What to do?? Inheriting Potential Bad Tenants & Below Market Rent...

5 Replies

Hi!

I am closing on a 4 family I will be going owner occupied on in 1 month. I just received the leases from the seller and the three tenants I'll be inheriting are on a month-to-month lease which is dated back to as early as 2004. Based on everything I've gathered so far, I know the tenants have been late on rent payments more than once over the life of their tenancy. The house is located in an area where young professionals live and is on a nice safe street.

I am trying to develop my strategy before I become the owner.Here are my ideas, let me know what you think!


Inherit potentially bad tenants and...

Idea #1:

-Give them a written notice rents will be rising $25/month in 30 days (for 2 of the tenants) and $50/month (for one of the tenants since this will bring all 3 to the same price) on the day I take over ownership.

-In the written notice for the 30 day increase in rent, also let them know rents will be increasing by $10/month over the next 5 months. Basically, that's another $50/month increase in rent, totaling $100/month increase in rent after 6 months from the rental price when I bought the place.This will bring the rents up to market value.

-Discuss with all tenants if they plan to stay with the new rent and what their plan is for the next coming months when taking over the property.

Idea #2:

-Give them a written notice that rents will raise $100/month in 60 days.

-Discuss with all tenants if they plan to stay with the new rent and what their plan is for the next coming months.

-If tenant does not want to stay, market for new tenants and turn the apartment in one week with it being vacant.

Idea #3:

-Do nothing. Keep rents where they are and enforce late payment fees strictly. If they continue to miss rental payments, break their leases and ask them to leave.

-If they are paying the below market rents on time, keep tenants through the winter and give them a written notice that rents will be increasing by $175/month on 5/1/2016. This will give them plenty of time.

What would you do?Is there something you would do entirely different?

I know there are some other factors to consider, but curious as to what people think.


Thanks!

It depends.  I don't know your local laws, so first, you want to make sure what you're planning on doing is legal in your area.  Your tenants have been there a long time, so 30 days may be too short of a notice for any change in their MTM tenancy.  Just double check your local laws on tenant's rights before you move forward with any plan.  

If the units are in great shape and the turnover can be done cheaply & quickly, I'd raise rent by the full $100 at once - and offer cash for keys if they don't want to stay.  

If the units aren't in great shape and you don't really want to turnover your tenants, I'd do the $25 / $50 increase over 2 years instead of increasing rents by $10 every month.  That's too confusing and will probably upset your tenants.  

No reason to leave rents where they're at.  Tenants expect a bump in rents on owner turnover.

Regardless, strictly enforce your late payment policy no matter what the rent is.  

Goodluck! 

Thanks Michell!  I agree with your logic, I like it.  Also agree with abiding to the local laws, I need to check on those.  

I'm leaning towards bringing all rents to $500/month on Nov 1, 2015 (so a $25 increase for two and $50 increase for one).  I do not want to raise it a full $100 due to the time of the year.  It's going to be harder to turn an apartment during the holidays.

I want to bring rents to $650 eventually (once I get all the upgrades done I want in every unit to make them very nice) which will put me very close to the 2% rule in a nice area.  My goal is to lock in a 12 month lease around the end of May/start of June at $600-$650/month. The numbers still work with rents at $500/month from Nov 2015 - May 2016.

Like your ideas. I would add one thing...offer the tenant some moving assistance if they decide to move out. In other words contact a local rental focused realtor and let them know about the opportunity for them to pick up some business. You can also outline the current situation for them. Have the realtor start looking for apartments close to the current rental rates they are pAying with you. Inform the tenant that the services of the realtor come at no cost to them. That goodwill will go a long way with your current tenants and limit their animosity toward you for raising rents. You might also offer some financial bonus for the tenant when they move out if they leave your place in good condition and remove all their belongings. This is sort of a twist on "cash for keys."

@Max James

Hi Max

You have a good and tough problem.  My guess would be to assess the market rents, check rentometer.com.  Once you take over the property, issue them a tenant letter stating your rules and regulations.  Before you start increasing rents, the equitable thing to do would be to add value to the tenants, whether it would be to take care of deferred maintenance or some other value add.

You need to put yourself in your tenant's shoes. They are probably apprehensive about a rent increase and a new owner. Your goal is to make the transition as smooth as possible. The goal in real estate is to raise the NOI and you have a good opportunity with this property. If you are concerned with all the tenants leaving, choose to raise one per month. If you are going to market, the tenants will go out and look, and then realize they had the deal of their lives for the past several years.

Treat tenants with respect and well because they are your clients and paying the mortgage, but in return expect to get paid for the service.

Good Luck

Gino

Medium jake and gino real estate 400 consultants 3 01Gino Barbaro, Jake & Gino LLC | [email protected] | (914) 522‑3041 | http://www.jakeandgino.com | Podcast Guest on Show #182

Here is what I ended up doing:

1. Closed on Sept 14 with rents at $475, $475, and $500, moved into one of the units.

2. Immediately upgraded the common areas (land scapaing, new hand rails, fresh new paint colors, refaced the storage units with wainscoting, cleaned the garage so people could park easier, etc.)

3. Rehabbed 80% of the unit I was living in

4. Dec 31, one resident gave 30 day notice to leave. I immediately started marketing and was able to get a new resident in there without doing any upgrades to the interior at $665/month (from $475) without any days of vacancy.

5. Rehabbed the two other units and slipped rental raise letters in Feb for an April increase in rent. One resident left and the other is staying. The rental increase went up to $600 in April, then $620 in May, then $640 in June.

6. Immediately started marketing to fill the unit with resident leaving. Was able to get a new resident in there at $645/month with no vacancies.

So far, I have put probably around $3,500 into rehabbing the building and was able to bring gross rents from $1,925/month to $2600/month (once I move out). 

I'm collecting $1,950/month from the three units and living in one of them now. I got the property for $137k.

Very happy so far with this property!