When to tell inherited tenants that their rent will be raised?

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When to tell inherited tenants that their rent will be raised?

Alan K Auman
Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes

Hello all, 

I'm currently in the process of buying a duplex that has long term tenants on both sides. By all accounts the tenants are great tenants. Apparently they pay their rent on time every month, both times I've been to the property the units were clean and tidy, and they seem to be just good working class folks who take pride in their homes. On one side is a divorced blue collar kind of guy. He's got a bit of a bachelor thing going on in his unit aside from the pictures of his kids he has hanging on the wall. On the other side is an older couple who may or may not be retired. They look like they're still working age but they have both been home both times in the middle of the day so who knows. Their unit is impeccable although I did smell cigarette smoke and they have a small dog. So now that you all have some background here is my question:

Their leases aren't up until Oct so I can't do anything until then anyway but when it is time to sign MY lease they will be paying quite a bit more if they choose to stay. One unit right now rents for $450 and the other for $500. Both these units should be at $650 AT LEAST and could probably realistically fetch $750 a piece. They're mirror images of each other. Each is a 2level 3bd/2ba with about 1400sf. The property is a block away from the park and is within a .5 mile of a major hospital and within 3 mi of a major public university. I want to give these people as much notice as possible that there will be changes if they choose to renew (besides the increase they will also no longer be able to smoke in the unit, they will have to file deposits with me which for some reason they currently don't have, and any future pets will be subject to a pet deposit and monthly fee (I'm going to grandfather the current little dog in so he won't cost them anything)). I'm afraid that if I tell them right from the get go that there's always a possibility that they become difficult tenants in retaliation to the changes they know are coming. On the other hand I don't want to wait too long and blind side them. I honestly don't know if they have any idea how under market value they are as none of them strike me as the internet savvy type so I can't picture them cruising CL to check current market rates. 

So what say you all. Give them a lengthy heads up and risk turning good paying tenants into difficult tenants or wait until about 60 days out and leave them in a situation where they may be scrambling a bit to figure out their next step? I'm really quite torn.

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Adam P
Investor · Chicago, IL · Member since 2010 · 76 posts · 55 votes
10y

I have been running into a similar issue.  In my opinion;

1) You should never institute a no smoking policy for an existing tenant.  The damage is done.  More smoking when they already smoke won't cause any further damage.  Just make sure it doesn't impact the neighbors.

2) Dog probably has to be grandfathered in.  Especially until lease expires.  As with smoking, the dog damage is already done anyway.  

3) I typically raise rents to about $100 - $150 under market value.  Turning a property with a long term tenant is very expensive.  There are probably multiple issues you don't even know about that they just live with.  I just delivered 7 letters last week on 2 buildings we recently purchased.  Some tenants are paying as low as $450 per month on units that I can rent in current state for $850, and rehabbed for $1200.  I have raised everyone's rent to $750, which is still cheapest in neighborhood, but is a significant rise for some.  Last year when I went through a similar process with 4 units, 2 left, and 2 stayed.  Those that stayed actually asked about staying very long term.  They knew they had an under market rent for years with an absent landlord, and were happy to pay still slightly under market rent for their home.

4) Remember that turning a unit with a long term tenant is typically at least 1 month vacant (as it can be hard to show units with long term tenants), painting costs, and I would add in up to another $1k on the unknown issues.  For the sake of $100 a month, that can be 2-3 years to break even, let alone all the work you need to do.  

5) If you feel you can get $650-$750 on open market, I would raise rents this year to $600, and then next year to $650, assuming they truly are good tenants.  That $1200 you lose in the first year, easily is offset by turn costs, and saving work time.  Spend your time and money elsewhere to make more money.

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  • David Stone
    Rental Property Investor · Davenport, FL · Member since 2013 · 285 posts · 220 votes
    10y

    I had a similar situation when I bought my duplex.  The current tenants were about $100 a month below market rent.  This was my strategy:

    My goal was to increase the rents to market rent gradually without losing a good tenant.  Both sides had pretty good tenants.  

    I raised rent on both tenants $30 a month about 6 months into obtaining the property (both were on a month-to-month).  I didn't touch it after that until they moved out (both moved out within 2 years).  The new tenant that moved in was put right at market rent.  I was willing to take the lesser rent for less headache, less damage, less turnover, etc.

    The slight rent increase brought me closer to market rent without risking losing a good tenant.  They weren't going to move out over $30 extra a month, but they might have over $100+ a month. 

