how to handle the existing tenants

30 Replies

in process of buying a duplex, the duplex has tenants who live there for 4 years already. the rents are way lower than the market rent because the seller hasn't raised the rent for 4 years. Not sure shall I vacate the renters or just raise the rents?

Also what else shall I watch for when inheriting the tenants?

Thank you in advance!

Stella

Hi @Dong Yan aka Stella. In Orange County, rents have gone up by about 5% year over year. I personally increase all of my tenants by about 2-5% per year. I would first check the leases. Know exactly when you can increase the rents with that. In the state of California, you can raise rents by as much as 10% with 30 days notice. I would give that a shot across the board and see who buckles. Chances are it won't displace all of the tenants. I would prepare to do it again the following year until you feel that they are at market. 

If they moved in 4 years ago, I agree that they are probably under market, but they might be closer to market than you think given that it was only 4 years ago as opposed to 15 years ago. Definitely try the 10% and go from there. Best of luck!!!

@Dong Yan there is plenty to watch out for an evaluate in this situation.  

Vetting the current tenants:

1.  Make sure that you have a copy of all the current contracts, rental applications, and other related items for each tenant.

2.  Are they on month to month or yearly leases as you may NOT be able to raise rents if they are on a year lease.

3.  Do a comprehensive exit interview with each tenant.  Verify all the information above.  Ask if there are any concerns or repairs they need to have done.  Are there any hidden items that the seller has NOT disclosed to you?  Make sure that they are not violating the current rents with additional tenants or pets.  There is a lot of information that you can gather from a tenant in this situation.

Vetting the financials:

1.  Raising rents may be easy and should be done on a periodic basis, but that is just the beginning of the decision process.

2.  What is the condition of the home now and are the rents reflecting those issues?  

3.  If you decide to raise the rents then the tenants MAY move out of the home leaving you with having to rehab the unit to make it "rent ready" again.  If you raise the rent $100 a month/ $1200 a year what is the payback if the tenant decides to move out and you need to pour in $4800 to bring it back to "rent ready" condition.  You are looking at a 4 year payback period.  Is this a good decision or maybe you should only increase the rents gradually.

Let's talk about "rent ready" vs "saleability."

1.  When I purchase "buy and holds" I put my properties in a "rent ready" condition.  This means new flooring, painting and making sure all the appliances are in good working condition.  NO need for a new kitchen.  NO need for expensive flooring.  Etc...  Lower costs...

2.  When I get ready to "sell" the unit is when I do a complete rehab so that i can get the best value and be able to recoup my rehab costs in a timely manner.

One last tip:

Never tell the tenants that you are the owner.  Please tell them that you are the "Property Manager" and you will need to check with the owners on all improvement requests.  This will reduce any tension between you and the tenants as it is not your fault that the owners said NO to an improvement.  Also, NO improvements without an increase in rents.  For example:  The tenants want new carpeting.  This costs me about $1200.  The answer is "Yes the owner will install new carpeting, but your rent will increase by $100 a month.  My break even on this is one year.  The choice is up the to tenant on what they want to do.  (Obviously this is a month to month tenancy.)

Good investing...

Thank you for all you valuable tips Truly appreciated!

IT is month to month lease, so I think I can raise it once I take over.

How can I make an appointment with tenants, the contract stay don't disturb tenants... 


Originally posted by @Joe Homs :

@Dong Yan there is plenty to watch out for an evaluate in this situation.  

Vetting the current tenants:

1.  Make sure that you have a copy of all the current contracts, rental applications, and other related items for each tenant.

2.  Are they on month to month or yearly leases as you may NOT be able to raise rents if they are on a year lease.

3.  Do a comprehensive exit interview with each tenant.  Verify all the information above.  Ask if there are any concerns or repairs they need to have done.  Are there any hidden items that the seller has NOT disclosed to you?  Make sure that they are not violating the current rents with additional tenants or pets.  There is a lot of information that you can gather from a tenant in this situation.

Vetting the financials:

1.  Raising rents may be easy and should be done on a periodic basis, but that is just the beginning of the decision process.

2.  What is the condition of the home now and are the rents reflecting those issues?  

3.  If you decide to raise the rents then the tenants MAY move out of the home leaving you with having to rehab the unit to make it "rent ready" again.  If you raise the rent $100 a month/ $1200 a year what is the payback if the tenant decides to move out and you need to pour in $4800 to bring it back to "rent ready" condition.  You are looking at a 4 year payback period.  Is this a good decision or maybe you should only increase the rents gradually.

Let's talk about "rent ready" vs "saleability."

1.  When I purchase "buy and holds" I put my properties in a "rent ready" condition.  This means new flooring, painting and making sure all the appliances are in good working condition.  NO need for a new kitchen.  NO need for expensive flooring.  Etc...  Lower costs...

