I'm (hopefully) about to close on my first rental property and I'm really in stupor about what my first steps should be.. The situation is this
This is a 4-unit property (2 duplexes, 2BD 1BTH apts., rent control exempt) fully occupied. Current owners - a senior couple - live there and plan to move out in a few months. According to them, all the tenants are good and pay in time, one of them has been living there for 8 years, the others for around 3 years.
1. None of the tenants has any paperwork, actually the landlords just didn't bother with rental application nor did they with lease. No security deposit either.
2. Tenants pay ridiculously low rent. Something below $800 while the market for 2BD in this area (Bloomfield NJ) just starts at 1100.
The condition of the apartments is not terrible but definitely needs renovation once the units become vacant.
So, looks like as I take possession of the property I'll need to have the tenants fill out rental application, sign lease and provide a security deposit. Also it's the best time to rise the rent. I think this will be a great stress on the tenants and I'm afraid they will move out all at once.
The key word is not "move" but the word "at once".. It's OK if they leave one by one as I need to renovate the units anyway, but all at once.. you know what I mean..
How do I pursue my goals and not to scare tenants out at the very first moment? Any ideas?
Thanks in advance!
First, I would try to get an "estopple letter" signed by each tenant. It would outline the rent, the security deposit ($0), and the term of the lease (month to month, I assume.) And any additional terms such as who pays utilities, how much notice is required to leave or terminate the lease, etc. I'd spend a couple hundred to have an attorney in your area who specializes in landlord tenant law review your lease and brief you on laws and customs in your area.
Raising rent from $800 to $1100 is sure to cause vacancies. That's a big jump. You could try doing it one at a time, but they will all figure out what you're up to, so you may get move-outs before you plan. Hopefully your business plan is able to tolerate the vacancies.
I would, at the least, put the former owners on a formal lease at market rates rents, unless you've already negotiated something else. In any case, you want a formal lease with them.
Personally I like month to month. A long term lease binds a landlords hands more than a tenants hands.
@Aleksey Vinogradov this can be a tricky situation. Do you know what your expenses are? Is there positive cash flow now? You need to consider the area of the units and likelyhood of re-renting quickly at higher prices.
One the one hand, if you have good tenants, they keep the property in decent condition and pay on time, then you may want to keep them (even with lower rents). Good long term tenants sometimes beat out high turnover when you try to raise rents (just my opinion). We have one rental that is a 2/1 and charge only $350/month (we could get $450). However, we like the tenant, he takes great care of the property and even helps us with repairs on some of our other units.
On the other hand, I definitely see the appeal to raising the rents if equivalent units are renting for $300 higher per month. If you do decide to raise the rents, I would probably give them a lease for say 3-6 months at their current rent and let them know that you intend to raise rent after that. If they want to stay, then have them fill out an application so you can verify that they can afford the higher rate and require a deposit. At least this way they have time to find something else and gives you time before a mass move out to save some money to cover expenses while units are empty.
I'm sure others will have other ideas and opinions but I hope this helps.
Best of Luck!
I kinda of went through the same thing about 6 months ago. But not as extreme. My property was 50% occupied. One my Tenant's rent is $50 below market value. I did not raise his rent but I did get him on a lease. He was reluctant at first because the previous landlord did not address many of his concerns/problems. Once I fixed 3-4 items he signed because he saw I was serious about taking care of the property. He also had no security deposit. I wrote his lease as such and so far there has been no issue.
In your case you could make/loose a lot of money with that much of a spread between what they are currently paying and what the units are really worth. You have to look at all of the numbers and weigh if you can support a vacant property for 2-3 months while you renovate and re rent at the higher rate. Once you invest the renovation cost will the property still cash flow as much as it does now?
You could also talk to each tenant individually and tell them your plan to raise the rents. Maybe instead of $300 you raise it $100 or $150 this year. And then revisit the situation a year from now.
The estoppel that @Jon Holdman mentioned should be notarized.
Although I do one year leases typically, this is a situation where I would initially go month to month. And raise the first tenant you want gone up to market rents so that they move, you renovate, then get a new tenant. Once you have a good tenant in that unit, repeat with next unit to be renovated. Of course, you have to follow local law for notification of rent increases.
One other thing not covered is the former owners being holdover. This can become problematic. I suggest that your agreement require that some of the purchase money due to them remain in escrow until they move out; otherwise, they might not choose to move peacefully.
Thank you, Jon, Christine, Jarrett and Steve! I'll write down your ideas and discuss them with an attorney..
My concern is if I raise rent to one tenant, would it be considered a discrimination of some sort?..
