Purchased 3 duplexes w/below market rent & tenants on m2m leases

6 Replies

Hey all, 

I'll be taking possession of 3 duplexes, next door to each other, in about 10 days. Rents run between $445 - 530 for each unit and are month to month leases as this point. Tenants have been there from 1 year to 16 years. Rents in this same area are going for $600-625/mo.  

My question is, what is the best strategy for getting all units up to current market levels without driving out all my tenants within the first 2-3 months? These units are in a great neighborhood in the best school district in the county and shouldn't be hard to rent.

My first thought is to have them sign a new month 2 month lease and then ask them to check out what they can rent a similar place for in the same school district and come back to me with what that number is and then we'll decide together on a new beginning rent price from there.  I figure the month 2 month lease will let me get a handle on which tenants are a pain in the butt and which ones aren't. Then I can serve them notice and get new tenants in that will pay market rent.

What are your thoughts as to what i should do to get rents up without driving everyone out immediately? Thanks. 

Matt Kauffman, Hobbes Properties Ltd

Why are they below market in the first place? Did you just buy 6 slumlord units that are in need of update?

It's all very well upping the rent, but if the tenants have been there any length of time, then the units probably need updating to be worth $600-650.

Matt-

Dealing with some pretty similar issues now. 

For one of them, I was given the financials and the tenants paid the first of every month. They are paying $550, but they should have been paying about $625. I decided they were paying every month and had been there for awhile, and at the price I picked up the duplex for the numbers worked so I let them keep those rents. Perhaps I'll readdress that in the future, but I am using their rents to pay for other turnarounds right now. 

These sound like lower income properties, so I would pay you don't want to piss off the tenants too much and do anything too aggressive. At that price point, I don't think you are going to have tenants who are going to want to shop around and make you an offer.

Also, being in Ohio, make sure you do this during a good time to rent. The summer would be good and you have that going for you... Maybe do it to one duplex in June, (other cash flows can help cover turnarounds), one in July, and one August. I would do something staggered like that as I don't like to have to come out of pocket for everything.

Steven

It doesn't take much in the way of vacancy to wipe out the ~$1200 a year difference. If they are taking good care of the place and are good tenants I would think that is a greater value?

@Matt Kauffman

I would let them know the rents are going up for July 1st.  If they are super easy to rent, then anyone who leaves should be easy to replace.  

Plus you are screwing around with $25 adjustments.  A month of vacancy will be made up in under 4 months of rental income if you have to go with a vacancy for a month.

Or if you are already making your target numbers, jump everyone by $50 each year and keep the current folks.

@Matt Kauffman    If the lower rents were because the tenants have been in the unit a long time, the unit will need repairs to make it look current and fetch the market rents.  Go at your own pace.  We gave each tenant a hello letter, announcing the change of ownership and where to mail the next month's rent, etc.  It also announced a rent increase going into affect 60 days out, going up to $525.  We let them each resign at month to month, at the new rate.  The unit who's rent had never been raised in 12 years (still $300) chose not to resign at $525.  The unit will be updated and rented at the market rate of $625.  Other tenants will get first dibs on the fresh unit.

Medium redbirdlogo g page 001Kathy Henley, Redbird Properites

Originally posted by @James DeRoest :

Why are they below market in the first place? Did you just buy 6 slumlord units that are in need of update?

It's all very well upping the rent, but if the tenants have been there any length of time, then the units probably need updating to be worth $600-650.

 They were below market because the man who built them in the early 70's owned them all this time. He rarely raised rent on anyone. I live in an economically depressed area where even the good rentals don't go for lots of money. These units in another market with a moderately healthy economy would go for much more than what I can get. 

Units are in very good shape. They need the usual paint job and some carpet, but in general have always been taken care of very well. Only 2 of the 6 units needs more than paint and carpet. 

@aaronmontague

I've contemplated doing just what you said to do. Two of the units are $520 & 530, i think i can live with raising their rent $50 this year and $X the next year. That'll get me close to market. The other units would take more time to raise their rents to market at that rate. I can make acceptable numbers at $520 & $530, but not $445, 460, 470, & 500. 

@kathyhenley

Thanks for the advice. I have already begun to format a letter to announce the change. Was planning on having them resign a new m2m lease and raising the rent. 

I noticed there is no pet policy currently in place. I make my other tenants pay a nonrefundable pet deposit and an additional $25/mo in pet fees. I'll need to include that going forward as well.  

Matt Kauffman, Hobbes Properties Ltd