Rental Property Investor · Portland, OR · Member since 2015 · 338 posts · 332 votes
I purchased a fixer duplex with tenants who pay $695/mo ea. Market is $1300/mo. in that Portland neighborhood. Their rent hasn't been raised since they moved in in 2012, and the units are in varying states of disrepair.
They're on month to month agreements.
The rental agreement I drew up is also month to month, but it raises their rent to $1208 in 100 days. I'm also offering them $700 if they choose to leave within 40 days, and $300 if they choose to leave within 70 days. Ideally, they would choose to leave sooner rather than later so I can fix the units and rent them at market. But it's their choice.
I have an appointment to sit down with the tenants (each separately) this weekend to go over the new 7 page lease and answer any questions they might have. I realize there's no way to do this without being the bad guy, and I can't worry about them liking me. AND, I'd like to do it as painlessly for everyone as possible.
Have any of you had to have this discussion before, and if so, what worked/what didn't, and what did you learn from the process? If you can recommend specific things I could say, or scripts even, to place the "blame" on the previous owner who decided to sell and/or the market, so it's not a "me vs tenant" interaction, I would really appreciate it.
I bought the property with a partner, but I agreed to be the one to manage it. We can play good cop bad cop if need be (I'm probably bad cop), but since I agreed to manage, I want to keep my agreement to him and leave him out of this if I can.
Dani Z. Congratulations on your new acquisition!Woodlawn is such a great little neighborhood and it's nice that you're not very far away.
What you're going through is the hardest part of the business in my experience. I agree with another poster who advised that in the future closing should occur when tenants move out. That's definitely the ideal, but not something the seller necessarily will willingly do. Therefore you do find yourself in these situations from time to time.
I like your empathetic approach to the situation but will caution you that no matter what, it's going to be you vs the tenant. It's very unlikely that you will be able to spin it as "us vs the previous landlord/market". Your reasoning is sound and your talking points are spot on, but at the end of the day you're still the one whose responsibility it is to increase the rent, file a no clause, fix up the property, etc. It wasn't just the landlord's fault that the property degraded, it was also the people living in each unit. This is the reason a lot of property owners hire property managers, and I applaud you for taking on the responsibility you agreed to.
I personally don't think you need to do a cash for keys approach if you're looking to hold onto the property and the tenants are on a month to month lease. If you need an expedited timeline then offer the money in exchange for keys, but if not, use the 90 days as a good time to plan and get things ready.
My approach would be to tell the tenants that it's your job to be the steward of the property, and as such, you have different standards than the previous owner. Your job is to ensure that the property is in good condition moving forward and that your tenants have a safe, clean, and quiet place they can call home. State the facts they already know--rent is well below market and has been static for five years. If you'd like to keep the tenants then go ahead and issue a 90 notice to increase rent, but I wouldn't go all the way to market rates. I'd also give them an update as a show of good faith- buy a new refrigerator, replace the carpet, update the cadet heaters, sometime so that they can feel like they are getting value in return. What's tricky here is that you still need them to know it is not okay for the apartments and common areas to be trashed.
Sometimes having all new tenants is a good thing. No lingering spillovers from the previous landlord's tactics and a hand-selected tenant base of your choosing. If there are tenants in there that you absolutely do not want in your building then you need to give them a no cause 90 day notice to vacate, no exceptions. Don't forgive rent in the meantime for leverage sake, but I do think it's nice to pay for the moving truck. Be firm and consistent but also courteous. It's your job to follow the letter of the law and be sure to document your communication. It's a rocky period but it'll pass. Tell them you'll prorate rent back to them if they end up moving before the 90 days. Never unconditionally give them back the security deposit ahead of time since you need to hold onto all the leverage you can get.
It's nice that you have compiled resources for them to contact but be sure that you're not handing them the keys to call a lawyer that will help them in a plight to become professional tenants. The last thing you want is a tenant with a wrecked apartment that is now a legal crusader for all of Portland's housing woes.