    I believe maintaining a good relationship with your tenants.  Treating them with kindness and respect goes a long ways in this business.  When they like you and trust you, they will be more open, honest, and caring to you and your property.  I also believe that long-term success relies on an approach not centered around greed.  I still made a profit each month with rents below market, so I was happy and so were my tenants.

    The bottom line is:  Do what will make you a profit and keep you in business.  Also, do what will be fair to the new tenants who just experienced a change in ownership and already has stress over the situation.  Is the money each month more worth it or the ease of ownership in your investment?

    Here is the letter I sent to my tenants on increasing rent after I spoke with them:

    Notice of Rent Increase

    June 4, 2015

    To: <TENANT>

    This is to inform you that effective August 1, 2015 the rent for the unit you now occupy at 592 SW <PROPERTY> will be increased to $660.00, payable on the 5th day of each month.

    All other terms of our month-to-month rental agreement continue to remain in effect.

    We strive to provide quality housing at an affordable price. While keeping up with the inflating cost of expenses, we are still able to provide rent below the area’s average of $697 a month for a 2-bedroom. Thank you for your understanding. We appreciate your tenancy.

    Sincerely,


    David Stone, Landlord

    Please sign and return this document to:
    <RETURN ADDRESS>



    ____________________________________
    <Name>

    ____________________________________ __________
    Signature                                                    Date

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  • Jennifer T.Pro Member
    Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
    10y

    Caveat: I'm a small time LL and haven't yet faced this.

    I'd be inclined to tell them know now about the rent increase in October and give them the option to break their lease (with no repercussions) during this time, as long as you are given a 30 day notice.  I'd also mention you will be collecting a security deposit for $X with the new lease.  Phrase it that, if they choose to move, you wanted to give them as much time and notice as possible.  The upside is, if they chose to move sooner, it is that much earlier you can get a new tenant in and start charging market rent.  The other upside is, if they choose to stay, they have now been given ample notice to adjust their budgets and start saving up for both the rent increase and the security deposit.

    I'd also point out that the market rent is $750/month but, because they've been great tenants for you and the previous owner, you will set the rent $100 less than that at $650/month. 

    2Reply
  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y

    Indiana, and most other states, have statutes known as "Landlord/Tenant Laws" that govern when and how such notices should be delivered. For a thorough explanation of such timelines and how they may apply to your case, you ought to seek out a local Landlord/Tenant lawyer. Anyone who is not licensed in the state of Indiana cannot give you such information, or risk certain issues. Please, speak with a local attorney and do not rely on information from this website.

    For educational purposes only and not legal advice: Most states, like my own, require such notices typically within 30 DAYS of the increase, unless otherwise modified by statute. I cannot tell you if that rule applies in your state, as it may very well. Additionally, many states, like my own, may require such notices in writing.

    Seek out a local attorney.

    1Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @David Stone:

    I had a similar situation when I bought my duplex.  The current tenants were about $100 a month below market rent.  This was my strategy:

    My goal was to increase the rents to market rent gradually without losing a good tenant.  Both sides had pretty good tenants. 

     BRAVO Dave!  Good relationships & stable rents go a long way to avoiding drama and unnecessary vacancies.  

    Having your rents = FMR is mindless in this example. I would send the Notice of Change in Terms at lease 60+ days ahead AND only increase the rent 10%.

    Sadly, IMO if you closed on the purchase with the assumption that proforma rents were the reality, I bet you PnL projects are not looking thin.  Hopefully you closed with Actual Rents and are now only to improve your profitability as a future growth, NOT a necessity.

    1Reply
  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @David Stone

    Thanks for the suggestion. I wish I could do what you did but these tenants are so far under FMV that a slight increase like what you did would still leave them ridiculously far under FMV. I don't mind leaving SOME money on the table every month to secure a good tenant with a reliable background like how you did in your situation. If I could raise it slightly and only have them under FMV by 30 or 40 bucks I would no doubt do that. However in this scenario even to get them within $50/month of FMV would take a substantial increase. I very much appreciate your input, though.

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  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Jennifer T.

    This is a solid approach and is basically what I was leaning towards doing except I hadn't thought of giving them the option to break the current lease and leave early. That's a really good idea that gives them even more options and flexibility. Thanks for the suggestion!

