Ethics Question !

[Benton Williams]

I am looking to buy a fixer upper. I’ve been seeing some options come through a wholesaler that are multi family and some are rented currently. 

I would aim @ renovating the property and increasing the rents. My girlfriend mentioned that it was sad if the current tenants wouldn’t be able to stay there. I thought it was a little sad too. 

What would your response be to justify the purchase and renovations? 

[Bruce Woodruff]

First, you need to stop listenng to your girlfriend, who has zero 'skin in the game'. But be polite.

Second, decide if you want to operate a business or a charity. Very simple question for yourself.

Third...wrap your head around the concept that others have mentioned....YOU are taking the risk here. Spending your (I assume) hard earned capital to invest in a place for others to live is a big deal. You need to set an expected ROI and set your rents to provide you that profit. As you may know, a good portion of your monthly rent will not go in your pocket, it will go to the constant maintenance, upkeep, repairs, taxes and the like.

Fourth, ask yourself... if you have a vacancy, the economy goes in the tank, you have huge unexpected repairs, etc....will your tenants chip in to help you out? WIll anyone...maybe the Govt? You know the answer.

Just be a good landlord - provide a nice, clean and safe place for people to live and charge accordingly. Simple stuff here....

[Andrew Syrios]

These situations are always tough but if you are improving the property, I think you have every right to increase the rent. 

I do think you are morally obligated to give the tenant a heads up of what's coming and sufficient time to find a new place if they can't afford what the new rent will be. (And of course, you can't raise their rent until their lease expires.)

A few things you could do which we usually do to one degree or another, but I don't think you are morally obligated to do. 

1) Raise the rent, but not to market. Sort of split the difference.

2) Offer them moving expenses and/or to return their entire deposit if they decide to move out

3) Discount the rent while the renovation as going on since it will surely be an inconvenience

[Troy P.]

I agree it is a tough decision, but at the end of the day, this is a business and they should live where they can afford to live, whether that is on your property or elsewhere.

That being said, you have every right to improve your property and allow for a better quality of life for someone.  If your rent is significantly below market for the area, you are essentially operating a charity.  If that's your goal, I applaud you, but I'm sure most would choose other avenues for their charitable contributions.

I like the idea of "organic vacancy".  You can wait for the tenants to move out on their own or allow them to move into a newly renovated unit at a temporarily discounted rate.  You avoid having multiple vacancies, it allows you to renovate their old unit, and it gives them time to figure out if they are able to stay.  If they aren't interested in a better unit, then I would respectfully ask them to start looking for another place to live.  A lot of people will disagree with this and say cut the cord and evict them, but I think it's worth trying to keep a solid tenant.

[Chris Seveney]

Quote from @Benton Williams:

I am looking to buy a fixer upper. I’ve been seeing some options come through a wholesaler that are multi family and some are rented currently. 

I would aim @ renovating the property and increasing the rents. My girlfriend mentioned that it was sad if the current tenants wouldn’t be able to stay there. I thought it was a little sad too. 

What would your response be to justify the purchase and renovations? 

First just want to state, she is your girlfriend not your wife, which is very different in regards to financial status/situation.

For me its simple, I am buying this asset and taking on the risk of renovating it and as part of it will be seeking to earn income from it to better myself in the future as I know a W2 job and a 401k does not get you far in retirement. I am thinking long term in planning what is best for my specific situation. 

[Bill B.]

Why are the strangers already living there more important than the strangers that want to rent the property after it’s already fixed up?

How do you know they can’t afford it? If I was a renter and the landlord was didn’t know what they were doing and priced the rent 30% too low do you think I would insist on them raising the rent? Or would I just invest/spend/blow the savings on something else? In a capitalist society every transaction is based on both the seller and the buyer/renter thinking they’ll be better off after the transaction. If you try to charge more than your property is worth it will sit empty. If you charge what it’s worth or less you’ll make someone happy when they decide to rent it. 

