Just closed on four-plex and meeting with existing tenants....
Rental Property Investor · Lexington, KY · Member since 2017 · 56 posts · 22 votes
Hi All,
We just closed on our first buy and hold property, a four-plex. The units are currently rented, but way under the market price. I reached out to each of the tenants, confirmed they are interested in renewing for another year and let them know we will have a new lease agreement and rent increase considerations. I really need to increase the rent by 18% in order to meet my ROI numbers and to get closer to the market. Any suggestions as to how any of you have approached this in the past. I realize that is a large increase ($100) just to kick-off our landlord/tenant relationship, but this is a business after all. Suggestions?
Like what @Danny Randazzo said, double check what you consider "market" rents. I think some of the best advice I've seen on BP is this: You don't set the rent prices, the market does. If you get it wrong, high or low, it will cost you money. Say you raise the rent $100/mo and your tenants leave, but you were wrong in your market assessment. The unit stays vacant for an extended period of time, and you have to lower the rent to fill it again.
I inherited tenants for probably 80% of my rentals, and have subscribed to the philosophy of leaving them in place under current prices, letting natural turnover take place. Check the vacancy history for your units. If all the tenants have been in place for less than two year, you know that you will experience a decent turnover rate, and consider anything over a year to be bonus. Raising the rents just accelerates that process. Try not to create artificial vacancy if possible. A unit is renting for $100/month under market rate at $800/mo will take you 8 months to recover 1 month of vacancy.
The other part to consider is the rehab required for turnover. Current tenants agreed on renting the unit as it is now. That unit may or may not be in great shape. If the current tenant vacates, you may have to dump a considerable amount of time and money to get it into condition to rent at "market" rate again.
Through my personal experience, last year I purchased a 4-plex with all units full, knowing that they were each in rough shape. They were all renting for $75-150 under potential. I decided to leave the tenants in place until they left under their own conditions, because I knew that whenever one left, I would have to spend $10k to bring the unit up to a condition that would attract the tenants I was looking for. I didn't want to spend $40k the first year, so I will keep the prices low and keep the existing tenants in place for as long as possible. When they leave on their own, I'll do the rehab.
They are all on 1 year leases and they expire at the same time? If they have time left on their current lease, you need to honor that lease until expiration, I am sure you already know this. I would recommend increasing them one at a time as their leases expire, so you are not stuck with 4 empty units at once.
Like what @Danny Randazzo said, double check what you consider "market" rents. I think some of the best advice I've seen on BP is this: You don't set the rent prices, the market does. If you get it wrong, high or low, it will cost you money. Say you raise the rent $100/mo and your tenants leave, but you were wrong in your market assessment. The unit stays vacant for an extended period of time, and you have to lower the rent to fill it again.
I inherited tenants for probably 80% of my rentals, and have subscribed to the philosophy of leaving them in place under current prices, letting natural turnover take place. Check the vacancy history for your units. If all the tenants have been in place for less than two year, you know that you will experience a decent turnover rate, and consider anything over a year to be bonus. Raising the rents just accelerates that process. Try not to create artificial vacancy if possible. A unit is renting for $100/month under market rate at $800/mo will take you 8 months to recover 1 month of vacancy.
The other part to consider is the rehab required for turnover. Current tenants agreed on renting the unit as it is now. That unit may or may not be in great shape. If the current tenant vacates, you may have to dump a considerable amount of time and money to get it into condition to rent at "market" rate again.
Through my personal experience, last year I purchased a 4-plex with all units full, knowing that they were each in rough shape. They were all renting for $75-150 under potential. I decided to leave the tenants in place until they left under their own conditions, because I knew that whenever one left, I would have to spend $10k to bring the unit up to a condition that would attract the tenants I was looking for. I didn't want to spend $40k the first year, so I will keep the prices low and keep the existing tenants in place for as long as possible. When they leave on their own, I'll do the rehab.
@Eddie Sorrell If your numbers are so tight on the day you close, then you probably didn't give enough cushion when you made the offer. Sometimes, rent increases out of the blue is not the best strategy. Especially if it is pretty steep for the renters. As it might lead to vacancy, which cost you money for turnover, marketing, ... etc. You need to find that balance based on your market/tenant base. Do you have budget for some minor cosmetic improvement on the property to "make sense of" the rent increase? I don't know ... you can power wash the building for a few hundreds ... to give the exterior a new look ...