2.  When I get ready to "sell" the unit is when I do a complete rehab so that i can get the best value and be able to recoup my rehab costs in a timely manner.

One last tip:

Never tell the tenants that you are the owner.  Please tell them that you are the "Property Manager" and you will need to check with the owners on all improvement requests.  This will reduce any tension between you and the tenants as it is not your fault that the owners said NO to an improvement.  Also, NO improvements without an increase in rents.  For example:  The tenants want new carpeting.  This costs me about $1200.  The answer is "Yes the owner will install new carpeting, but your rent will increase by $100 a month.  My break even on this is one year.  The choice is up the to tenant on what they want to do.  (Obviously this is a month to month tenancy.)

Good investing...

I like you strategy, I will try to increase little by little then even though I do have an option to evacate them but if they are long term renters if they pay rent on time (base on the seller , it is ) then I can keep them for a while till I have the resource to remodel the property

Originally posted by @Kristina Heimstaedt :

Hi @Dong Yan aka Stella. In Orange County, rents have gone up by about 5% year over year. I personally increase all of my tenants by about 2-5% per year. I would first check the leases. Know exactly when you can increase the rents with that. In the state of California, you can raise rents by as much as 10% with 30 days notice. I would give that a shot across the board and see who buckles. Chances are it won't displace all of the tenants. I would prepare to do it again the following year until you feel that they are at market. 

If they moved in 4 years ago, I agree that they are probably under market, but they might be closer to market than you think given that it was only 4 years ago as opposed to 15 years ago. Definitely try the 10% and go from there. Best of luck!!!

Hi Joe,

I  just found out the duplex (the front house is facing the street) , 1 minute away from elemantry school . Is it a big problem.

When I purchase the residential property , the first rule is choose quite area. but I am not sure about the multi-units?

are there different criteria to choose single family house, condo and multiunits?
Thank you so much!
Stella

Originally posted by @Joe Homs :

@Dong Yan there is plenty to watch out for an evaluate in this situation.  

Vetting the current tenants:

1.  Make sure that you have a copy of all the current contracts, rental applications, and other related items for each tenant.

2.  Are they on month to month or yearly leases as you may NOT be able to raise rents if they are on a year lease.

3.  Do a comprehensive exit interview with each tenant.  Verify all the information above.  Ask if there are any concerns or repairs they need to have done.  Are there any hidden items that the seller has NOT disclosed to you?  Make sure that they are not violating the current rents with additional tenants or pets.  There is a lot of information that you can gather from a tenant in this situation.

Vetting the financials:

1.  Raising rents may be easy and should be done on a periodic basis, but that is just the beginning of the decision process.

2.  What is the condition of the home now and are the rents reflecting those issues?  

3.  If you decide to raise the rents then the tenants MAY move out of the home leaving you with having to rehab the unit to make it "rent ready" again.  If you raise the rent $100 a month/ $1200 a year what is the payback if the tenant decides to move out and you need to pour in $4800 to bring it back to "rent ready" condition.  You are looking at a 4 year payback period.  Is this a good decision or maybe you should only increase the rents gradually.

Let's talk about "rent ready" vs "saleability."

1.  When I purchase "buy and holds" I put my properties in a "rent ready" condition.  This means new flooring, painting and making sure all the appliances are in good working condition.  NO need for a new kitchen.  NO need for expensive flooring.  Etc...  Lower costs...

2.  When I get ready to "sell" the unit is when I do a complete rehab so that i can get the best value and be able to recoup my rehab costs in a timely manner.

One last tip:

Never tell the tenants that you are the owner.  Please tell them that you are the "Property Manager" and you will need to check with the owners on all improvement requests.  This will reduce any tension between you and the tenants as it is not your fault that the owners said NO to an improvement.  Also, NO improvements without an increase in rents.  For example:  The tenants want new carpeting.  This costs me about $1200.  The answer is "Yes the owner will install new carpeting, but your rent will increase by $100 a month.  My break even on this is one year.  The choice is up the to tenant on what they want to do.  (Obviously this is a month to month tenancy.)

Good investing...

@Dong Yan your stated rules are correct for SFR, however it's difficult to evaluate your purchase without knowledge of the location. However, with multi-family you should be OK with an elementary school a minute away. As long as you are not in front of the school where the parents drop off and pick up the children creating a traffic and noise nightmare. Ask the current tenants if they have any issues with your concerns.

Good Investing...

Before you offer new leases to the tenants, try to informally background check them. At the very least ask the seller to tell you who they are, what they do for work and honestly account on their rent payment history.

