Interested in a property, but current tenants' rents are way under market. Suggestions?

11 Replies

I am interested in a 2F property upstate, and everything seems solid. However, my numbers are based on MARKET rents for that area. Initially I did not know whether the current tenants had leases and/or what they were paying in rent.

I just found out they both have leases, one is up in August and the other ends in November. They are both paying the same rent... which is about 67% of market rent for the area! Naturally the deal doesn't work so well at those numbers.

How would you handle this? I am checking with my lawyer, but I am fairly sure there is no rule about increasing rent in the area where the property is located. Assuming that is the case, what would be the best way to go about this? Just increase them to market price when their leases end, or some other more diplomatic way?

The timing of the leases is a bit awkward as well... if not handled correctly, this could lead to a vacant property for several winter months.

Since you have to abide by the current leases, there really is nothing you can do until they run out. At that point, I would raise rents to market value, even if winter is on the way.

If you are really worried about them leaving in winter, then just raise them a little at lease end, and raise the rest of the way in March or April.

There are always people looking for places to move to, all year long. It snows here, and I have no problem renting anytime of year.

I would let them run out, and tell current tenants you plan on doing "Upgrades"/repairs if you are.  I would also think you could get a better "deal" (price or terms maybe?), because the current tenants are paying such low rent.  Also make sure you get into both apartments to "inspect"

Here's a wild idea - an prolonged closing. Tie up the 2F and actually close after the last lease ends.

As mentioned above, you wont be able to raise the rent until the lease ends. early winter months aren't that bad for finding new tenants. If possible I'd avoid Dec-Feb for finding new tenants as those that are looking are usually looking because they were kicked out of their previous apartment. A recommended search while looking over tenant applications is:

Here you can look up past evictions for this area.

As far as raising, if you raise it rapidly the tenant may not be able to afford the increase and you will be setting them up for moving and yourself for a lost months rent possibly more if the tenant wants to stay until you evict them (and they probably will) . If the tenant is a good one (you wont know without knowing them for a few months) then they are worth keeping and raising it slowly. A great tenant is hard to find, and sometimes worth sacrificing a bit on the rent. 

Most people expect a slight increase when the house sells, so don't be afraid of a small 25-50 increase off the bat. I had one tenant (an elderly woman) give me a hug when i told her i was raising her rent by $25/ month, she expected a larger raise when i bought the property. 

There are so many bad landlords out there that we get a bad wrap. My philosophy is that this is a service industry, they pay us for a rental unit and the service to the unit. All my great tenants get great service, the bad ones - mediocre.. but don't neglect needed repairs, in the end its still your building not theirs. 

Hope this helps!

@Al Williamson

 is right, one approach is to delay closing until leases expire, and you could even have a clause in the contract that the units are to be delivered vacant with no tenants so you can pick your own, and charge your own rents.

Another option would be to pay the tenants to leave early.  If they volunteer to leave the law is complied.

Also what is your source of market rents.  imho  rentometer is closer to reality than Zillow/trulia

I like  @David Krulac 's idea of cash for keys.  If you can negotiate with the seller that the seller either get them out, or subsidizes the difference in rent you need with a price reduction that will get you through the end of their leases and into spring?  Something like that.

Let's be pragmatic for a second. If you close the deal today as is with current tenants in, are you cash-flowing? If yes, this gives you time until lease expires and not be in red. IF, the tenants are great and you wish to keep them, have a talk to them and explain honestly, hey look you had a great deal but I'm buying etc and market is in a different place today, I know it's not what you wanna hear but current market rent is $xxx/mo and I'll give you a 10% discount for being great tenants and staying. Have them sign a lease extension at new price before you close, that way you know you're not gonna be in the dark if they pull a quick on at the end of the lease.

Not sure why lots of people look at it from the wrong angle "how much can I raise it per year" vs. "how much discount can I give from market rent" instead.

If you know 200% you can rent it before it's vacant at 90% market rent then that's your strategy if they move out. I feel for tenants, but we're running a business here that needs to cashflow so...

Originally posted by @Al Williamson :

Here's a wild idea - an prolonged closing. Tie up the 2F and actually close after the last lease ends.

 Al, can you enlighten me on how you would recommend one accomplish this?

I'm interesting in hearing your suggestions, and anyone else's, as I feel like it would be really hard to convince someone to have an extended escrow unless there was an incentive involved for the seller. 

Thanks in advance 

Unless there are a slew of interest and pending offers, the incentive to the seller is to actually close on the property.

As a general rule I like picking my own tenants.  Obviously not practical in say a 50 or 100 unit building, but in the 2-4 unit range, its doable.  Besides the low rent sometimes you can tell from maybe the attitude of the tenant, (I'm not letting in anybody for showings) or the housekeeping (or lack thereof) that you might come to the conclusion that picking a new tenant would be in your best buyer interest.  A little cash spread around to seller and tenants can go a long way.  And this should be written into the original purchase contract.

If you can get the property vacant, that is probably the ideal scenario.

If that won't happen, I would ask both tenants what they are comfortable paying.  If it is over 80% of market rent, I would probably keep them on - assuming they would pass screening.  Unless the numbers they give you are wildly different I would give the smaller raise with the expectation that raises will get the rent closer to market rate.  

If one(or both) tenant won't agree to a rent increase, I would look at offering them an incentive to terminate their lease early.  Probably the best situation is one where a tenant agrees to a rent increase and the other agrees to terminate their lease and move.  You should be able to get close to 90% of market rent overall and only have one vacancy to deal with.

I purchased a multi fam last year that was rented about 33% below market rate in the Boston area.  I was planning on moving in to one side of the house so there was only one unit in play that needed to be increased.  

The tenants were TAW but were really nice people and I would have been happy keeping them, plus the seller was very adamant about keeping the tenants - she basically wasn't going to sell it to anyone that asked for it delivered vacant.  I was also faced with the bank forcing me to obtain a 12 month lease on the new property to get financing approved by the bank because the approval was dependent on income from the rental property and without a lease it wouldn't qualify.  I was at the mercy of the tenants agreeing to a new lease in order to actually get the mortgage approved.  

Long story short, I proposed a 12 month lease and executed this with the tenants prior to even purchasing the place.  The lease was structured as the first two months being at their current rate of rent, the third month increasing about 15%, the fourth increasing another 15%, which would bring them up to close to market rent.  I gave them the option to terminate the lease at any time with 30 day notice within the first 3 months of the lease.

The tenants paid their first month, and gave notice to terminate at the end of the second month.

At that point we had 30 days to rent the place, which in the Boston area market isn't that difficult.  We wound up getting higher rent than we would have with the tenants that left by an additional 15% or so.

Mind you, there were a lot of reasonable people involved in this transaction and the stars aligned for us on this one... That said, I think the step up structure can be highly effective as long as you know there is risk in the tenants possibly leaving and you needing to fill the vacancy. 

From a math stand point, if the rent is $1000, and the market rent is $1333, you can pay back one month of vacancy pretty quickly - eg., if a unit is vacant and you lose out on the $1,000, at the 33% higher rate, you'll earn that $1,000 back in three months.  I know this can add up quickly if you have a couple of units and a couple of months of vacancy but don't be afraid to go after it if the rental market is decent and you have the reserves to accomplish it.

Good luck!

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