Quick Question about Existing Tenants / Cash for Keys

21 Replies

Hey everyone!

I've been looking at a few multi-tenant properties in my area, and have a few quick questions.  Most of the ones that I've looked at have existing tenants.  When doing the calculations in the BiggerPockets Tools, it's hard to properly estimate what the current rents are.  For example, if a tenant has had a lease for the last year, their rent may be lower than the average for that area.

So, would I be able to request current rent/lease length information from the current owner? I know that getting the current leases / estoppel usually falls under due diligence after the property is already purchased. But what If I want to know this information before even offering on the property? Also, I want to make sure that I'll be able to move into the property when I purchase it (Owner occupied requirement for FHA Loans).

Also, can I offer Cash for Keys if the tenant is currently in a lease?  I know that Cash for Keys is typically to get a problem tenant out rather than going the eviction route.  What if I just want them to leave for a different reason, like to rehab the unit or raise the rent?

Thanks for taking the time to read this!

-Emily

Hi Emily,

Sometimes these answers can be somewhat elusive, as I'm sure you are already experiencing. You just need to try and drill for these answers, I typically find that most people are willing to share the lease dates and rental amounts. You would need to pull the rental comps online form several different locations.

With regard to the Cash for keys, you can do that anytime, as long as both parties are amenable to this and the amount/timeframe.

@Emily Eustance , actually providing you with rent rolls and current leases is due diligence BEFORE closing, but after an accepted offer. Make disclosure of rents a contingency of your offer so you can back out if needed. If they are elusive (as most will be for poorly managed properties), ask that the building be vacant prior to closing and make it a contingency. That way you don't have to deal with it. HOWEVER, if you ask that it be vacant it could impact your financing if you are using a portion of the income to qualify.

@Kim Meredith Hampton

Thanks for the advice.  I will keep looking for answers.  I have rental comps for the area, but am looking for the current rent amounts on the current leases.  When I put everything into the BiggerPockets Calculators, I want to be able to figure out what my current rent income would be if I had to keep the current tenants.

Who would typically request this information?  Since I'm working through a realtor, would they be the one to reach out to the current owner?

And that's great to know about Cash for Keys.  What do you typically pay for for Cash for Keys?  Is there a general rule, like 2 months rent or something like that?

Thanks!!

@Ray Harrell

Great advice.  I would like to know the current rents/leases before forming an offer, if possible.  Plus another big thing is that I'm planning to owner occupy the property, and would either have to purchase a property with an empty tenant, or one where a lease is going to end soon.  Which is why knowing when the leases end is important to me.

How would a current owner handle a Vacancy contingency?  Wouldn't they still have to honor the current leases?  They wouldn't be able to just evict them because they are selling the property, unless that's stated in the leases.

Also, doesn't the rent have to be on your taxes for two years before you can use it for financing?  Can I use the current residents in a property I'm looking at to help qualify for that property?

Thanks!!

@Emily Eustance , I don't think anyone will give you current lease information before an offer, but you could always try. If you are going to occupy, then you are correct, timing is everything (especially if you are currently renting and have a lease).

The current owner would handle a vacancy contingency by offering cash for keys to vacate prior to closing, or they may be month-to-month tenants.

Some lenders will allow a renter credit toward qualification for owner occupied properties. For example, they will allow 75% of rents to qualify you for the mortgage. the 2-year stipulation is primarily for non-owner occupied property since it's considered a business and not a primary residence. Qualification using current rents will depend on your lender.

Originally posted by @Emily Eustance :

@Kim Meredith Hampton

Thanks for the advice.  I will keep looking for answers.  I have rental comps for the area, but am looking for the current rent amounts on the current leases.  When I put everything into the BiggerPockets Calculators, I want to be able to figure out what my current rent income would be if I had to keep the current tenants.

Who would typically request this information?  Since I'm working through a realtor, would they be the one to reach out to the current owner?

And that's great to know about Cash for Keys.  What do you typically pay for for Cash for Keys?  Is there a general rule, like 2 months rent or something like that?

Thanks!!

 Emily,

Yes your Realtor should ask for those. Cash for keys vary from area to area, rent amount and how willing both parties are with making it a win win for everyone 

@Emily Eustance I am an agent in Illinois and buy rentals out-of-state. My agent always gets me rental income, annual expenses and vacancy information before I put in an offer. I also have start and end date for leases and monthly rental amounts. I am not sure how you would figure numbers without it especially if you are buying an under performing property. 

When purchasing an occupied property the new owner inherits the leases 'as-is" and tenants have rights and believe me they know what they are and how to use them. So be careful with trying to "get a tenant out" and not honoring the lease. Now, if the tenant is month to month, part of your negotiations to purchase the property could be for the current owner to serve proper notice to the tenant that they need to leave. 

