Real Estate Investor · Logan, UT · Member since 2015 · 46 posts · 7 votes
Currently I own 16 units in Utah. 12 of those 16 we just inherited and these new units have came with their fair share of "honey do's". We knew that going in, and they are going to be awesome once we are through the stabilzation period.
We are at the point where we need to raise rent on the tenants living there. All of these tenants have leases that were inherited from the previous owners, or property manager depending on when they signed a lease.
Some of these leases are month-to-month, some of these leases are extending out further through mid to end of 2017.
My question is do I sign new leases and lock the tenants in for another year, and raise rents shortly thereafter, or do I just sign new leases with all of the tenants at the new raised rate?
Not sure what the best approach, or if anybody has any advice???
@Nate Julian - If the rents are below market for their current condition regardless of any improvements needed...then by all means raise rent on the current month-to-month occupants.
If you need the units vacant to do the updating required then let the month-to-moth expire and start doing the updates (assuming available capital after the acquisition) once completed then rent for market rate.
The longer leases will obviously need to stay...which isn't a bad thing so that you can figure out how things are going with the month-to-month folks and use them as trials to gauge the level of repair and rent which you'll be able to fetch. That way when it comes time to work on the others you can renew their lease at the higher price, but they will be required to move into one of the renovated units that way you can now have an empty unit which needs renovating.
@Nate Julian - If the rents are below market for their current condition regardless of any improvements needed...then by all means raise rent on the current month-to-month occupants.
If you need the units vacant to do the updating required then let the month-to-moth expire and start doing the updates (assuming available capital after the acquisition) once completed then rent for market rate.
The longer leases will obviously need to stay...which isn't a bad thing so that you can figure out how things are going with the month-to-month folks and use them as trials to gauge the level of repair and rent which you'll be able to fetch. That way when it comes time to work on the others you can renew their lease at the higher price, but they will be required to move into one of the renovated units that way you can now have an empty unit which needs renovating.
Nate Julian Have you priced out the honey-dos and do you know how long it will take to accomplish them? I always have a hard time raising rents if I have good tenants. It takes a while to recap lost rent during the time it takes to get it rented and (in your case) attend to the honey-dos. If I was in your shoes I'd just let it marinate for a few months until you see who are the good vs. bad renters. However, that assumes that you don't need to raise rents to cover mortgage payments, expenses, etc.
@James Masotti I don't have any major renovations I can't complete while tenants are living there. I don't need to shuffle anybody around, and am filling my last vacancy this next week so all units will be filled.
They are below market rent-yes and I plan on raising rent in all units needed as soon as possible. I also would like to sign new leases with all the tenants asap if possible because a lot of the leases that came with the property are absolutely terrible.
I am just trying to decide if it is more advantageous to lock in the tenants first with a new lease before raising rent and then dealing with the rent raise afterwards, or to just get it all done in one swoop.
Not sure what the best choice is, as I don't feel super strong either way. Trying to get a feel from others on what their opinions are and why.
If I understand your question properly you're wondering if you should lock people into a year long lease and then raise their rent after a month, or if you should just raise the rent up front on the lease renewal?
You can't raise the rent on a year long lease unless you write it into the lease. That's what the tenant gets for agreeing to stay in your property for a year - stable terms and conditions that they know up front.
@Nate Julian I'm kind of with @Wes Brand... I guess I don't see the advantage of not raising rents now and locking them into a new lease with the hire rent...or moving onto new tenants.
Unless their is a clause in their old lease that indicates a change in ownership nullifies their lease agreement you likely wont be able to make everyone sign new leases until their current one expires.
@Nate Julian, I would research the market rents, then raise the rents after giving proper notice. You will have to let any existing leases expire before you can raise the rent, or send them a letter a week or two before it expires inviting them to sign a new lease at the new rate. If they decide to walk, tell them a written 30 day notice, for example, ( check with your state ) is required. For the month to month raises, you can do it slowly with a small increase if the tenant is worth keeping (pays on time, no 3 day violations, etc) and gradually get it up to market rent. Some tenants may even be cooperative and willing to pay a higher rent and tolerate some remodeling while in place. If you want them out and/or remodeling is too extensive, then give them a termination notice of ending the agreement. Remember, you are da boss!
I assume you have studied your state landlord tenant regulations in which case you know the rights of your tenants regarding inherited leases and rent increases.
In your situation I would give notice to raise rents on all M2M tenants immediately. As the term leases come to an end I would be informing them of their rent increase to market and would have all tenants transition to M2M leases. There is no advantage having tenants on term leases, in fact it is to the tenants advantage/landlords disadvantage. M2M leases allow the landlord control of the property.
Andrew's advice is spot on. There are some things to keep in mind when taking over legacy tenants.
The most under market tenants tend to be the one's who have been there the longest which means that those units are the most expensive to turn (but the biggest monthly gain when rents are brought up to market)
You don't want to risk a mass exodus particularly in February or March. Of course, late summer here is a great time to have vacancies. But you have a lot of risk with 12 turnovers in August. So think about when you want your turnovers to happen assuming 12 month leases.
You want to force out the most problematic tenants first. Of course this means not just the late payers, but the ones who bring down the value of the entire community with violations (formal or not). Things like cigarette butt cans in their entries, break down vehicles, general untidiness, noise complaints, etc. If you have tenants like this, it will be more difficult to get full market value from the unit next door.
Finally, raising rents gradually let's you maximize your market rent. This type of housing is very price sensitive and a $25 dollar increase might push people out. You want to get right up to that ceiling. A wholesale rent hike could force a high turnover or leave money on the table. You want to test it a few times to find that sweet spot.
I'm with @William Hochstedler and @Andrew Johnson@Nate Julian. Years ago I bought a 5 unit with low rents and MTM tenants, and raised all the rents at once. From this I learned the best strategy to clean out a building. It was not my intent to clean out the building, but nonetheless, 3 out of 5 gave notice, and 1 asked to move to a smaller unit, thereby requiring 4 out of 5 turnovers.
So I'd let it percolate, find out who are the tenants that you would prefer lived elsewhere, and deal with those first. As you turn those units, you'll get a better feel for the sweet spot in rents and can then keep the good tenants at a somewhat increased rent.
Thanks for all the insight everybody! I only have about 1/2 of the tenants that I could raise rent on due to clauses built into their existing leases. The others were already at max rent, or higher. Maybe a bit against the grain of all the great advice I received, I went ahead and served the rent hikes to all 6 potential candidates. 2-3 of these were M2M and also happen to be my worst tenants by far. I know because I have spent copious amounts of time there within the first 30 days of ownership getting my hands dirty. :) The others were smart enough to know it is coming, and also are the most willing. I guess the reason I took this course was I felt comfortable doing it based off my knowledge of the tenants, and their leases etc.
Appreciate all you guys do!
I'll let you know if it turns out sour, but I have had no back lash yet. These properties, while dilapidated, came with some really great tenants who have been entirely supportive of my "cleaning house" and establishing new rules/regs to their leases etc. They are grateful for a landlord who is taking care of business, and know that the attention to detail, or even larger items comes at a price.
@Nate Julian, if you had said you had bad tenants and needed to clean house, you would probably have gotten different advice. I would certainly have told you to get rid of the bad tenants, that's an entirely different issue from simply needing to raise rents to market.
Sounds like it should work out well for you at any rate, so good luck with this undertaking.