Why don’t you fix it up and then keep the rent the same? You’re already giving strangers the equivalent of a cash gift every month. Make it a larger gift. Or… Let it get more and more run down so you can lower the rent. If they don’t like fixing it up I’m sure they’ll like it falling apart in exchange for lower rent. 

Ps. Ask any landlord how tenants that have been charged “under market” rent for 5-10 years act when you explain it to them and raise the rent even half way to market. I’ll give you a hint. They don’t appreciate the thousands of dollars they’ve been given over the years. 

[Troy P.]

Quote from @Troy P.:

I agree it is a tough decision, but at the end of the day, this is a business and they should live where they can afford to live, whether that is on your property or elsewhere.

That being said, you have every right to improve your property and allow for a better quality of life for someone.  If your rent is significantly below market for the area, you are essentially operating a charity.  If that's your goal, I applaud you, but I'm sure most would choose other avenues for their charitable contributions.

I like the idea of "organic vacancy".  You can wait for the tenants to move out on their own or allow them to move into a newly renovated unit at a temporarily discounted rate.  You avoid having multiple vacancies, it allows you to renovate their old unit, and it gives them time to figure out if they are able to stay.  If they aren't interested in a better unit, then I would respectfully ask them to start looking for another place to live.  A lot of people will disagree with this and say cut the cord and evict them, but I think it's worth trying to keep a solid tenant.

 Edit: you would give them a notice to vacate, not technically an eviction.

[Bruce Woodruff]

First, you need to stop listenng to your girlfriend, who has zero 'skin in the game'. But be polite.

Second, decide if you want to operate a business or a charity. Very simple question for yourself.

Third...wrap your head around the concept that others have mentioned....YOU are taking the risk here. Spending your (I assume) hard earned capital to invest in a place for others to live is a big deal. You need to set an expected ROI and set your rents to provide you that profit. As you may know, a good portion of your monthly rent will not go in your pocket, it will go to the constant maintenance, upkeep, repairs, taxes and the like.

Fourth, ask yourself... if you have a vacancy, the economy goes in the tank, you have huge unexpected repairs, etc....will your tenants chip in to help you out? WIll anyone...maybe the Govt? You know the answer.

Just be a good landlord - provide a nice, clean and safe place for people to live and charge accordingly. Simple stuff here....

[Sam Yin]

@Bruce Woodruff you beat me to it! Especially that last sentence.

His is not really an ethics question but more of a business fair practice question... If I spend money to renovate/fix up a place to rent out, can I rent it for more or at market to recoup my cost? Answer: YES. Should I? Answer: YES. Is that fair? Answer: YES.

If I neglect a place, can I increase the rent? Answer: YES. Should I? Answer: NO, unless you want it vacated. Should I give a discount for the lesser living conditions? Answer: that's up to you.

BTW, like others have said, you girl should not have any say in the investment, unless she will be putting in capital. AND IF SHE DID, I would suggest not to go into REI because that charity mentality will lead you to go BK.

[Bruce Woodruff]

Quote from @Sam Yin:

BTW, like others have said, you girl should not have any say in the investment, unless she will be putting in capital. AND IF SHE DID, I would suggest not to go into REI because that charity mentality will lead you to go BK.

Yessir. Straight into BK. Although it is nice to be nice..... sometimes....it has it's time and place. People like her think with their hearts only and that is the death kiss to a business.

[Bruce Woodruff]

My additional (and final) thought to @Benton Williams is this. If you continue to want to think like this, just don't go into a business, especially like RE. Just put your money in the market or someplace where you don't have to worry about it. Note - They are probably doing real unethical and immoral things too, but you don't have to think about it. 

Because if you have to even ask this question, you just may not be cut out for this business.....and that's fine. Just move on....

[Brian Kloft]

Quote from @Benton Williams:

I am looking to buy a fixer upper. I’ve been seeing some options come through a wholesaler that are multi family and some are rented currently. 

I would aim @ renovating the property and increasing the rents. My girlfriend mentioned that it was sad if the current tenants wouldn’t be able to stay there. I thought it was a little sad too. 

