Inherited Tenants Have Rent Rate From 5+ Years Ago

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Inherited Tenants Have Rent Rate From 5+ Years Ago

Ryan Donohue
Real Estate Agent · Ridgewood, NJ · Member since 2015 · 114 posts · 43 votes

Hey BP, 

So I'm about to close on my first ever property the end of the week, yay! It's a two family in Northern New Jersey and I will be living in the top unit. The tenants are both month to month and I had to give notice of quit to the top unit so I can live there(FHA loan). I've been doing research since I first came upon this property as to the fair market rent to be sure that the numbers make sense. So the tenant is paying $1250(absolute steal for this area) and the fair market rent for all the amenities, space, and extras such as 2 car garage, full driveway privileges, small dog, and more $1650 is pretty on-point. The increase is definitely a shock and I've been given permission to give the tenant notice of increase before closing that rent will be $1650 upon my possession. She really wants to stay and I really would like the convince of already having a tenant but she's saying the rent is a little too high. I offered to replace her oven or refrigerator to soften the up in rent but curious of everyone's opinion here on BP. Has anyone been in a situation where they've had to raise rent so high(yes, there's no rent restrictions in the town) , if so what helped to make it an "easy" transition?

-Ryan     

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Max T.
Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
9y

@Chris Eaker there are other costs associated with turning a unit over aside from the month vacancy. Those costs tend to be higher in units where the tenants have been there for a while. More cleaning, more painting, more repairs, etc...

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  • Judy Parker
    Rental Property Investor · Closter, NJ · Member since 2015 · 884 posts · 722 votes
    9y

    @Ryan Donohue Congratulations on your new acquisition.  Did you run this scenario by your attorney, and did he/she give you permission to raise the rent from $1,250 to $1,650 upon your taking possession?  Just curious because I will be in a similar situation soon with a building I might be purchasing - there is a tenant in a one bedroom apartment only paying $550/month when they should be paying over $1,000/month.  I was always under the impression that such a large rent increase would be considered "Constructive Eviction" and the residential tenant could sue the Landlord.  And you are very lucky there are no rent control laws in that town.  As for your question: if you want to keep the existing tenant, perhaps raise her rent to something she can afford, i.e. $1,550/month?  If she vacates, you are going to be stuck with a vacancy for a month or more, you are going to have to paint and clean the apartment - all of which cost money.  Best of luck to you, and I am following this post to see how others have handled this situation.  Thank you for sharing.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    If the law permits you must have the present landlord give notice for it to take place before you take possession. Usually requires tenant to be at point of lease renewal. Otherwise you wait to take possession then you give notice at lease renewal time.

    The best way to manage a stiff rent increase for inherited tenants on M2M leases is to inform them of the increase amount and determine if they will stay or go. If they will stay fine, if they intend to leave give them 2 months notice to increase rent allowing them to find a place and for you to screen new applicants at the new rental rate.

    This will allow for a smooth transition without a vacancy and gets rid of inherited tenants allowing you to bring in tenants to your standards to properly educate.

    Giving smaller increases over a longer time period will end up in the same position, at some point with the inherited tenant leaving, and only places the landlord in a position of having to supplement their rent till they do leave. Loss of time and money for the landlord. Do it all in one step and start fresh with your own new tenant.

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  • Ryan Donohue
    OP
    Real Estate Agent · Ridgewood, NJ · Member since 2015 · 114 posts · 43 votes
    9y

    @Judy Parker Thanks for the quick response.  My attorney was the one to issue the document to my tenant stating that we'll be increasing the rent so he's aware of the whole situation.  I could only increase to $1550 but with my analysis I'm seeing it might take longer to get to the sweet spot to cash-flow once I vacate and rent my unit.  You definitely have a point on the fact that I'd have to do some serious cleaning and painting of the unit! Thanks and I wish you luck in your dilemma as well.  I'll keep everyone updated of the outcome. I might speak with the tenant directly on negotiating.    

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  • Ryan Donohue
    OP
    Real Estate Agent · Ridgewood, NJ · Member since 2015 · 114 posts · 43 votes
    9y

    @Thomas S. Thanks for your response! I'm awaiting the acceptance of the tenant so I should know soon.  My letter that my attorney issued to them stated that if they were not accepting they'd have to vacate at the time of rental increase i.e. April 1st.  My original strategy was to renovate which ever unit I was living and and transition between leases but know I need to be flexible so I might need to do that once I hear from my tenant.     

