House hacking, Multi family, long term tenant way under market
Rental Property Investor · Dover, NH · Member since 2016 · 47 posts · 9 votes
House hacking, Multi family, long term tenant way under market
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Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
10yIn my short tenure as a RE investor, inherited tenants have been my biggest "X factor" when it comes to trying to stabilize a property with regards to cash flow and return.
My advice to you would be professional but firm with them, as the initial interactions will set the perception in their minds whether you are "fly by night" pushover landlord, or someone who is running a business. Did they once have a security deposit and it was used up with late fees, etc.? I think their response to your request for a security deposit will speak volumes as to how they are as a tenant.
I would definitely get a security deposit and as a courtesy, incrementally increase their rent over time (you decide an appropriate pace) until it reaches what you think is fair market rent based on the unit's condition. They will shop around and realize you are still giving them a fair price.
I can understand your need to be "fair" but you also have to protect your investment. Be careful about setting precedents that are unhealthy for your business relationship with your tenants.
Good luck!
11 Replies
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes10y
@Nate Burnett - I would talk to the tenants, you never know. When @Danny Duran took over an occupied property he had a tenant there for a few years paying $1200 a month and market rent was $2000. He approached the tenant about it and he agreed to the full increase, knowing he had been getting a great deal for the past few years
Second City Real Estate4.821 Reviews - Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes10y
In my short tenure as a RE investor, inherited tenants have been my biggest "X factor" when it comes to trying to stabilize a property with regards to cash flow and return.
My advice to you would be professional but firm with them, as the initial interactions will set the perception in their minds whether you are "fly by night" pushover landlord, or someone who is running a business. Did they once have a security deposit and it was used up with late fees, etc.? I think their response to your request for a security deposit will speak volumes as to how they are as a tenant.
I would definitely get a security deposit and as a courtesy, incrementally increase their rent over time (you decide an appropriate pace) until it reaches what you think is fair market rent based on the unit's condition. They will shop around and realize you are still giving them a fair price.
I can understand your need to be "fair" but you also have to protect your investment. Be careful about setting precedents that are unhealthy for your business relationship with your tenants.
Good luck!
- 10yDerreck WellsPro MemberSpecialist · Pelham, NH · Member since 2013 · 544 posts · 269 votes
Nate, what you do here relies on whether you are in business to make friends or to make money.
This tenant might be a great tenant at $1200 but that may be all they can afford. If you bump to $1300, it could be out of their budget and they end up late all the time and you have to evict. People get used to the lifestyle they're living. Maybe they make $5000 a month and because they're only paying $1200 in rent, they went and financed 2 new cars where if they had been paying market value all along, they would have bought used and been able to afford $1600 in rent. Frankly, it's not your concern how they spend their money, your concern is getting market value for the units.
I would simply explain to them that with the current condition of the property, rent will be $XXXX per month. As repairs are made and the value of the property goes up, the rent will increase accordingly until it reaches market value of $1600 per month. The rate at which those updates happen is up to you.
To be honest Nate, legally, a lease in NH isn't worth the paper its written on except that most people, including the tenants, don't realize that. NH law states that a lease can be broken by either party with a 30 day written notice. Said notice must be delivered in the same method as rent, so if the rent is mailed every month, the notice must be mailed. If rent is hand delivered, the notice must be hand delivered. It's not like if they sign a year's lease and leave after 3 months you're entitled to the other 9 months of rent. You might get some in court if they didn't give you the 30 day notice, but don't expect it.
In my mind a "Rental Contract" or "Rental Agreement" is better then a lease. Spell out what is expected in terms of property care and maintenence, due dates, late fees, landlord access for repairs, security deposits, how to end contractual obligations, agreement to vacate if terms are violated, penalties if terms are violated, etc., etc.. That way you can spell out any rent increases, you can offer to waive any early termination fees if they have to move before the contract is up if they move out by mid month so you have time to do the turnover, you can basically make it as "fair for both sides" as you need to feel comfortable with. When you get something written up, pay a lawyer a couple hundred to look it over for you to make sure it's legal.
I just personally like the word contract over lease. I believe it leaves things more enforcable in court. I don't know for sure, but it seems to me that the word contract would work better for you if it goes to small claims court.
But I'm not a lawyer, I'm a deleader that likes to read laws. ;)
- Member since 2016 · 13k+ posts · 12k+ votes10y
You are not the big bad landlord by taking over a failing business and turning it around.
You tell them the new rate and they can accept or move on. They have no reason to hold that against you and if they do then you have discovered early that you have a tenant that you do not want. This is a good thing as you have no responsibility to keep this stranger happy.