What would your response be to justify the purchase and renovations? 

Unlike what many others have said here there is nothing wrong with your thought process on this and there are some positives. While yes this is a business, but you can also be a human being and respect others too. It sounds like these multi family properties already have some vacancies. What I typically do when I buy them is I will fix up the vacant units to a very nice standard and lease them out at or near top dollar. I fix them up to a quality that justifies that price. If the outside of the property needs fixing up I will do that too. I do not typically kick out any existing tenants just to fix up and rent out their units at a higher price. I will however raise their rents a fair amount each year until we get to what fair market rent would be for their space in it's current condition. Now when the existing tenants move out I then will renovate their unit and push the rent up to the market rates that the other renovated units get. 

One of the benefits of this is that you don't have to spend so much money all at once. I am typically spending around $15k/unit to fix them up and I do it off of my cash flow. I appreciate only doing 2-3 a year. Plus if some of the older tenants have been there a long time, don't cause trouble and are stable there is a benefit to that and not just having all new tenants in a property. 

You can still make good money on your property and have a heart. A lot of what people on here tell you to do is what also gives Landlords a bad rep and often causes cities to change laws that limit Landlord abilities. A lot of these aggressive tactics that the purely business people mention are the reason that some states and cities have created rules that now make it harder on Landlords to run their properties. As far as what your girlfriend's thoughts are, well that just depends on what kind of a relationship you are wanting to have with her and how serious it is now. I am not as harsh as, if she doesn't have money in the deal then she has no input. If she is a part of your life, and especially if she is a big part of your life, then you two most likely have input on what both of you do as that is the way a good relationship works.

[Hunter Stoudnour]

Hey Benton, 

Like many other people have said, this is a tough decision. Ultimately, I think you should go through with the renovations and increased rent. With proper communication and giving the current tenants ample notice, I think you would be giving them plenty of time for them to make a decision that is best for them.

[Andrew Syrios]

Quote from @Bruce Woodruff:

First, you need to stop listenng to your girlfriend, who has zero 'skin in the game'. But be polite.

Second, decide if you want to operate a business or a charity. Very simple question for yourself.

Third...wrap your head around the concept that others have mentioned....YOU are taking the risk here. Spending your (I assume) hard earned capital to invest in a place for others to live is a big deal. You need to set an expected ROI and set your rents to provide you that profit. As you may know, a good portion of your monthly rent will not go in your pocket, it will go to the constant maintenance, upkeep, repairs, taxes and the like.

Fourth, ask yourself... if you have a vacancy, the economy goes in the tank, you have huge unexpected repairs, etc....will your tenants chip in to help you out? WIll anyone...maybe the Govt? You know the answer.

Just be a good landlord - provide a nice, clean and safe place for people to live and charge accordingly. Simple stuff here....

I don't know if it's quite as simple as a business vs charity decision. Yes, in the end you have to decide whether it's a for profit venture or not, but there are all sorts of ways to mitigate what is an unfortunate thing to have to do as I mentioned in my first post. (Paying something for their moving expenses being one option). And sure while the GF shouldn't have final say, I don't think it's wise relationally not to listen to your girlfriend throw in her two cents from time to time even she doesn't actually have any skin in the game. 

[Nicholas L.]

@Benton Williams

slightly different take.  

1. the best fixers are severely distressed, and may even be unlivable. if you're seeing something that is occupied and "just needs cosmetics"... you likely won't get the ARV boost that will make it worth buying. paint and carpet aren't enough right now. you need very, very distressed properties that are going to take a huge effort.

2. the tenants in something that you buy occupied might be completely uncooperative and not really interested in your plans either way.  that would be a major added cost to a project.

so - there are 2 reasons to just find something vacant that have absolutely nothing to do with kicking anyone out.

[Sam Yin]

Quote from @Benton Williams:

I am looking to buy a fixer upper. I’ve been seeing some options come through a wholesaler that are multi family and some are rented currently. 

