Acquiring tenants and them meeting "Your" qualifications

General Landlording & Rental Properties
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Acquiring tenants and them meeting "Your" qualifications

Brett Hearn
Investor · Hanford CA · Member since 2016 · 77 posts · 11 votes

Hey everyone, I have a general question for you master landlords out there.  I am about to buy a triplex and the situation is as follows:

1st tenant month-to-month

2nd tenant 3 months left on lease

3rd tenant 6 months

The rent is grossly under market, so I planned to purchase the property and re-screen the first tenant who is month-to-month.  If they do not meet my standards I would ask her to leave as I will be raising the rent $150.  I do plan on doing some reno on the unit so there is some justification for raising the rent.  If they do meet the qualifications and they agree to $150 rent hike then they can stay, no problem.

I then plan to do the same thing to the 2nd tenant when their lease comes up, and the 3rd as well.  I am doing this in CA.  Am I able to use this strategy?  Or is there a better way to go about getting the raised rents and getting the tenants in the units that "I" have screened.  Again if they agree to the rent increase, and they qualify my screening process (Standard screening: 2 times the rent 650 credit score, deposit 1st months rent plus deposit etc.) they can stay, no problem.  Yet, I doubt they will want to pay so that is fine with me.  Anyway, any advice or different strategies are welcomed.  thanks

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Jenny Bayless
Real Estate Agent · Colorado Springs, CO · Member since 2016 · 109 posts · 96 votes
8y

@Brett Hearn 

Not knowing the specifics for CA state law, you should be able to do your proposed plan so long as you provide each tenant with proper notice of non-renewal if that is what you end up doing.  Then you would be essentially creating a brand new lease, with your terms (with whomever you choose).

Personally, I don't re-screen inherited tenants.  I figure that if I can review the current rent rolls and they are paying timely, then the credit score does not matter to me (even though it does matter to me upon selection of a brand new tenant).  By inheriting a tenant, you get a sneak peek as to how clean they are since you presumably did several walk throughs during the purchase period (being able to see pets, etc), and if they pay in full, on time (viewed during your due diligence period).

Similar to your situation, we have bought 3 SFHs with existing tenants, and within each of which, the rents were significantly under market value.  For the first one, the house was in great condition, but they were month to month.  We gave them notice to vacate in order to start the clock, but also told them if they signed a lease before the notice to vacate period was up, then the lease prevailed.  After shopping around, they decided that staying was the best option (we raised the rent $200/mo, and it is STILL under market value by at least $50-100!).  For the other two cases, the rents were both under market value and houses were in pretty bad shape.  For the latter two, we did raise the rent, but we also put several thousand dollars in rehab in each house and provided superior customer service.  Those tenants could instantly see the value created, and have not complained about the rent increase at all.

Note that in my market, I could get another tenant in any of my properties in a matter of 1-2 weeks, so if vacancy rates are high in your area, that should play into your calculations.

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  • Jenny Bayless
    Real Estate Agent · Colorado Springs, CO · Member since 2016 · 109 posts · 96 votes
    8y

    @Brett Hearn 

    Not knowing the specifics for CA state law, you should be able to do your proposed plan so long as you provide each tenant with proper notice of non-renewal if that is what you end up doing.  Then you would be essentially creating a brand new lease, with your terms (with whomever you choose).

    Personally, I don't re-screen inherited tenants.  I figure that if I can review the current rent rolls and they are paying timely, then the credit score does not matter to me (even though it does matter to me upon selection of a brand new tenant).  By inheriting a tenant, you get a sneak peek as to how clean they are since you presumably did several walk throughs during the purchase period (being able to see pets, etc), and if they pay in full, on time (viewed during your due diligence period).

    Similar to your situation, we have bought 3 SFHs with existing tenants, and within each of which, the rents were significantly under market value.  For the first one, the house was in great condition, but they were month to month.  We gave them notice to vacate in order to start the clock, but also told them if they signed a lease before the notice to vacate period was up, then the lease prevailed.  After shopping around, they decided that staying was the best option (we raised the rent $200/mo, and it is STILL under market value by at least $50-100!).  For the other two cases, the rents were both under market value and houses were in pretty bad shape.  For the latter two, we did raise the rent, but we also put several thousand dollars in rehab in each house and provided superior customer service.  Those tenants could instantly see the value created, and have not complained about the rent increase at all.

    Note that in my market, I could get another tenant in any of my properties in a matter of 1-2 weeks, so if vacancy rates are high in your area, that should play into your calculations.

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  • Michele FischerPro Member
    Rental Property Investor · Seattle, WA · Member since 2013 · 2k+ posts · 1k+ votes
    8y

    Rescreening your tenants may not be very popular.  We ask tenants to fill out a one page info sheet that is not as extensive as our application so that we have some information about them. We let them stay on M2M as long as they pay and follow the rules.