It is a oportunity as a new landlord to start fresh and train a new tenant to meet your requirements.
Inheriting tenants is only good as a bridge until you can establish your own tenants.
- Investor · Boston, MA · Member since 2016 · 245 posts · 436 votes10yDerreck Wells makes many good points. Essentially what you are doing is prioritizing your tenant's financial situation over your own, which is obviously not good. If the tenant is smart he will realize he had been paying well under market for many years and will understand the rent increase. Your not the "big bad landlord", your a business owner who needs to make a living. If the tenant does not understand that, then you know you need to find someone else. Just a quick point, if he/she does agree to the rent increase make sure you properly screen them to ensure that they can handle the rent increase. As Derreck said, you don't want a tenant who has been budgeting for a $1200 unit living in a $1600 unit.
- Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes10y
If you raise the rent and the long term tenant moves out, how much will it cost you to upgrade the unit up to the market rate that you want to charge?
Do you have the funds for a renovation now, or would it be better to stabilize the property for another year or two before going down that road?
- Rental Property Investor · Dover, NH · Member since 2016 · 47 posts · 9 votes10y
@Derreck Wells, good points, I have never had a lease since living in NH. Mostly renting from friends, and it was a "live in the unit and rehab it and you can pay less rent" kind of deal. I figure if we close on this one, I'll approach the tenant with a schedule of rent over then next X years, explain the situation and deal with it one way or the other. The area is not hard to get a replacement tenant.
@Max T. , as it sits, it should get $1600/month. If I put $20,000 into rehabbing the unit to modern standards and make it towards the mid to upper range, we could potentially get $1900-2100 depending on what we do to it. (If budget allows, we have space for an additional on suite for one of the rooms) So we'd be looking at 3.5 to 4.5 years to recoup that money with the increased rent not accounting for rate increases/anything else that comes up. Personally, I'd like to concentrate that money elsewhere on the property to add a third unit (more modern, better laid out one for ourselves), move to the new unit ourselves and then rent out the other original unit after updating kitchen/bath. Which would next us about $1400-1500 additional a month with the extra unit.
- Investor · Houston, TX · Member since 2015 · 6 posts · 0 votes10y
I'm pretty green when it comes to property management, but if they seem to have been a good tenant to the previous owner I would try to see if you guys can strike a deal that they can feel good about and bring you closer to your rental goal. If your area is a really hot rental market then you maybe shouldn't worry too much about their reaction, unless it suits you better to have the stable income in the beginning after paying a down payment (whatever your situation may be). I'm just curious, are you going for more of a house hacking (just to cover costs to fund other deals) approach or trying to generate some income on top of expenses.
- Rental Property Investor · Dover, NH · Member since 2016 · 47 posts · 9 votes10y
@Nicholas Commerford, we're going for a mix. We're starting with this property as a BRRRR, When we decide to move on to the next property I'd like to have this one positioned to cash flow a decent return. Granted, as it has some acreage, I could see us building a SFH towards the back of the property as a potential next move as well. As far as keeping them, our market is in a big flux, lower end rentals are going out the window as people in Portsmouth get pushed out to surrounding cities and are willing to pay more in the markets that previously. Granted lower end rentals will always be needed but that isn't my target market.
- Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes10y
I think as long as I'm at a good cash flow number I'd be more worried about getting a security deposit then increasing rent to market. When you do offer them a new lease, you need to make sure to get a deposit.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes10y
@Nate Burnett We get our best deals in CT when we inherit a tenant situation like the one you outlined. First of all, make sure you get proof that the tenant is actually paying the $1200 in rent that the owner claims. If they aren't then I would evict them for non-payment of rent as soon as your state allows. Easy solution.
Next, if they are paying, I would take @Brie Schmidt's advice and when a deal is imminent reach out to the tenant (via letter we find works best) and tell them the improvements you plan to do to the property and that on X date their rent will increase to X amount.
If you are able to work something out with them, whether they stay or go, that is always the path of least resistance. The problem comes when long term tenants dig their heels in. If you get no response to your letter before you close, the day you close send them another letter saying you have bought the property and clearly outline where they should send their rent payment to.
If you still get no correspondence from them in the form of trying to work something out or in the form of a rent payment (which in your case would be for the $1200) then file an eviction for non-payment of rent and let the situation play out from there.
Hopefully you priced into your offer the cost in terms of time and money that you will incur if you have to evict the tenant.
This situation isn't easy to deal with but it can be a good way to negotiate down asking price if handled correctly. Remember you are dealing with a seller who didn't care enough to raise rent for 10+ years. I am guessing they won't have an issue coming down a little on their price to get a deal done.
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