If they sound good, then offer a new lease, but certainly jack the rent to current market value. Give them 5-10 days to accept the new terms or accept that they will have to vacate by closing.

If you write a detailed contingencies addendum into your offer, the seller will have to facilitate this process for you.

You have to increase rents to be able to maintain the property properly and still protect your returns, especially since there will be likely be a higher note carrying the property.

But be ready that if any of them accept the higher rent, they will also expect their return on maintenance. Most tenants paying below market rent keep their mouth's shut about small maintenance items because they don't want to ruin the deal they have. So by increasing the rent, you'll likely be meet with a laundry list of maintenance needs. Take that on the chin---if you fulfill their requests, they're likely to die down with more requests after the first month or so.

Hey Dong,

You should definitely try to get the rents up to market anyway possible. If raising rents causes the current tenants to vacate, this could be a blessing in disguise as it gives you the opportunity to potentially fix up a unit and get a new great tenant in there. 

One thing to be cognizant of when dealing with a duplex: great tenants are everything! A couple of turnovers could kill all of your profits so spend the extra time and care when screening for new tenants if you decide to go that route.

Best of luck!

Thank you so much for your input. I am in the escrow now .

one thing I just found out from the sellers' disclosure is he pays for the water bill for the property.not sure why he would accept such bad terms for his rental contract.
The water bill is extremely high, he states in the disclosure, one of his renter was using the portable swimming pool but he already requested him to remove the pool from the property.

The seller is terrible of managing the rental ,I guess that's why he wants to get rid of the property even though the property locates at really popular/convenient location. He only request the half of the monthly rental as deposits, he also allow the pets. If I were the landlord I would not allow the pets unless they pay two months' rents as deposits.

I will definitely try to let tenant's pay for their own water bill but not sure will it cause any legal issue? 

I have the contract , it is month-to-month.

The areas is really popular and has high demand. The property is also very close to a local university. I do see the potential of this property, I may convert it to the out of the campus' rental at the righ timing .

Thank you again!

Originally posted by @Rob Beardsley :

Hey Dong,

You should definitely try to get the rents up to market anyway possible. If raising rents causes the current tenants to vacate, this could be a blessing in disguise as it gives you the opportunity to potentially fix up a unit and get a new great tenant in there. 

One thing to be cognizant of when dealing with a duplex: great tenants are everything! A couple of turnovers could kill all of your profits so spend the extra time and care when screening for new tenants if you decide to go that route.

Best of luck!

May I put those terms into the contigency if the transaction is in escrow right now?

I was never think the seller would accept my offer since my offer price is 15% lower than his asking price but my agent negotiate it well with him.so eventually he accept the offer. But now I see the issue of inheriting the tenants what workaround do I have?

Thank you!

Originally posted by @Robert Ortiz :

Before you offer new leases to the tenants, try to informally background check them. At the very least ask the seller to tell you who they are, what they do for work and honestly account on their rent payment history.

If they sound good, then offer a new lease, but certainly jack the rent to current market value. Give them 5-10 days to accept the new terms or accept that they will have to vacate by closing.

If you write a detailed contingencies addendum into your offer, the seller will have to facilitate this process for you.

You have to increase rents to be able to maintain the property properly and still protect your returns, especially since there will be likely be a higher note carrying the property.

But be ready that if any of them accept the higher rent, they will also expect their return on maintenance. Most tenants paying below market rent keep their mouth's shut about small maintenance items because they don't want to ruin the deal they have. So by increasing the rent, you'll likely be meet with a laundry list of maintenance needs. Take that on the chin---if you fulfill their requests, they're likely to die down with more requests after the first month or so.

I doubt seller will give tenants notice,, and main thing is to see if leases are month to month or term.. You can not make changes until thier leases are up for renewal month to month is fine,, you can give 1 month notice to raise the rents after you take possession. 

If you choose to raise rents considerably I'd do one unit at a time.. the crappiest one first so you can get in and fix up so when done you can get the top price rent right away,, then give notice to raise rent once that unit is lease up.. 

@Joe Homs mentioned he never tells tenants he's the owner,, I"M just the opposite  I want respect, I want tenants to know I mean business and I'm a business owner,, I give straight answers, keep my buildings updated and in good repair,, I have nothing to hide.. I expect the same from my tenants... It's a business not a hobby.

good Luck

@Dong Yan

If you're that far along, it's not likely you can insert those terms into the P&S---most attorneys would strike the attempt if it wasn't in the offer.

But you can still proceed with offering the current tenants a rate hike or asking them to clear out if they don't accept. The only difference here is you don't have a contigency with the seller to make him help before closing. Which means the burden for getting rid of them if need be is entirely yours.

If he's nice, the seller can still facilitate a little if you ask, for good faith. 