    Podcast Guest on Show #79
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  • Brett Hearn
    OP
    Investor · Hanford CA · Member since 2016 · 77 posts · 11 votes
    8y

    @Jenny Bayless, thanks for the replies.  Jennifer B. I think it is a good idea what you said about giving them notice and proceeding with having them vacate if they do not sign a lease, my only concern is that they may not be able to handle the $150.00 mark up each month and I will have to deal with that situation.  I do love the idea have walking thru and getting a sneak peak at them.  I have not done so just yet.  How do you usually get rent rolls?  Do you see if the current landlord has a bank statements?  Unfortunately the woman I am dealing with is a 75 year old woman who does not even use the internet so I have a feeling it will be difficult to get some of the paperwork that I would like to see.  Any suggestions would be great.  Plus, Jennifer we do plan on putting money back into the property and adding some value to their experience as tenants.  I think it is really important to justify raising the rents, outside of only what market value should be.  Even if it's just being real legit landlords!

     Yet I do like the idea of using that method combined with the M to M that @Michele Fischer mentioned.  This way, if and when we run into that problem their lease will be up.  Best of both worlds. Michele, so if the tenant is good do you wait a couple of months and, pending them being outstanding tenants, sign a longer lease.  Or, do you just let it ride until the end up moving?

    Thanks a bunch you two, really appreciate the tips.

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  • Bethany Sloan
    Investor · Redlands, CA · Member since 2015 · 13 posts · 7 votes
    8y

    Hi Brett, congrats on the triplex purchase! Just keep in mind for California rent increases you need to give 30days notice if the increase is 10% or less than the current rent and 60days notice if its more than 10%. Assuming you give the proper notice, there shouldn't be any issues unless the tenants decide to create issues. I think its important to have open communication in this instance.

    A lot of tenants after a purchase are nervous and there is a lot of unknown for them - which can put them on the defensive and without proper, timely communication - matters could be made worse. I wouldn't waste any time meeting them in person once escrow closes and being clear and transparent on your intentions and reasons for the rent increase, as well as the new screening qualification - it makes sense if the rent will be higher then their income qualification will need to match that increase. I just think communication is key!

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  • Michele FischerPro Member
    Rental Property Investor · Seattle, WA · Member since 2013 · 2k+ posts · 1k+ votes
    8y

    Brett, we keep all our tenants on M2M always.  It just gives us more flexibility.  We assure those that want a longer lease that if they follow the rules and pay they can stay as long as they want.  But it gives us more levers to pull if they don't.

    Podcast Guest on Show #79
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  • Jenny Bayless
    Real Estate Agent · Colorado Springs, CO · Member since 2016 · 109 posts · 96 votes
    8y

    Hi @Brett Hearn

    If the former owner doesn't have rent rolls, I would check her bank statements.  You could also view copies of the cleared checks to see when they were dated (in case she took a while to get to the bank to cash them).

    Since you will be doing renovations, I would definitely just communicate that to the tenants.  For the tenants in the latter example of mine, we replaced all the windows and doors as well as did a major furnace clean, so we explained that even though rent was going up, their utility bills would be decreasing.  They have told us that they could instantly feel a difference in the inside temperature.  Just being transparent and working with them is the best thing you can do in this situation, while still making sure you have yourself protected in the event they end up not staying.

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  • Account Closed
    Pottstown, PA · Member since 2017 · 79 posts · 31 votes
    8y

    @Jenny Bayless to go off on a tangent... How do you approach updates with tenants in place? A furnace clean is easy but all new windows can be an inconvenience for them. How do you approach getting the work done?

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  • Brett Hearn
    OP
    Investor · Hanford CA · Member since 2016 · 77 posts · 11 votes
    8y

    @Bethany Sloan so if I were to bump the rent from $600 to $750 it sounds like I need to give 60 days notice.  I do plan on sending them a formal letter and letting them know about the formal renovations which we plan as suggested by @Jenny Bayless.  I think it is a great idea to sell it as though it will be beneficial to them as their utilities will be coming down and value would be added to their living experience.  I suppose as long as we give proper notice we won't run into any legal problems. 

    @Michele Fischer I like the idea of keeping them month to month, as long as they pay rent on time, but only one of the tenants will be at the month to month stage at that point.  The other one tenant will have 3 months and the other has 8 months left.  I suppose it could be structure like this.

    -send letter to all tenants that rent will be increasing in 60 days but we will be doing renovations.  They are welcomed to stay on month to month if they are able to pay on time.

    -start renovations on the outside of the property first and as leases come up do renovations on those first.

    -tenant A who will be month to month, do not screening and if they are able to pay rent on time bump their rent in 60 days and if they stay do small renovations.  If they leave use that as an opportunity to get in there and fix up properly.  Then place another tenant.

    Tenant B who has 3 months left.  When their lease comes do bump the rent and do small renovations if they stay, and if they leave do full renovations and get anther tenant.

    Tenant C who has 8 months left.  When their lease comes do bump the rent, leave at month to month if they stay and do small renovation, and if they leave do full renovations and get another tenant. 