Cash for keys is usually in a troublesome situation i.e. tenant does something that violates the lease and you offer them cash instead of evicting them. It is a win-win for both of you. Not sure how cash for keys would work in this situation unless the tenant does not really like it there and wants to break the lease anyways. 

Hope that helped a bit. Good luck!

@Emily Eustance - I have done this a few times when my client needs to owner occupy for their loan.  Your agent needs to be clear with their agent upfront about it.  Your loan requires you to occupy within 60 days so if the leases go beyond that your lender will ask for proof that you can occupy it. 

What we have done in the past is make our contract contingent on getting a tenant to agree in writing to vacate early, usually the seller will not go to the tenants until after you clear all the contingencies, so the timeline is short, and they may ask you to split the fee

You should be able to obtain all the information you need prior to making a offer through your agent. Getting the information is however under the control of the seller. If they are unwilling to provide basic information like rents, status of rental units and lease end dates you should suspect something and decide if you want to move on to the next deal or not.

You will come across sellers that are either incompetent, lazy or simply not motivated to sell in which case you must decide if you are moving forward with a blind offer or not. This business requires a great deal of work which usually begins with prying information out of sellers that do not have proper business practices. Mom and Pop can be difficult to work with but may also be the most undervalued properties. They are the ones that set their rents below market in the false belief it helps to retain tenants. Their lazy approach to business usually devalues their property.

@Emily Eustance I have requested and gotten lease amount and lease term prior to making an offer. I just looked at a deal where the seller shared copies of all the leases prior to even making an offer. At a minimum you need to verify that at least one tenant is month to month because you plan to owner occupy. 

You could offer to buy out a lease by giving the tenant cash to leave. I wouldn't count on that to satisfy your owner occupancy requirement, because there is no guarantee someone will agree to this.

@Patrice Boenzi thank you for the advice.  I will have my agent reach out to them and request the information.  Asking for annual expenses and vacancy information would also be incredibly helpful! Thanks for the suggestion.  

@Brie Schmidt Having a contingency to have a single tenant vacate early is a good idea.  I would have no issue helping pay for a cash-for-keys situation.  I would gladly split a fee if it means that I get the property and loan that I want.  Thanks for the advice!

@Thomas S. That is incredibly insightful.  I never though of that, but it totally makes sense!  I can see how all of those things would point towards a lazy owner.  Even if the purchase process is difficult, once the property is purchased, those issues go away, right?  Is there any issues that would cause in the future?  Thanks!

Originally posted by @Emily Eustance :

Hey everyone!

I've been looking at a few multi-tenant properties in my area, and have a few quick questions.  Most of the ones that I've looked at have existing tenants.  When doing the calculations in the BiggerPockets Tools, it's hard to properly estimate what the current rents are.  For example, if a tenant has had a lease for the last year, their rent may be lower than the average for that area.

So, would I be able to request current rent/lease length information from the current owner? I know that getting the current leases / estoppel usually falls under due diligence after the property is already purchased. But what If I want to know this information before even offering on the property? Also, I want to make sure that I'll be able to move into the property when I purchase it (Owner occupied requirement for FHA Loans).

Also, can I offer Cash for Keys if the tenant is currently in a lease?  I know that Cash for Keys is typically to get a problem tenant out rather than going the eviction route.  What if I just want them to leave for a different reason, like to rehab the unit or raise the rent?

Thanks for taking the time to read this!

-Emily

Emily, yes, you can ask for anything you want during the offer period, it is a legitimate request to see the rent roll prior to setting an offer price.

As for cash for keys, you can do anything, as long as it complies with your Real Estate Laws.....  You may want to consider keeping as many tenants as possible, while you renovate the units either all at once or one by one or a few at a time. Keep the cash flow going if possible as best you can, it never hurts :)

@Emily Eustance - Just make sure you bring it up before you offer.  You don't want to blind side them halfway through and back them in a corner 

@Steven Gesis Thanks for the advice. I am looking to get an FHA, which requires you to live on the property. So the Cash for Keys option would be for a single tenant, just so I would be able to occupy the property.

@Brie Schmidt Yeah, I mostly want to know this information before I even send an offer. 

Thanks everyone for all of your help!  I really appreciate it!!

My REA is usually able to tell me the rents and lease status for properties I'm considering, even before I put in an offer.  Like others have stated, some sellers may require an offer before providing that info, but there shouldn't be any issue with them providing it.  If there is, that would be some red flags flying high for me.

I did cash for keys once with an inherited tenant.  "Tenant" in my situation was a strong word, lol.  I bought a dilapidated duplex that needed substantial work.  The seller's brother had been living in one of the units for over 10 years, rent free.  I normally would have required the tenant be out before closing, but, because I was getting this property dirt cheap and it was in a landlord friendly area, I estimated $1,000 in my costs if I had to evict and drag this guy through to the bitter end. 