If the tenants are on a month to month agreement now, the worst case scenario is you inherit them at closing and then immediately terminate the month to month agreement giving them 30 days to leave.

You might still be able to terminate before closing by you or your attorney sending them a termination letter. They would still have 30 days, but you could initiate the countdown sooner.

RE:

May I put those terms into the contigency if the transaction is in escrow right now?

I was never think the seller would accept my offer since my offer price is 15% lower than his asking price but my agent negotiate it well with him.so eventually he accept the offer. But now I see the issue of inheriting the tenants what workaround do I have?

@Dong Yan it is a common tactic to find properties mismanaged and where the owner is paying for utilities. Depending on the market, it shouldn't be a major issue (no legal problems) to change the lease agreement to tenants paying for utilities. If you want more help about this, I would call up a local property management company in the area.

surprisely, this units have been handeled by the property management company. they never raise the rent and covers the water utilities.

They told me it was the common practice for multi-units since the multi-units share the same water meter. I am not sure is that true or just because they are lazy. I have several single family houses, all my renters pay utilities on their own. Maybe it is very different beteween how to manage multi-units and single family house.I have never owned the multi-units before so I don't know enough to judge the property manager's statement is true or false
Originally posted by @Rob Beardsley :

@Dong Yan it is a common tactic to find properties mismanaged and where the owner is paying for utilities. Depending on the market, it shouldn't be a major issue (no legal problems) to change the lease agreement to tenants paying for utilities. If you want more help about this, I would call up a local property management company in the area.


Great! That is so nice of you to share such an important information since my agent doesn't know how to sepearte bill as well he said that is the common problem with all multi-units. That's why many land-lord end up paying the utilities. His statement gives me a second thoughts to moving forward of my multi-units deal. The ROI is high but after all the utilities and all other cost the cap rate gets super low.
Are you familiear with orange county rental market? Is Single family rental or duplex more profitable ?
Originally posted by @Rob Beardsley :

Hey @Dong Yan what you are looking for is called RUBS (ration utility billing system). This is how landlords of multifamily properties solve this problem. With some investigation, you should find that hopefully it is not too difficult to implement this for your new investment. Good luck!

The first thing you need to do is either hire a lawyer familiar with your area or sit down and take the time to learn your state/district landlord tenant codes. Taking random advice on the internet from people that do not know your specifies codes can be a recipe for disaster. If you are going to be in business learn your laws first hand.

You can not fly by the seat of the pants when dealing with tenant rights. Do nothing till you learn the law.

@Dong Yan I know a little bit about OC because I am from NorCal. All of California has really low cap rates and the cap rates agents and sellers tell you are most likely inflated. Single family rentals and duplexes are very similar in nature so I don't think there would be much of a difference in terms of profitability. A duplex might be slightly better because you are not competing with personal homebuyers. However, the whole SoCal market is very tough in terms of cash flow. If you have to stay local and invest in that market, you have to think outside of the box and look for off-market deals or buying something near the beach and running it as an airbnb. 

Yes that is what I felt too , super heated market.
The duplex I am intent to buy is close to the elementary school and freeway, that's why the property is cheaper than the normal market price.

The tenants willing to stay for long term the issues are they will not able to afford if I raise the rent to the market value. Shall I cancel the deal?
if it is so noise, is it possible to convert it as airbnb? try to figure out the exist strategy if there is any in my situation. I only have 28 days left with my 1031 exchange period... super worried! any advices are highly appreciated!
Originally posted by @Rob Beardsley :

@Dong Yan I know a little bit about OC because I am from NorCal. All of California has really low cap rates and the cap rates agents and sellers tell you are most likely inflated. Single family rentals and duplexes are very similar in nature so I don't think there would be much of a difference in terms of profitability. A duplex might be slightly better because you are not competing with personal homebuyers. However, the whole SoCal market is very tough in terms of cash flow. If you have to stay local and invest in that market, you have to think outside of the box and look for off-market deals or buying something near the beach and running it as an airbnb. 

Noisy will not affect airbnb market? Every untis I have right now are all in the quite neighborhood, I thought Noise was something I can't change rather than interior remodel. If it won't then I can move forward with the deal . my main concern is the noises.
Originally posted by @Rob Beardsley :

You could try to operate this duplex as an airbnb. But your original plan would work fine. You may have to let the current tenants leave so you can command market rents just screen the next tenants real well to avoid future turn over. Don't panic! You're in a fine situation. Best of luck!

Great advices ! Truly appreciate your help!

Originally posted by @Rob Beardsley :

I don't think that would be a huge deal as they are traveling and should be out exploring most of the day. Look on airbnb near this duplex and call up any listings and ask them how much their tenants complain or care about noise.

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