I would aim @ renovating the property and increasing the rents. My girlfriend mentioned that it was sad if the current tenants wouldn’t be able to stay there. I thought it was a little sad too. 

What would your response be to justify the purchase and renovations? 

 Lots of good responses already from different angles. I think you just need to ask yourself what strategy are you looking to use in your pursuit? What is your end goal? Will this property fit that end goal using the strategy you have in mind?

When I started, my vision was not clear and I did a few charity moves that did not help me. Instead, it really retarded my growth. But I pivoted quickly and treated it as a business and it kicked my growth into high gear. If I stuck with the original mindset, it would have taken me at least 10-15 years of investing and still working W2 to achieve a meaningful return that I could live on. The pivot cut the time down by almost 10 folds.

[Mike Dymski]

Provide the residents with the option to (1) stay in the unit and renovate what can be done with an occupant or (2) provide notice to move out.  Someone is going to buy and renovate the property; so, it may as well be you, someone who will handle it respectfully (and many residents end up staying).  Communities and residents do not benefit from allowing properties to stay in disrepair (that would be unethical).

[Alecia Loveless]

@Benton Williams Buy the property, raise the rents and give a 60 day notice of the coming increase (a minimum of 60 days or what is allowable in your jurisdiction). If the tenants choose to stay hold off on the renovations until they move out.

This is key because you can often non-renew if you need to renovate. I am in the middle of a situation where I would like to non renew due to some issues but renovated the unit mid-lease and now have no legally justified reason for the non renew without jumping through some hoops first.

Don’t do a mid-lease renovation.

I’ve bought several buildings and raised rents and am in the process of buying another to do the same.

The seller has a much smaller loan than I will have and for that reason just doesn’t care that these units are about $500 under market rent. These tenants have had a good deal for a while but the reality is I’m running a business and can’t afford charity.

[Bruce Woodruff]

Quote from @Andrew Syrios:

I actually agree in a way. And please note that although I am telling him to tell his girlfriend that......I'm not saying that I'm stupid enough to do that.....

[Sam Yin]

Quote from @Bruce Woodruff:

Quote from @Andrew Syrios:

I actually agree in a way. And please note that although I am telling him to tell his girlfriend that......I'm not saying that I'm stupid enough to do that.....

 Ditto!

[JD Martin]

Quote from @Bruce Woodruff:

First, you need to stop listenng to your girlfriend, who has zero 'skin in the game'. But be polite.

Second, decide if you want to operate a business or a charity. Very simple question for yourself.

Third...wrap your head around the concept that others have mentioned....YOU are taking the risk here. Spending your (I assume) hard earned capital to invest in a place for others to live is a big deal. You need to set an expected ROI and set your rents to provide you that profit. As you may know, a good portion of your monthly rent will not go in your pocket, it will go to the constant maintenance, upkeep, repairs, taxes and the like.

Fourth, ask yourself... if you have a vacancy, the economy goes in the tank, you have huge unexpected repairs, etc....will your tenants chip in to help you out? WIll anyone...maybe the Govt? You know the answer.

Just be a good landlord - provide a nice, clean and safe place for people to live and charge accordingly. Simple stuff here....

 The first thing anyone who wants to get into this business needs to ask themselves is if they want to run a business or run a charity. One makes a profit (ideally) and one serves a need, real or imagined. Most people who think they want to do both, as soon as they get into this for a little while, find out that this is pretty hard work if you're not going to reap any reward. Then they bail out and someone who wants to run a business buys their property. 

But fixing up the property doesn't have to be an all or nothing proposition. It can be done in phases, around the current tenants. Or it can be postponed until a future date (say normal turnover). In a MFH you might even be able to move the tenants into another vacant unit while you rehab theirs. 

As far as raising the rent, well there's not a lot of point in putting a lot of money in renovation (I'm not talking about basic maintenance, which should be done regardless unless you want to be a slumlord) unless there's some kind of return on the money, unless you just want to give your tenants nice things out of your pocket.

Some of the things I've learned about tenants over the years:

1. They will always do whatever's best for them, financially speaking, in the short term, regardless of what you are doing as the landlord.