I served him a 30-day notice to vacate the day after I closed and offered $500 if he was out in 2 weeks and $250 if he was out in 30 days and the property was in the same condition as when I bought it.  The histrionics and hand wringing were Oscar worthy.  And he was a complete PITA for those last 30 days, including stealing our hose twice.  But, 30 days later, he was gone with $250 cash in his hand.  Maybe he would have left anyway, but I still consider that $250 as money well spent.

You can and should ask for rent rolls, copies of existing leases and perform your due diligence for all aspects of the investment.

There are only three reasons to evict. 1. Non payment of rent 2. Breach of Lease and 3. Proper Legal Notice when the tenant is on a month to month. What is legal depends on the state the property is located in. Call your lawyer.

I would not offer cash for keys if no violation has occurred. Call your lawyer.

You should give notice of future rent increases upon possession. Why wait to the last minute and have everyone move at once. They may self terminate gradually if you give them time to look around.

Once you purchase this property, then what?  You sound like you have researched the location and are studying market rents, but do you really understand the role of a Landlord?  

Things to ponder in addition to accessing a property as a rental (and you are thinking multi-family which equals multi responsibilities) is to study your state and City Laws as well as landlord common sense issues, such as the eviction process.

When you become a landlord it is truly a business.  Most people look at us as though we are just mean people who only think of money.  They don't see that we are on call 24/7, which means Christmas, Easter, and every Holiday under the sun.  And believe me, you will be called on those very days for the furnace going out, the lights don't work, or your neighbors are making too much noise. No they see us as sitting back, watching television with a beer, and smiling as we collect the dough. 

Then you have the Eviction Process.  The threats, the damages, the fixing the properties up again and again and again.  

The eviction process is a very emotional and dangerous time as it is, but especially so to someone who is new.  

You will want them out!!!! And you will make many mistakes because you're not getting your rent and they won't move and they are doing damages.!!! This is where a lot of landlords get it wrong.  They try SELF-HELP. 

The Eviction process is long and we must be patient.  We must let the courts do their job.  It's hard to stand by and watch it happen, but if you do one thing wrong, it could mean a lawsuit against you, and some have lost their investments, their properties by doing it their way.

Now, I'm not writing this to scare you, because we all were new once upon time.  But, I write this so that you and others (and perhaps you already know all this) have something to think about.  

The most responses I get from people when they find out that I was a landlord and saw my home, was "are you a doctor, a lawyer", and I would say no I'm just a Landlord, and they would say, "Wow, and that's all you do".  And I would smile and say, Yep that's all I do, because I knew that they had no clue as to what it entails to be a landlord so why even bother. 

Everything I've written about so far, doesn't even cover all the LAWS  that we must obey and follow,  plus the high property taxes we have to pay, and mortgages for those who chose to finance.   There is  lot of pressure on us.  We are responsible for other people's lives, because if our house doesn't cut the mustard, and anything happens to these tenants, we suffer the consequences, if it is caused by our neglect of the building.  Lot's of expenses.  So it is imperative to know how to strike up a good landlord/tenant relationship and keep tenants long term.  We are not on a mission to kick them out over every single thing they do.  But we are also firm when implementing our Lease Agreements which is a legal, binding, contract!!  We have to wear a lot of hats. Therefore, it is imperative we know how to be strong, yet fair.  Make our tenants respect us by us respecting them.  It is a two-way street.  It takes time to perfect it.  

I hope I have helped in some way to add some more knowledge to your  already eager-to-learn mind.  That's a beginning you know.  An eager-to-learn mind.  Be strong, don't give up. But always study, always research and always keep-up-to-date on the laws and the rental market. 

Good luck to you.

Nancy Neville

I wrote this piece a long time ago, but I think it still prevails today.  It's called "The Tenant Phase"

THE TENANT PHASE

THE FIRST MONTH (THE HAPPY PHASE)

During the first month of a rental period, the tenant is happy. They wanted the home, they got the home and everything is fine. THEY ARE VERY HAPPY! You spent a lot of time at the signing of the lease telling them what you expect from them and what they can expect from you. They seemed to be happy and they nodded in understanding.

THE SECOND MONTH

Somehow during the Second Month, when the newness wears off and the happiness falls into a routine, the new Tenants become confused. They seem to forget what the rules are and when rent is due (even though they have a written lease agreement to refer to). If they are one of the few tenants who do not get confused during this time, this means they have jumped from the Second Month phase into the TESTING PHASE which may cause a few problems, but I will talk about that in a few minutes.