Best of luck and let us know how it turns out!
I totally agree with Curtis. There is absolutely no business reason at all to 'put yourself in their shoes'. The fact is the market rents are much higher, and just give them the facts. I just recently sent out letters on units that were below market by hundreds of dollars. I set a rent that accomplishes making the cash flow right for the ROI and future capex, and I'm still beating the market rate. Your tenants will look at the market and do the math.
This is not about empathy. This is about fairness. If you have a fair rent, you will get many applicants, and get your market rent.
A second idea is that it may be better to offer them a better "buyout" rather than risk the delay and potential legal costs. What you may realize is the potential costs may be as high as $1,000 in legal fees, plus ($1,300 - 695) $605 in lost rent per month for up to 3 months, PER APARTMENT. This could amount to $2,800 per unit. On top of that, they may stop paying rents.
So, you may be wiser to immediately serve them the (no-cause) foreclosure notice, and then offer them $2,000 to move tomorrow, with a reduction of $50/day for each day they delay after that. That is a big carrot, but the offset is that they have already been pushed further down the eviction process quicker if they decide to stay put.
I really like this suggestion. This could be the fastest way to get them out and could really help them because it puts money in their pocket for the next place they need to move into. There is no reason to offer a rent increase option because even if one of them could afford that huge increase, then you are stuck with only 3 vacant units to renovate. You want to renovate everything at the same time to keep costs down and minimize interruptions to other tenants (vacancy means no tenants to disrupt).
My partner and I were talking about the business of property management last night.
It's easy for investors to swoop in and send in their property managers to no-cause evict all the tenants so they can make repairs and increase rents. The new building owner never has to deal directly with the tenants, and the property manager is simply sending letters on behalf of the landlord. No one meets anyone in person, and even if they did, they can hide behind their "property manager" veil.
The manager can justify their actions to the tenants (and more importantly, to themselves) because they're just doing what the owner asked them to do; they're not the bad guy.
But when you manage your buildings yourself and you meet your tenants in person (which I believe is the least someone should do for integrity's sake given that you're potentially uprooting families' entire lives), and there are no letters or property managers to hide behind, then it's no longer as simple as just giving them 90 days to get out. Not unless you're heartless and unfeeling.
Which is why many landlords send letters or hire property managers to send letters.
In the end, each of us must run our businesses in the way we each see fit and that allows each of us to sleep at night.
My partner and I were talking about the business of property management last night.
It's easy for investors to swoop in and send in their property managers to no-cause evict all the tenants so they can make repairs and increase rents. The new building owner never has to deal directly with the tenants, and the property manager is simply sending letters on behalf of the landlord. No one meets anyone in person, and even if they did, they can hide behind their "property manager" veil.
The manager can justify their actions to the tenants (and more importantly, to themselves) because they're just doing what the owner asked them to do; they're not the bad guy.
But when you manage your buildings yourself and you meet your tenants in person (which I believe is the least someone should do for integrity's sake given that you're potentially uprooting families' entire lives), and there are no letters or property managers to hide behind, then it's no longer as simple as just giving them 90 days to get out. Not unless you're heartless and unfeeling.
Which is why many landlords send letters or hire property managers to send letters.
In the end, each of us must run our businesses in the way we each see fit and that allows each of us to sleep at night.
Doing the right thing by your tenants is completely about integrity. It is also about building a reputation for being fair to people. Some people think fair means following the law. Ethics go beyond the law. Here is a good way to think about it. When are deciding to do something, imagine it becomes the headline in tomorrows newspaper. Imagine all your friends and family read about what you did. Would you be proud? It changes how you look at things.
This is a really interesting topic. I have the same issue in Chicago, and need to provide tenants letters this week. In my case they are paying $500 per month. Rehabbed units are about $1100-$1200. In current condition, they could probably get $850 market rents, and I am thinking of raising rents to $750 in the hope some stay, and some go (giving me time to slowly rehab units rather than having too much work at the same time).