    @Matthew Kreitzer

    I'll definitely be giving them AT LEAST 60 days minimum notice so legally I'm good. That was the first thing I looked into. Having said that I'm really leaning towards telling them right from the start so I don't think the timeline is even going to come into play.

    0Reply
  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Jeff B.

    Unfortunately there is no way that only raising rents 10% would make sense in my case. I could easily get $650/month for these units as is, and could almost certainly get $750/month if I put in some new carpet and painted. As I said in a previous reply, I can live with leaving SOME money on the table but a 10% increase in this case would still leave these tenants $150 and $100 under the bottom of FMV which is just too much too leave on the table, even for a very sympathetic landlord like myself. I didn't close on the property with any assumptions, only facts. I know for a fact these units can rent for what I say they can rent for. I have a property I'm currently renting to a great tenant for $650/month that's a 2b/1ba and 400sf smaller in a less desirable neighborhood. The property with rents as is will cash flow around $450/month so even with them staying at their current rents until their lease is up in Oct I'm still going to be ok. But as much as I would like to keep these tenants, this is a business and any business man/woman who claims they would be willing to leave $4200/year in cash flow on the table just to be nice is a business man/woman that I would argue, won't be in business long.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Guess 18ys is just too short :sigh:

    I suggested how to keep stability, the tenants and to avoid vacancies, which I sincerely hope does not occur.  The choices are all yours.

    0Reply
  • Ross Denman
    Real Estate Consultant · Whitestown, IN · Member since 2014 · 549 posts · 933 votes
    10y

    I have to agree with @Jeff B.in this matter. If you have to paint both units @ 1400 sq ft each... you are looking at $2,500-3000. This is not including other repairs, carpets, cleaning etc. I would imagine that the cost to turn these sizable units will cost $5000+. When you figure in holding costs and lost rents during vacancy period you are probably looking at another $2000 ($750/month/unit+ utilities.) 

    You will see that $4200/year in increase will not be enough to put you in the black for as much as 2 years if the reconditioning and vacancy costs are anywhere near my expectation.

    Yes, eventually you are going to have to face this $7000+ hurdle, but if you are cash flowing now, I would recommend a $50 rent increase this year ($1,200 / year) and another $50 rent increase next year as well. This will put you closer to market value, give your tenants time to acclimate to the new pricing, and push back the reconditioning / vacancy costs. One tenant may also leave before the other cutting that cost in half and making it easier to continue forward without breaking in to the piggy bank.

    There is no clear cut answer to this issue, only understanding what the risks are in either decision. The best investors that I deal with evaluate their deals by risk more so than reward. It is easy to cause a home to lose a years worth (or more) of cash flow... it's not just about income, it's also about expenses as well.

    3Reply
  • Brandon Battle
    Real Estate Agent · Buena Park, CA · Member since 2016 · 743 posts · 424 votes
    10y
    Alan,you're not going to keep them,pure and simple.You're going to raise their rents significantly and deny them their desire to smoke in their homes so,they're going to leave.Tell them now exactly what they are facing in October and expect them to squawk like chickens.Then offer them an early out of there lease in 60 days or more and hope they take it without further griping so you can get some full paying tenants in those units.Clean them up nice,do your upgrades and repairs,and get ready for the search for new tenants.If your units are truly worth 750 a month,go get it boy!!!! Do a rental market analysis now and compare your units with the competition to see what they're getting in rent right now.
    0Reply
  • Wade Sikkink
    Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    10y

    The reality is that it depends on what other options your tenants have.  When we bought our current building we had a similar situation that the rents on all apartments were under market, but the 2 bedrooms were particularly bad.  6 months after we bought the building we notified all tenants in the 2 bedrooms that their rent was going from $400/mo. to $475/mo.  I knew this wasn't going to be an issue for us because the rental market in our area is very tight.  We didn't lose a single tenant.  A year later when one of those 2 bedrooms units turned over we moved it up to $500/mo.  Even at that price we're the cheapest place in town.

    If you are the best/cheapest option available to them, they will likely stay and pay the increase.  However, if at the new price there are other good options available to them, you risk them moving and should probably take the advice to raise rents slowly.

    Maybe if there are a lot of good options available to them at $650, then raise them to $600 and they will likely stay put because there isn't a better option at that price.  That's my $0.02.

    Good luck.

    2Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    @Wade SikkinkGood point; compare your rent to FMV of the area - - does that indicate an option for the tenant?