    Does this sound like a decent plan?  Does anyone know if you are able to up the rent (with a 60 day notice) even if the tenant still has time on their current leases with the previous owner.  Like Tenant B and C?  Or do you have to wait till their leases come to and end like I have suggested in the plan above?  

    Thank you everyone for your suggestions. 

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  • Bethany Sloan
    Investor · Redlands, CA · Member since 2015 · 13 posts · 7 votes
    8y

    @Brett Hearn Correct, you would need to give them 60 days notice for anything over $660 in this instance. The tenants that are in leases you can just set yourself a reminder to send out their notices 60 days prior to their lease expiration date.

    I would definitely present it as a positive (which it is). You could even give the leased tenants the option to have some interior improvements started now so they can enjoy some of those benefits immediately. Sometimes they will take you up on it and the benefit for you is that you can save yourself some vacancy downtime down the road when you go to finish the rehab on their units. I've had tenants take me up on offers such as new windows, upgrading ac/heat, even did a full bathroom remodel for one tenant while they were still there and left the cosmetic stuff for once they moved out and had the "remodel" done in a weeks time, which would have taken at least 3 weeks had I saved everything for once they moved out. Of course the downside is you are paying costs for benefits you wont realize until down the road but if you have the cash for it - it works!

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  • Brett Hearn
    OP
    Investor · Hanford CA · Member since 2016 · 77 posts · 11 votes
    8y

    @Bethany Sloan thanks.  Yeah I like that approach a lot.  I did plan on spending the money on the rehab unit by unit, lease by lease, only because I could spread out my renovation costs over 6-8 months.  But, I do see what you are saying about doing some work while the tenant is still paying rent, and when their leases come up most everything will be done if they can't pay the higher rent.  This keeps the vacancy time low, I like that!

    If you don't mind me asking how much did you pay for the new double windows?  I've got a good idea about much of the cosmetic stuff, and I know that your market is different but a round about number per window with labor would be awesome for an estimation on the property.  I'm going to do most of the cosmetic stuff but the window will be contracted out. If not no big deal.  Thank you again for your response. 

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  • Bethany Sloan
    Investor · Redlands, CA · Member since 2015 · 13 posts · 7 votes
    8y

    @Brett Hearn I usually buy my windows at Home Depot or Lowes and pay my handyman to install them. You can get a better idea on costs by going to their website and checking measurements, but on average about $130-$150 for an average size window plus $50 to install is what my handyman charges - you'll pay a lot more if you use the Lowes/HD installers, or you can install yourself to save a buck. Also if the windows end up being custom order for your measurements they always take longer to arrive (plan 3 weeks) so make sure you order well in advance before starting the rehab so they don't hold you up.

    As a general rule of thumb, as soon as a tenant gives notice (or I give notice) I try to plan their preliminary walkthrough well in advance so I can also use it as an opportunity to walk through the unit and make my own checklist for repairs as well as take any measurements so I have all parts/materials ready to go as soon as its vacant!

    Hope this helps!

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  • Jenny Bayless
    Real Estate Agent · Colorado Springs, CO · Member since 2016 · 109 posts · 96 votes
    8y

    Hi @Account Closed

    For the fixes that require the tenants to be inconvenienced (such as the doors and window replacements), to be honest, none of the tenants seemed balked at the idea of it.  In sum, both the windows and doors took one full day of having contractors in the tenants' living space, but with the better energy efficiency that we told them to expect (and which they instantly felt), as well as with the doors being replaced to avoid critters coming in (yes, that was an issue!), the tenants were quite fine, and actually pretty excited about the idea of the repairs :)

    We just strived to maintain open communication with them throughout the process, and showed that we respected the property itself, as well as respected the tenant's time and how they have made it their home as well (by showing that we want to fix it up for them to provide a better place for them to live).

    Granted, we could have just lucked out an have easy-going (and logical) tenants, but in sum, I think being respectful of the tenant's time and space, and showing objective reasons why the repairs will benefit them goes a long way in rapport building and getting the job accomplished.

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  • Peter Sinclair
    Duarte, CA · Member since 2015 · 65 posts · 54 votes
    8y

    Read through this. Its a great resource for CA landlords. 

    http://www.dca.ca.gov/publications/landlordbook/catenant.pdf

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  • Brett Hearn
    OP
    Investor · Hanford CA · Member since 2016 · 77 posts · 11 votes
    8y

    @Bethany Sloan yes!  This has all been extreme helpful.  The units have old wood windows which are different sizes so it will be quite a job I am imagining.  The old ones will have to be pulled out and siding cut to fit plus sealed back up with finished wood frames around it.  I will keep in mind the 3 weeks for installment purposes for sure.  

    I'm thinking that the windows alone will justify the rent hikes but I like to keep a clean, cozy living area for people.  Seems like it attracts the best tenants.  Thanks again. 

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