To help the Tenants not be confused during the 2ND MONTH PHASE, I always bill my Tenants their rent 10 days before it is due. It's during the 2ND MONTH PHASE that I will answer any questions they may have and not make them put it in writing.

TESTING PHASE (May begin as early as 2nd month):

The TESTING PHASE, is a very crucial phase. Whether the tenants and you get along is determined during the TESTING PHASE. More Tenants than not like to Test the Landlord. If they had gotten away with it with their previous landlord, chances are, they feel, they can get away with it with you.... so they will try. They will pay their rent when they want to, putting you last and live the way they want to regardless of your rules.

It is very important to nip this in the bud during the TESTING PHASE, because if you allow the tenant to get away with things such as paying their rent when they want to and doing what they want, then chances are you will never proceed past the TESTING PHASE.

THE THIRD MONTH:

If you make it to the third month, that is good. But it is also very crucial during this time as well to make sure the tenant stays on course. The Third Month, strengthens your position as to who runs what. During this time you want to make sure that the tenant keeps paying their rent on time and keeps obeying the rules. One little falter on your part can throw the tenant back into the TESTING PHASE. It is very important that you guide them during this time as to what you expect and want. And important that you gain their trust and respect during this time.

THE FOURTH MONTH - THE COMFORT PHASE:

The Fourth Month through the first year, is THE COMFORT PHASE: the tenant becomes accustomed to your rules and is starting to feel comfortable. If you have handled everything correctly, being strong when needed to be, and doing evictions when needed, the Tenant will feel secure because the Tenant will know what is expected of them and will feel comfortable and will want to stay. (Tenants usually feel comfortable with stability and sameness).

AFTER THE FIRST YEAR:

After the first year, the COMFORT PHASE, becomes more stable and each year thereafter. It's just a matter of keeping your Tenant happy, yet, making sure they don't slip into the Testing Phase from time to time. Even old time Tenants will want to go to the Testing Phase if they see their Landlord falter, get too over generous or too understanding.

When that happens the Tenant's stability changes because the rules are changing throwing the tenant into the Testing Phase again, so we don't ever want to falter but always stay strong and in control.

THE MOVING PHASE:

During the moving phase the Tenant, no matter how many years they have been with you, seems to forget everything again. They become babies and they revert back to the TESTING PHASE. Once again they never refer to the Lease and must depend on you for answers.

During the MOVING PHASE, the Tenant can change personalities quickly. It's like they drank a potion that changed them from Jekell into Hyde. They become this fiend, this villain that could destroy you and is probably the hardest phase of all the phases.

It is during the MOVING PHASE, that you must be cool, have all your wits about you and be prepared, yet still be cordial so as not to enraged the monster that seems to be lurking in your Tenant during the MOVING PHASE (as there is NO ANTIDOTE to calm the savage beast once it takes form). If by chance this happens, it is best to not confront the beast but to keep your distance until the courts can set it free!

With time everything will fall into place as long as you treat Landlording as a business!

Rent On!

Nancy Neville

When I am researching a property, I try to get a good idea on the financials before wasting the time to step foot in the property.  I usually put in a request for lease info, renal history, utility costs, who pays utilities, ask if there is a management company, figure out who takes care of the lawn/snow and try to get the last few years of financials.  Many times I get some of the information without getting the utility info or financials.  The realtor will say something along the lines of the homeowner just did it part time and doesn't have financials... which doesn't make sense since they need to report the income on their tax returns.   I can usually contact the utility company for yearly averages in utilities and will try to base my projections on that.  If the place looks like an ok deal, I will schedule a showing to see it in person.

A simple inquiry to the listing agent should help you figure out the current occupancy level and if any units are on month to month leases.  I prefer month to month leases in case I need to kick someone out.  I market a 12 month minimum, but the leases are month to month contracts in case things do not work out.

@Nancy Neville Thank you for all of that information.  It's incredibly useful.  I am pretty familiar with the eviction process, and know how difficult it can be to manage tenants, therefore I will definitely be going with a property management company.  Nevertheless this information is very useful, so thank you!

@James Woodrich Figuring out who pays to what utilities, and who manages the yard/snow is important information to know as well.  Thanks for the suggestions.  I've reached out to my agent to have her ask the current owner. Thanks!

Tenants/Landlord responsibility can make a significant difference in if a deal will work or not-especially in multi family.  Definitely make sure who pays the items below and do not assume you can simply pass these costs on to the tenants if the owner is currently covering them.  I see posts saying to split them out, but if the tenants are already paying market rent, it might not always work out well.

-water/sewer

-electric

-gas

-exterior maintenance (mow/snow)

-trash

Also, be aware of rental licensing requirements for different cities as they may differ.  I have homes in two connecting cities.  One lets the landlord do as they please with no rental licensing program.  The other is a PITA.

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