    0Reply
  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Ross Denman

    All that would need done to the units to get them up to the $750/mark would be paint and a deep carpet cleaning. In my area carpet cleaning for both units would probably be around $800-$1000 total and I could paint the entire place myself in a weekend for around $500. I think I may have been a bit unclear in how I worded my previous post. These units are in above average condition as is but I like my properties to be pristine which is why I would want to paint and deep clean the carpets....or possibly pull them up if there's hardwood underneath which is likely given the age of the home. All this said....I'm honestly not even shooting for $750/month. I really like the $650 price point because I could literally rent out both units within a week without doing any updates at all. I probably still would paint and update or clean the floors but I honestly wouldn't even have to and these would still fill very quickly. My question isn't so much SHOULD I raise the rent as much as it is WHEN to raise the rent. There is a very good chance they decide to leave but it won't be because they find a cheaper place to live that has all the amenities this property does. That's for sure. In my area dumps are renting for $450-$500/month. I really like what you said in your last paragraph. That's a very interesting way to look at things and I never really viewed things from that prospective. Thanks a ton for your input!

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  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Brandon Battle

    I think you're right that I probably won't keep them but as crazy as it sounds I think it will have more to do with the no smoking policy and the deposits required than it will the increase. I don't think they'll be happy about any of it but telling someone who's been smoking in their home for 4-5yrs that that's no longer allowed is not going to be pretty. Thanks for the reply.

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  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Wade Sikkink@Jeff B.

    @$650/month for a 1400sf 3b/2ba a block away from the park....the answer is no. They most definitely won't find anything nearly as nice at that price point. We have literal dumps renting in this area in outright bad neighborhoods for $450-$500/month. Now the only caveat is this: they would be able to find an actual house for $650/month if they wanted but it would almost certainly be only 2b/1ba and probably in a more C-ish type neighborhood. Bottom line is that although the increase would be substantial...the minute they started actually looking for comparable properties to their current homes they would see that they will be paying as much or most likely more than what I will be asking. Thanks guys for your input and J. Beard I assure you I wasn't trying to insult you in my previous post. I hope you didn't take my response the wrong way because I really do appreciate everyones opinions on how to approach this. 

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  • Greg Carrier
    Investor · Granger, IN · Member since 2015 · 195 posts · 129 votes
    10y

    I just bought3 SFH's which are all under by the same kind of shortfalls in rents. I bought them with good return at the current rents so my ROI is still good. That said though one is a 2/1 that the family is paying $350 a month for and have been in since 1992. I should be able to get $600 - $675 for it. The other two are also short but not by as much - about $200 and $100 respectively. My idea is to raise two of my three by a small amount (say 30 - 50 a month) and adjust the worse one to market or very close. If the tenant leaves from the big jump. Then I still have the other two paying and we can just deal with the one empty one. You could try that with your duplexes. Raise one to market and a smaller raise on the other and then you may just have to work on one at a time instead of both at once. Good Luck

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  • Adrien C.
    Property Manager · Griffith, IN · Member since 2015 · 1k+ posts · 913 votes
    10y

    I think you've received a lot of food advice regarding raising the rents so I won't comment anymore there. I will say that it doesn't make sense to enact the no smoking policy at this point unless you want that person to leave. If that's the case, just tell them you are raising the rent to $750 at the end of their term and give them the option to stay or go. I say it doesn't make sense regarding the smoking because the damage to the unit has already been done- what's another year of smoking going to do now? I'd rather the person stay and pay a little more than to piss them off and have to deal with all that delayed maintenance and getting the property rentable again. 

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  • Blake Messina
    Flipper/Rehabber · Orlando, FL · Member since 2015 · 15 posts · 8 votes
    10y
    Something to keep in mind when raising the rents on tenants is what their cost to move would be. Moving is expensive and one of the biggest headaches there is. A lot of people would gladly pay an extra $50/month than have to go through the hassles of moving. I have found that a lot of times it is best to ride out a current tenant as long as you can before getting a new one. Repairs and vacancy costs add up quickly. That being said, the smoking factor is a wild card. So, no set answer here, just wanted to point out that most tenants would rather pay a little more than pay to move. Good luck!
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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    10y

    I would immediately give the tenants the 60 day notice of rent increase.   Possibly add some value to the property to keep the commotion sown.  

    Franklin

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    10y

    @Alan K AumanIf they have been smoking in the place, the damage is done. I wouldn't risk losing long-term tenants over something like that. They may stay in place after an increase, but not if you tell them they can't smoke in their unit anymore.