Originally posted by @Aleksey Vinogradov :
My concern is if I raise rent to one tenant, would it be considered a discrimination of some sort?..
No. It could just be that the costs associated with that rental unit have increased and you wish to pass along those costs so that the tenant bears some or all of that increase.
Get all the paperwork going; that's #1. I am assuming you have met and looked at each place to check the conditions etc. I always do an1 year lease minimum but in this case probably better to go with a short term (3-6 month or month to month) and then after 3-6 months you can start raising the rent depending on how your tenants are doing for you. This is never an easy situation but you have to raise the rents soon to be in market conditions so be up front and tell them you will be raising it in a few months so to give them time to look somewhere else if they want. I would also offer to paint their place or offer something in return if they need work to show that you are improving the place. I also am in New Jersey landlording for 20+ years and know a landlord who used to rent in Bloomfield on Bloomfield Avenue. Any other local questions feel free to reach out to me. Good Luck and let us know how you make out !
Get a 'use of occupancy' from the sellers. Ask your attorney.
Mark, Marty, thank you for your input!
I would require full background done on your tenants. You want to know criminal history. I would tell them your insurance requires it - mine actually does. I would trust but verify the story the older couple is telling you (they are sellers after all). Finally, I would plan on marking rents up quickly, within 60-90 days I would want all my units at market rates.
I have finally closed on those properties! A huge deal for me, as a beginner..
Just returned from closing office, being in a kinda stupor what to do next..
Plan to go introduce myself to the tenants tonite..
Congratulations on your 1st investment property! a 4 Family is a great start (it's how i got my start BTW)
My first property I bought under similar conditions as you did it seems. One differnece was the prior owner did have security deposits from all the tenants, but no leases in place and rent was on the low side.
I actually left things as is for the first year as I was cash flowing ok for the most part but after the first year I did bump up the rents. In my town (Union township we are governed by 4% rent control so I raised 4%.
Are you self managing? Are your utilities seperated?
Once again Congrats!! I can remember closing on my 4 family feeling very similar to what you describe " ok now what" LOL Think I remember mosst was Realtor handing me this HUGE keyring with TONS of keys on it! Iw as Like WHOA!!!! I was 23 at the time!!!
Chris, thanks for your support!
This houses are exempt of rent control as soon as they are duplexes, so technically I can raise rent as much as NJ law allows. I don't remember exactly, last time we met Darren Sager told me there's NJ 8% limit or something like this. I need to figure it out sooner rather than later.
Yes, I plan to manage it myself to learn the ropes.
I was wrong - there's a security deposit from one tenant. They transferred it to me at closing. Along with a bunch of keys :)
Yes, utilities are separate, owner pays water
Hey @Aleksey Vinogradov , both myself and @Ankit Duggal let you know that in NJ if you try to raise the rent to market value, and that raise is 10% or greater than the current rent, the tenants can easily take you to court and the chances are greater than not the judge will rule against you because the raise will be considered unconscionable in nature. What we both recommended to you was to raise the rent below what a judge would possibly rule against you and enough that it would make sense. I believe that both our advice was to get yourself to market value in the least amount of years without attempting to lose the tenants if they're good people. Ankit can let us know if I missed anything.
@Darren Sager , thanks a lot for your advice!
@Darren Sager covered all the major points.
The only exception to the rule is if you will be doing substantial renovation to the unit and then and only then can you take the increase higher than the unconscionable increase. You will still get challenged but you can back up your claim with renovation contract/receipts.
How about to present numbers showing that the existing rent isn't sufficient to maintain the property?
That point @Aleksey Vinogradov is unfortunately irrelevant. What you paid for the property has nothing to do with it. You could easily overpay for the property and that has nothing to do with your tenants.
@Darren Sager , well.. not that i'm arguing.. just contemplating..
I had the properties professionally appraised (I believe they charge HUGE amount of money as compared with the amount of time spent and general level of education needed to become an appraiser) and the price I paid is a lil lower than the appraised value. As soon as the appraisal is supposed to reveal the current market value of the property the price i paid does deal with the reality..
Actual rentroll is this (all 2-bedroom apt)
1000 - former owners (their rental agreement is up Aug 01 2014)
Others 750, 725, 800
so what doesn't deal with the reality is their current rent level.. Still thinking what to do..
Just think what if someone pays $100 and doesn't want to leave.. now what? increase up to 10% a year to finally reach $1200?
hardship increase deals with rent control and to be presented to rent control board
the properties are exempt to rent control as soon as they are 2-family
so everything is to go to judge, not to the board, I think hardship increase may not work for judge
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