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Make sure you have read and preferably memorised all your state landlord tenant regulations. This is a must do requirement to be a landlord. Lawyers often do not know s**t about landlord tenant law and can very easily get a new owner in hot water.

    As a example if you were not the owner at the time your lawyer issued the notice it is very likely not a legal notification. If you were the owner was the tenant given proper time notification, is the tenant on a M2M lease. What does the law say on these matters in your state.

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  • Chris Eaker
    Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
    9y

    @Ryan Donohue

    Let's say you raise to $1,650 and she moves and you get someone in after just one month vacancy. That's $1,650 x 11 = $18,150. If you leave the rent alone, that's $1,250 x 12 = $15,000. So even with one month vacancy, you will still come out ahead raising up to $1,650. If you don't mind the vacancy and are pretty sure you'd have no problem filling it, then go ahead and raise the rent. Alternatively, if you don't think she'd move out if you raised it to $1,500, then you'd come out just about the same as if you raised it up to $1,650 and had one month vacancy. You will still need to explain to this tenant that she is still getting a deal at that price. Show her some comps of equivalent properties and their prices. Show her comps of what she's paying so she sees what she'd get for the same price elsewhere.

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  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    9y

    @Chris Eaker there are other costs associated with turning a unit over aside from the month vacancy. Those costs tend to be higher in units where the tenants have been there for a while. More cleaning, more painting, more repairs, etc...

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  • Bret Blackburn
    Investor · Fort Worth, TX · Member since 2016 · 65 posts · 10 votes
    9y
    I've been wondering the same thing. If you inherit a tenant on month to month, would you not have them fill out a new application to see if they for your rental criteria? I've got a house that I have an offer on with similar circumstances. The tenants are great and are long term. They are M2M paying $1250, rent should be $1400.
    1Reply
  • Chris Eaker
    Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
    9y

    @Max T. you make a good point about those expenses, which I neglected to account for. The more I think about @Ryan Donohue's situation, the more I think it might be better to simply raise in smaller increments and then take the full raise when she finally moves out. A solid, paying tenant is valuable.

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  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    9y

    It's great that they are month-to-month. Much easier to negotiate the transition from their previous contract to your rental agreement.

    It's very disruptive to the lives of tenants when the home they have enjoyed for many years is sold. They are likely fearing what will come next. You are a new landlord and lack experience at this point. What will your management style be? Do you have a team in place to handle the upkeep of the property? How well are you prepared to be a landlord, or are you planning to outsource the property management to an agency?

    We choose not to raise rent immediately upon taking possession, but sometimes we raise the security deposit to a better amount at that point if it is inadequate. We move them onto our rental agreement as soon as possible. We let the tenants know we are not raising rent at this time, that puts them at ease and they are then more likely to open up to us. They are then more likely to tell us things we need to know about the property that the seller never told us.

    We prefer to take about three months to attend to deferred maintenance, make improvements and get to know our tenants, before making any move to raise rent. We want to win them over so they will cooperate fully with us. Building a strong footing for the relationship is key, then later we can raise the rents to acceptable levels with ease. If you want to force a move, jump it to the top of market. If you want to keep the tenant in place and preserve a good relationship, do your rent increases incrementally and top it off at a level below your market competition.

    Don't underestimate the cost of doing a turnover. Both your time and your money. If the current tenant is performing well, they're worth keeping. Chasing after the dollar and landing an unknown tenant is perhaps one more plate to spin that could come crashing down on you. Since you are moving too, why would you want to take on the turnover at this point? 

    Everything's negotiable. Find out what she can comfortably handle and go with that at first. Typically, raising the rent more than 10% at a time will sting, even if the rents have been below market. The tenant may pay it, but grudgingly. You can do this better and make it a win-win.... think it through. After all, you're negotiating with not only your tenant, but also with your neighbor. The relationship is key. The money will follow.

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  • Alex W.
    Long Beach, CA · Member since 2017 · 23 posts · 6 votes
    9y
    Originally posted by @Marcia Maynard:

    Everything's negotiable. Find out what she can comfortably handle and go with that at first. Typically, raising the rent more than 10% at a time will sting, even if the rents have been below market. The tenant may pay it, but grudgingly. You can do this better and make it a win-win.... think it through. After all, you're negotiating with not only your tenant, but also with your neighbor. The relationship is key. The money will follow.

     Such a great point! Even if they can afford it, a 10% bump is HUGE. It's almost like getting a massive pay decrease at work! And great point about them being your neighbor...good relations is a must!

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