I am in the process of buying a duplex. 3 bedroom 1 bath in each unit. Both units are occupied with long term tenants. One(lower) has been there 21 years and other(upper)has been there 5 years. Rent down stairs is 485 and upstairs is 600. Seems like a big difference for each unit when there doesn't seem to be any added benefits. Is this okay to do? There is room in rental market raise rents, but with two long term tenants I am wondering if that would be a bad move? Any suggestions?
There are a few pieces to consider here. In your purchase, did you run your model at market rates? What happens to those numbers if you left the rents where they are? Are they on leases or have they just converted to month-to-month? Long term tenants can be amazing. They can also be your worst nightmare if for whatever reason they decide they don't like you - "old owner never made me do this", "old owner always let me pay in multiple payments", "old owner never cared if I did X", you get the idea. As I have said many times before, a rental is a like an eco system: get the balance right and it can be self sustaining while providing enjoyment to the owner. My suggestion is that you give them 1 year at their current rates. If they're not on a lease, have them sign one for your own protection, but at their current rents. See how the year goes, and you will know so much more about your property and its tenants. In 1 year, if the tenants are LOW maintenance and pay on time like clockwork - send them a gift card for being amazing and leave rents where they are. Sit at home and let the building do its thing - make you easy money. If either tenant is high maintenance, then it will be time to discuss raising rents. Remember that if you were to raise total rents by $200 a month, it would add $2400 in gross rents. If just one tenant leaves and it takes you 2 months to fill that vacancy, you've lost half of your gross upside. And assuming your new tenant only stays for a year, you'll have another month or two lost next year. Long term tenants are hard to find, but worth hanging onto - in my opinion.
There is nothing wrong with having long term tenants at below market rate as long as it makes sense for your business plan. If it doesn't, well then you need to start creeping up the rates to suit your needs and if that means turnover then so be it, the next tenant will certainly be willing to pay market rate. And the other effect, your current tenant probably knows how good they have it and may be willing to take an increase as they know they can't move without spending more.
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