I would caution against giving a permanent rent decrease for a tenant working for you. You run the risk of the tenant not coming through on doing the work, and you are stuck with the lower rent. Personally I would raise the rent to what you want, and either hire the tenant separately, or give rental discounts when work is provided. I have a few units with tenants who are interested in doing rehab work, who either never follow through, or think I am a millionaire, and start quoting $100 per hour for their time.
I'd thought about this earlier and, a) there's no such thing as a permanent rent decrease. Rent can be raised at any time, and the tenants know this. b) really the tenant should be more concerned about this type of arrangement than I. He doesn't know whether I'll ask him to do an unreasonable amount of work to make up for his low rent, and he's at my mercy to not increase the rent beyond what he can afford to pay.
Fortunately for him, I'm not an unreasonable person.
My partner and I were talking about the business of property management last night.
It's easy for investors to swoop in and send in their property managers to no-cause evict all the tenants so they can make repairs and increase rents. The new building owner never has to deal directly with the tenants, and the property manager is simply sending letters on behalf of the landlord. No one meets anyone in person, and even if they did, they can hide behind their "property manager" veil.
The manager can justify their actions to the tenants (and more importantly, to themselves) because they're just doing what the owner asked them to do; they're not the bad guy.
But when you manage your buildings yourself and you meet your tenants in person (which I believe is the least someone should do for integrity's sake given that you're potentially uprooting families' entire lives), and there are no letters or property managers to hide behind, then it's no longer as simple as just giving them 90 days to get out. Not unless you're heartless and unfeeling.
Which is why many landlords send letters or hire property managers to send letters.
In the end, each of us must run our businesses in the way we each see fit and that allows each of us to sleep at night.
You lost me at 'it's easy for investors to swoop in...'. It is not easy...if you are doing this right, it is work, it is time invested. If you do this right, you are looking at 10, 20, 30 before you find the right one. It is also extremely difficult to hire a property manager. Like finding a good realtor is incredibly difficult, just going with Renters Warehouse is a risk I'm not willing to take. I keep seeing you talking about uprooting peoples lives. I think you will be successful only if you can consider your purchases as a business venture. Where I sleep well at night is knowing in my business practice, I'm giving my tenants a great building at a very close to market rate. Keep the building well maintained is in everyone's best interest. It is a business decision...not a feeling based decision. If I buy buildings based on numbers, and rent based on the numbers, and then give existing tenants the option to rent at that new rate, it is not being heartless and unfeeling. It is about being good at your business.
I think your intentions are great. I hope you will not burn through a lot of energy on non-business related issues.
I'd thought about this earlier and, a) there's no such thing as a permanent rent decrease. Rent can be raised at any time, and the tenants know this. b) really the tenant should be more concerned about this type of arrangement than I. He doesn't know whether I'll ask him to do an unreasonable amount of work to make up for his low rent, and he's at my mercy to not increase the rent beyond what he can afford to pay.
Fortunately for him, I'm not an unreasonable person.
If the tenant doesn't perform the work as expected, and for some reason the tenant stops paying rent. I would hate to be in eviction court, with a tenant claiming their rent increased as retaliation for not doing "free work" for their landlord.
I would raise the rent to market rates (or close to), and be very generous with what you pay the tenant for any work they can complete. This protects you (if the work doesn't get done, you get full rent), and the tenant (they get to directly see value in the work they perform).
@David Moore, do you meet the tenants who live in the buildings you buy face-to-face, one-on-one? Do you meet their kids?
Every one. I see the kids if they bring them with to the lease signing. Other than that, I give my tenants space. My LLC is the property management company, and I am the manager of the LLC...but everyone knows I own the building.
@David MooreI'm not talking about the new tenants you find. I'm talking about the tenants you inherit and on whom you raise the rent to levels beyond what they can afford.
I had numbers too. I had a proforma and a repair schedule etc. etc. I still have those things. But once I met these people (on whom I'd planned to raise rent from $695 to $1208 so I could get the COCR and cap rate I wanted), I realized that it wasn't going to be as simple as sending a letter.
