Long term tenant paying under market rent. What to do?

Question

I just purchased a tri-plex and I'm closing 9/20. The building will be owner occupied though it is currently fully rented with 3 month to month tenants. Unit 3 is occupied by a 12 year long term tenant (high quality, consistent) who has essentially made it his home with his son.

I have a few predicaments here.

1. The 3 tenants are all paying under market rents. Unit 1 - $825, Unit 2 - $950, Unit 3 - $825 (Total $2,600/mo). I analyzed and purchased the property knowing median rent for my area and property type/quality pulls in $950-1100/mo. The biggest problem is telling a tenant of 12 years that I need to increase his rent by $200. One suggestion made is to raise by $100 and inform him that I should be raising $200..but his good standing has earned him the discount. I think I'd go for that.. but am I really robbing myself of $1200/year?

2. 2nd issue is the owner occupy issue with 3/3 units occupied. I need to evict the 1st floor tenant so I can move in.  Am I going to be responsible for eviction or do I make that a responsibility (fees included) of the seller before closing.

What do you guys think. I have other questions but I'll post them as separate discussions to stay organized. Thank you!!

Mike Cumbie · Answer

For an investor like @Greg S. I may agree.

Chris posted in another thread he is a new investor and first time home buyer. He is going to be starting off as a landlord and moving onto the property. In the middle of "Learning" and "Moving" and getting things up and running I don't think the best course of action is to throw the training wheels off (The 12 year consistent tenant) and try throwing in background checks, 2 unit rehabs, advertising etc.

Just my thoughts and good luck in whatever you decide.

Chris R. · Answer

Wow, I appreciate all of your responses and I think, in distilling these comments into a single point, keeping him is worth it with winter and the big move-in approaching.

The potential for immediate repairs and the fact that in reality, the $1200 would be lost in vacancy anyways, makes this an easier choice. I don't want to rob him of his home and a good point was made @MikeCumby that he is already concerned with new ownership. I want to run this as a business and customer service always wins over greed.

I'll keep you updated

Thomas S. · Answer

There is no reason for you to experience a vacancy if you know how to operate the business properly. Have a tenant provide 60 days notice is more than enough time to find a replacement tenant in normal situations. The business has proven not to be a seasonal as many landlords believe, tenants move all year long.

I would have the owner initiate the termination of one tenant for you to move in at closing and as soon as you own optimise the business income by raising all tenant to full market. Business is only abut making money. It does not make any difference how long a tenant has been in place or how good you thing they are. Supplementing a tenant rent is illogical. Make the move, replace tenant if necessary and move forward. There is no business purpose in loyalty to tenants that are costing you money every month. That is very poor business practice considering tenant turnover is a natural part of business. Start out by raising rents and cleaning house if necessary to get all your own tenants in place.

The irrational fear of a vacancy is no excuse to operate a business poorly.

Bryan O. · Answer

The other side of Thomas S. "increase the income always" coin is to reduce the cost. In many cases it saves you more money to keep the rent slightly below market for tenants that reduce your maintenance costs. Yes, it's great to increase your income by $1k/year or whatever. It's also just as good to remove your vacancy, maintenance, and make ready costs by $1k/year or more.

There is more than one way to run a profitable business. If you like to feel like you are The Man and you are okay with the extra time to turn units frequently then you can make that profitable. If you would rather make the same net income and spend more time doing other things, you can make that profitable as well. Increasing income is not the only way to improve your bottom line.

Best of luck and happy investing.

Jason Baron · Answer

I just recently had to address this situation. I have a great tenant that pays on time and takes care of the place, but was paying significantly under market.

I used an accelerator approach: I let him know what fair market rent should be and also reminded him how much I valued him as a tenant and didn't want to see him leave. I set up a schedule whereby the rent increases by a defined amount over a period of 5 months and brings him up to an amount just slightly below what I could "probably" get if I tried to find a new tenant. As was previously mentioned, there is great value in a known and reliable renter.

He appreciated the slow roll and that he would still be paying a little less than what he'd find in a comparable unit in the same area.

Judy Parker · Answer

Before raising a residential Tenant's rent by $200/month, check to make sure the town doesn't have Rent Control laws.  Also, maintain a good relationship with that Tenant.  Tenant could conceivably take Landlord to court and sue for Constructive Eviction, i.e. Landlord deliberately raised the rent to an unconscionable amount in order force the Tenant to vacate.

Jennifer L. · Answer

@Chris Ryan One thing you will deal with if you have had a tenant of 12 years is that there are probably a lot of repairs that need to be done that will not constitute wear and tear.  If you raise the rent, you are possibly going to lose a good paying tenant and you will have immediate expenses to repair.  How long would it take you to turn the unit around and get top dollar? On top of that, if they are nice, quiet and low maintenance, you might be buying yourself problems with a new set of tenants.  On the other hand, if they are high-maintenance, then it may be time to raise the rent.

If you like them and want them to stay consider introducing yourself, and adjusting the rent modestly  ($50) or if you go to $100, offer to do some sort of improvement that you would need to do anyway.

I have no advice on the eviction, I'm guessing others here will chime in on that.

Jassem A. · Answer

increase the rents where you want and chances are at least one of the units will become available

Mike Cumbie · Answer

Hi @Chris Ryan,

In my opinion if you raise the rent $200 or even $100 on 9/20 you are going to have an apartment to rent out come snowy winter in Albany (We all know how hard it is to find tenants in winter).

a 12 year tenant that is low maintenance and pays on time is worth gold. He is already concerned because the place he considers home is being bought by someone new. You do need to raise it but try to do it in a manner that gets him to commit to another year, possibly a lease at 875 for a year.

Just my thoughts, good luck in your decision.

Thomas S. · Answer

I have never understood what landlords refer to as a "good tenant discount". All tenants are the same. They pay market rent on time and in full or they find some other landlord to take advantage of. Hobby landlords believe tenants stay because of the rent. That is usually their last reason not their first and hobby landlords fall into the trap of subsidising their rent because they think their tenant is "special". They are not special and good tenants, those that pay on time and in full, are in the majority.

All tenants expect to pay market rent and receive annual rent increases Your good tenant discount is simply flushing profits down the drain. Sad, very sad.

Long term tenant paying under market rent. What to do?

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