2. They will not care that you left them under market for months or years if/when you start bringing rents up, most will just resent it if they stay.

3. They all want renovations but not rent increases.

4. They almost always can afford the rent increases, especially if they're way under market already and the increase is not dramatic. 

5. You better learn how to be self-sufficient in this business or you won't be doing it for long, because no tenants are going to bail you out. 

What's funny to me is that this is posed as an ethics question. I don't see it that way at all. I grew up ridiculously poor, virtually everyone I knew were renters, and they all had the same things in common - a series of poor life choices and ignored opportunities that kept them renters. The only people I knew who owned a home were my grandparents, who were first generation full Italians. During the Depression and up until after the War they lived 3 families in a single house until they had each saved enough to buy their own house. These were poor, blue collar working people (my grandfather spoke broken English) that never made any significant money but worked hard, didn't piss away money on stupid stuff, and ended up with a nice little home that they paid off. 

There are times in most people's lives when renting makes sense, and I don't think any more or less of people who rent one way or the other - but lifetime renters who haven't deliberately chosen that path are generally there because they blew opportunities everywhere to own their own home, and if it doesn't bother them to be renters why should it bother me to charge them rent?

[Bruce Woodruff]

Dang it @JD Martin, you conservative dudes are heartless.... 😂

@JD Martin

[Andrew Syrios]

Quote from @Bruce Woodruff:

Quote from @Andrew Syrios:

I actually agree in a way. And please note that although I am telling him to tell his girlfriend that......I'm not saying that I'm stupid enough to do that.....

Well glad to hear we're in agreement. And as far as the relationship advise, is that kinda like saying "hey you know your girlfriend kinda looks fat in that dress, you should probably tell her that" or something along those lines?

[Bruce Woodruff]

Quote from @Andrew Syrios:

Quote from @Bruce Woodruff:

Quote from @Andrew Syrios:

I actually agree in a way. And please note that although I am telling him to tell his girlfriend that......I'm not saying that I'm stupid enough to do that.....

Well glad to hear we're in agreement. And as far as the relationship advise, is that kinda like saying "hey you know your girlfriend kinda looks fat in that dress, you should probably tell her that" or something along those lines?

 You got it. Totally hypocritical, I know..... :-)

[Andrew Syrios]

Quote from @Bruce Woodruff:

Quote from @Andrew Syrios:

Quote from @Bruce Woodruff:

Quote from @Andrew Syrios:

I actually agree in a way. And please note that although I am telling him to tell his girlfriend that......I'm not saying that I'm stupid enough to do that.....

Well glad to hear we're in agreement. And as far as the relationship advise, is that kinda like saying "hey you know your girlfriend kinda looks fat in that dress, you should probably tell her that" or something along those lines?

 You got it. Totally hypocritical, I know..... :-)

Sometimes being objective and completely truthful isn't the best approach lol 

[Marcus Auerbach]

I live in a city with a lot of old houses and I can tell you having neighbors come over and thank you for improving the looks of their street is a pretty nice feeling. 

Imagine what a city would look like after a few decades without investors and flippers. Most homeowners don't have the time, money and skills necessary to take on larger projects. Older cities would literally decay.

Just imagine nobody would fix up old apartments, because of your girlfriend's line of thinking.

We get paid by society for the problems we solve and the value we provide.

[Troy P.]

Quote from @JD Martin:

There are times in most people's lives when renting makes sense, and I don't think any more or less of people who rent one way or the other - but lifetime renters who haven't deliberately chosen that path are generally there because they blew opportunities everywhere to own their own home, and if it doesn't bother them to be renters why should it bother me to charge them rent?

 Bingo.  Renting isn't meant to be permanant, but the people who get such good deals from their landlord on below market rent have no issues making it permanent.  The vast majority of potential tenants I interview say something like "I'm only here for school" or "I'm only here because we're between houses".  None say "I want to live here forever".  And that is why rent is supposed to be expensive.  It is temporary, convenient, and necessary.