You are mistaken: it's a lot easier for a person like me to make 30 offers and to find a good property manager and to find a good RE agent than it is for a family to find another rental they can afford in a market with a 2% vacancy rate, than to come up with first/last/deposit when they're living paycheck to paycheck, than to pack up everything they own and to move a family across town, than for their three children to each change schools and lose all their friends, than to commute farther to work and to school, etc. etc. etc.
It's easy to lose sight of the privilege we have, and it's easy to diminish other people's lack thereof. I'm not saying that you should run your business any differently. I'm just saying, how I choose to run mine is to make decisions that incorporate people, not just spreadsheets. Maybe over the course of my life, I may make only $40 million rather than $50 million as a result, I don't know. But I know that, whatever happens, I'll be fine, and when I die, all I'll have are the decisions I've made and the people whose lives I've touched along the way.
Anyway @Adam Pthough I don't think these particular tenants would do what you describe, you make a good point. I'll have to reconsider exchanging work for rent and offer to pay some kind of project-based or hourly wage.
Market rents, if the units are in good condition with relatively new finishes is $1300, except there is some illegal dumping in an empty lot across the street that makes the block undesirable for people paying the highest market rents (that's another story . . . ) The two units are in different condition; one just needs some minor repairs (a family of 3 people who keep the place clean, and the dad has previously done maintenance as a job, and English is the family's second language), but the other needs a new kitchen and bathroom (a family of 5 with a dog, where no one is handy). Both units are 2br/1ba.
The first family (of 3 where one person has done maintenance as a job) can pay $850. The second family (of 5) can pay $945 (and they are asking for a larger trash bin at $20 extra/month). The people in both units are racial minorities (a protected group). This isn't relevant to the question of how much to charge for rent, but it's relevant in case one tenant wants to falsely claim that I discriminated with a rent increase or tenancy termination based on that. So whatever I decide, I should probably do exactly the same thing for both units.
When I met with the tenants in both units last weekend, I told them both that we were looking for $1050 to $1100 in rent, which I noted was still about $200 below market.
If it makes any difference to anyone, we are implementing RUBS for the water bill, starting one month after they received notice that RUBS would be implemented. So one side would pay 3/8 and the other 5/8 of the water bill, and that will increase their costs, probably by something like 30-50 per month (if they use water as though they are paying for it). (The total bill under the previous owner was around $170/month and I expect it should go down to about $100 month now.)
We are also replacing all the kitchen appliances with a new stainless steel package (fridge, dishwasher, range, and built-in microwave) in each unit. I'm ordering those today (Best Buy has a good sale through today and we found a stainless kitchen suite for $1550 per kitchen.) So there's some value-add coming up very soon.
Portland requires 90 days notice to raise rent beyond 5% or to terminate any tenancy. I was thinking of raising rent for each unit to something like $1000 or $1050 to in just over 90 days on June 1. They would then decide whether to stay or go.
On the side that's in better condition, where one of the tenants is handy, we plan to offer him the option to do repairs and maintenance on the property at $15/hour (which I imagine is more than he earns at his job if they can only afford $850 in rent, idk). We can probably keep him occupied for 10-15 hours per month, if he agrees to do this. That would add $150 to $225 in his pocket each month. This would be a completely separate agreement than the rental agreement, and we would 1099 him for the work.
If people can't afford the rent, they have 90 days to find another place. If they can, they can stay and we can defer some of our rehab costs.
Right now, I don't know whether to ask for $1000, $1025, or $1050, but it must be the same for both units, even if one of them has 5 people and a 50 pound dog.
I ended up raising the rent to $1025 for the family without the dog, and $1050 for the family with the dog. It's effective June 1 this year. I have to give 90 days notice if I want to raise the rent more than 5%, so maybe I'll raise it again for the end of summer, or maybe I'll wait until next April. $1050 is still about 75% of market rent.