Transitioning Inherited Tenants During Property Renovations
I am currently under contract to purchase my initial duplex, which will include two long-term tenants who are presently on month-to-month leases. Each unit is currently leased below market value at $595 per month and both would require substantial renovations, should I have to rent it to new tenants. Although it would remain profitable to keep the current tenants, I do not wish to displace them during the renovation process. As such, my plan is to transition them to a new month-to-month lease at their current rate for the first 90 days, after which it would increase to $675. This approach would provide adequate time for the tenants to determine whether or not they wish to continue their residency. If they choose to stay, it would be ideal as it would generate more cash flow without having to completely renovate. However, if they decide to vacate, I would have the opportunity to renovate the property while not forcing the the tenants to vacate, and could increase rent to at least $850 to new tenants. Potentially more depending on how it looks after the renovation. I welcome any feedback or suggestions on whether this strategy is appropriate or if there is a better course of action to pursue.
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If you are saying you plan to renovate with existing tenants in place, plan on it costing at least 30% more. Also, you need to get current applications from the tenants and properly screen them BEFORE offering them any type of renewal.
Quote from @Ivan Cortez:
Just make a decision. If it were me, I would end the leases with both Tenants, renovate the units, and rent them both at the higher rate.
@Ivan Cortez I agree with @Nathan Gesner on this one. End the leases for the tenants. Renovating vacant units is much easier. Plus you get new tenants at a higher rate. But I would add that you get one tenant to vacate. Renovate that unit. Get new tenants in at higher rents. Then do it to the other unit. That way you at least cash flowing one unit while the other is being renovated. Also, helps you focus on renovating one unit at a time. You will ensure that you finish the renovation quicker too. Don't get caught up on displacing tenants. They have enjoyed well below market rents for a long time. But at a cost of a poorly maintained property too. So its a push. Treat REI like a business and not a hobby. Like most hobbies (that project car in your garage) they never get done. The tenants have a lease agreement. It expired. So give proper notice to vacate and move on and increase your cash flow. That is more important that displacing tenants. They will find another residence.
Thank you very much @Joe Funari for the feedback. Your recommendation to renovate one unit at a time makes the most sense so that is the route I am going to take. I've never had to ask a tenant to leave so can you recommend the appropriate steps on how to do this properly for a month-to-month tenant?
Quote from @Ivan Cortez:
Thank you very much @Joe Funari for the feedback. Your recommendation to renovate one unit at a time makes the most sense so that is the route I am going to take. I've never had to ask a tenant to leave so can you recommend the appropriate steps on how to do this properly for a month-to-month tenant?
If tenant is month-to-month you should be able to give notice to vacate in 30 days. Search the internet for notice to vacate letters. Submit it certified mail and via email. Then go from there. Of course, this applies to Texas where I own rentals. So if your not in Texas better check the laws in your state regarding notice to vacate for month-to-month tenants. In the future when positing be sure to include the city and state your question is about. That way you get specific advise from experts in the area in question. Landlord and real estate laws vary from state to state. So don't let the rest of us assume where you are. The more specific you can get the better.
Wow those are really reasonable rents. Before doing any renovations with existing tenants make sure they are worth the improvements. You don't want to throw good money after bad. If they are not taking care of the unit, or not paying rent on time, you probably don't want to keep them on in the first place so I would proceed with caution. I have had inherited tenants in the past and one was excellent who is still my tenant to this day and the other not so much so you just need to take a wait and see approach.