lease at $50 increase OR 12 month lease at $150 increase. I would then do the same thing in year 2. The specific increase is up to you, these are examples to make the point. I do this because it cuts the risk that both tenants reject your proposed increase and put you on your back foot. 450 -> to 600 is still well below your market rent, and maybe you choose more, but be careful. I may be overly careful in my approach but I am a firm believer that when you enter these situations like "it's just business, this is market rent" you run the risk of things going left, quick. With your break even being a factor to consider I would just make sure you have adequate reserves in case of vacancy.

As for the lawn care and snow removal, that should never be built into rent. Ex. Your rent is 600 but you do xyz(wrong imo). Instead, Your rent is 750 and you do xyz for 150 a month. This creates clear lines and allows you to remove those tasks if you find it is in your best interest.

Cameron Schmahl · Answer

@Corina Eufinger

Thanks for the feedback!

I am stuck at their current rent for the first month, did a half increase for 2 months and then full rent from there.

It was a win, they told me they don’t want to leave, they know it was cheap rent and signed to stay. They were appreciative of the time to get used to paying more for their budget and were happy that I worked with them.

Other people may have don’t it differently but all parties are happy, I can cover my expenses and they are staying.

Appreciate the feedback!

Corina Eufinger · Answer

It's not very well known that in Wisconsin case law points to strongly encouraging (and some judges take it as law made by case law) to giving 60 day notice. If you think about it, only a 30-day notice is rather unfair. If you give them 30 day notice but they are also required to give you 30-day notice they are stuck paying one month of the increase because they had no choice.

I had to give big increases to my inherited tenants as well recently. I choose the route of halves. 1/2 of increase amount right away then second half in 6 months all on a MTM lease. This gives them a little bit to plan and adjust their finances.

Cameron Schmahl · Answer

@Kimberly Frazier

Thanks for the input! Glad to meet another Sheboygan investor.

My current duplex (which I’m house hacking) rents were low but not far off so the sticker shock wasn’t there. This property the gap was so large I was curious as to other thoughts.

Cameron Schmahl · Answer

@Matthew Irvine

Thank you! I really appreciate the feedback. The landscape being separate from the rent was an idea I never even considered but makes a lot of sense.

My current property (house-hacking duplex) I walked in to below market rents but they were much closer and it wasn’t quite the sticker shock for them.

Mo Karim · Answer

Congrats on your 2nd property! Seems like your tenants know what's fair market rent which is half the battle. They also seem like great tenants. You have to keep them at what they're paying until you give notice for M2M increase or sign new leases. I'd try to keep them at 650-700/month but have them sign new one year leases (bill back for utilities and keep having that one tenant take care of landscape). Having good tenants is worth taking a small hit in the numbers. Turnovers and bad tenants can cost you more money in the long run.

Buying duplex, inheriting tenants and how to increase rents?

Buying duplex, inheriting tenants and how to increase rents?

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