    The dog should be grandfathered in, because he's already there. I like the advice to research how tight your market is. They know they are paying below market rents, and a gradual increase to do absolutely nothing to the units won't be unexpected.

    I also like the advice to give them notice once you own the property, and allow them to leave with 30 days notice and no break-lease fee. They may stay, even at $100 increase. They may leave at a $25 increase. But if they're going to leave anyway, let them know they can leave sooner than later.

    [email protected]Podcast Guest on Show #261
    BiggerPockets
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  • Adam P
    Investor · Chicago, IL · Member since 2010 · 76 posts · 55 votes
    10y

    I have been running into a similar issue.  In my opinion;

    1) You should never institute a no smoking policy for an existing tenant.  The damage is done.  More smoking when they already smoke won't cause any further damage.  Just make sure it doesn't impact the neighbors.

    2) Dog probably has to be grandfathered in.  Especially until lease expires.  As with smoking, the dog damage is already done anyway.  

    3) I typically raise rents to about $100 - $150 under market value.  Turning a property with a long term tenant is very expensive.  There are probably multiple issues you don't even know about that they just live with.  I just delivered 7 letters last week on 2 buildings we recently purchased.  Some tenants are paying as low as $450 per month on units that I can rent in current state for $850, and rehabbed for $1200.  I have raised everyone's rent to $750, which is still cheapest in neighborhood, but is a significant rise for some.  Last year when I went through a similar process with 4 units, 2 left, and 2 stayed.  Those that stayed actually asked about staying very long term.  They knew they had an under market rent for years with an absent landlord, and were happy to pay still slightly under market rent for their home.

    4) Remember that turning a unit with a long term tenant is typically at least 1 month vacant (as it can be hard to show units with long term tenants), painting costs, and I would add in up to another $1k on the unknown issues.  For the sake of $100 a month, that can be 2-3 years to break even, let alone all the work you need to do.  

    5) If you feel you can get $650-$750 on open market, I would raise rents this year to $600, and then next year to $650, assuming they truly are good tenants.  That $1200 you lose in the first year, easily is offset by turn costs, and saving work time.  Spend your time and money elsewhere to make more money.

    3Reply
  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Adam P

    Really solid advice and I appreciate your taking the time to respond. A couple other people have also advised letting the smoking continue and I'm glad you guys did because after I thought about it, it really doesn't make sense to put a stop to it now as the damage has indeed already been done in that regard. I had already planned on grandfathering any animals in as it just didn't seem right to me to try to charge for that and I wouldn't ever dream of making someone choose between their home and their pet due to inability to pay the pet deposit and monthly fee. Thanks for your input. You, along with many others, have been a real solid resource as I get closer to having to deal with this situation.

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  • Chance Housos
    Investor · Sachse, TX · Member since 2015 · 223 posts · 66 votes
    10y

    @Alan K Auman

    I suggest ripping the band aid off asap and giving them the option to leave early. I am in a similar situation now. We closed on 8 houses Feb. 25. Just served 2 30 day notices, 3 new leases with $100+ rent raises and will be doing the other 2 30 days next month. 1 tenant is still under lease but we have given them option to leave early. We brought a market analysis to the tenants with the new leases to show we are still below market. If you bought them with the intention of rehabbing and raising rents then the turnover cost have already been added into figured cost.

    Another fun fact, closed on Thursday and Monday got a call that the water heater went out on 1 unit. Doesn't take long to eat a few months cash flow.

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  • Alan K Auman
    OP
    Investor · Terre Haute, IN · Member since 2015 · 55 posts · 8 votes
    10y

    @Chance Housos

    Arggghhhh....don't tell me about water heaters going out right after closing! I've already got enough on my mind as it is!! HAHA! In all seriousness though, thanks for the reply and congrats on closing on the 8 houses in one day. That's quite a feat. How did you manage to get 8 at the same time if you don't mind sharing?

    0Reply
  • Chance Housos
    Investor · Sachse, TX · Member since 2015 · 223 posts · 66 votes
    10y

    Thanks, Alan. I found a landlord that wanted to sell a different house from for rent adds. Ask him to sell, he gave me a price that didn't work, then he told me about his partner on other deals he wanted out of. Offered to by all of them and we came up with a win win price. It took about 2 months of negotiations and 2 weeks to close. Just remember, trust but verify :) 

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