If those market rent #'s are correct, I would clearly explain this to them, and then recommend that you offer to do some minor upgrades to the units for those existing tenants.
Put up a fresh coat of paint on the walls, pay for carpet cleaning (if there are carpets), do minimal upgrades to the lighting fixtures, and maybe even throwing in some USB outlets -all relatively inexpensive upgrades to your units that will help force appreciate the rent, even if they decide not to stay. You can use these upgrades as write off's come tax time.
The perceived value you added to their residence may go a long way in offsetting any negative perception from the rent increase, and as you as their new LL.
Hi All,
We just closed on our first buy and hold property, a four-plex. The units are currently rented, but way under the market price. I reached out to each of the tenants, confirmed they are interested in renewing for another year and let them know we will have a new lease agreement and rent increase considerations. I really need to increase the rent by 18% in order to meet my ROI numbers and to get closer to the market. Any suggestions as to how any of you have approached this in the past. I realize that is a large increase ($100) just to kick-off our landlord/tenant relationship, but this is a business after all. Suggestions?
If you raise the rent by $100, you end up pissing them off and they leave. Now you have vacancy expense, and then you have expenses to make the place rent ready. Only for a measly $1200 of potential income a yr, you will be spending over $10,000 (Vacancy + Repairs + PM/Realtor expense). Not smart at all.
If I were you, I'd keep the rent where they are. If you want to raise, raise them gradually by $25 or so a year after you've had your tenants.
Based on his post looks like he inherited the tenants. I like to buy a property that is vacant, but if the old landlord doesn't want to kick the tenants out, and deliver to you vacant, not much you can do. RE market is heating up. It's a seller's market. Seller can very easily go to another buyer and strike a deal. Lot of sellers don't want to be the bad guys who kicked out paying tenants, just for the sake of the transaction.
If you are that tight, it sounds like the price was set on "what you could get" rather than current rent.
My 4 plex was way "under market" but in reality it was not far under market for the condition they were in. We bit the bullet and cleaned house (can you afford to?) and renovate the entire building. It hurts in the short term, but they are in demand units that will increase every year. I know I can rent each one for more each year, so I welcome vacancy.
If you are currently "way under" as you say then you should welcome a vacancy. But if you are already questioning this line of attack then a tenant will smell it.
When someone is paying less than $600 rent a $100 increase seems like huge, but again if you are far below market then you should welcome them moving on. My new tenants pay between $1500 and $2000 a month in a booming area. I can't imagine raising $100 a month.
Thanks all for the feedback and suggestions. This is very helpful. I am going to test the market increase with only one unit. The other 3 tenants have rented the units for over 2 years and interested in staying longer term. I will screen them, convert to our new lease agreement and approach the rent increase conservatively and on a case by case basis. I want to establish a good LL relationship and provide value for any increase that takes place. After all, I am new to this and easing into a fully rented four-plex is a good start! Thanks again!
My approach when taking over inherited tenants is strictly business. We invest with the sole purpose of making maximum returns, no charity allowed. With that in mind I would give notice according to the regulations prior to their leases expiring. My goal would be to take every tennat directly to full market and I would make this clear to every tenant.
If we assume all leases expire on the same date upon expiry of their lease each would become M2M. I would begin with the tenant that has been there the shortest amount of time and give 2 months notice of their new market rent. I would give 2 months notice to each tenant each month after that going from shortest to longest time they have been tenants. This would have all 4 existing or new tenants at full market rent within 5 months from taking over the property.
Assuming each lease expires on a different date each would be given their 2 months notice prior to their leases terminating.
No place in my business plans for supplementing tenants rent when taking on inherited tenants. Clean house as efficiently as possible, making full market rents asap whether that be existing or new tenants. If renovation work is necessary turn over would be adjusted to control one vacancy at a time.
To be successful in business you must manage professionally and be super efficient. Every dollar not earned directly effects your bottom line and you ability to survive. Not charging full market rent reduces the value of your property as well.
You choose to operate as a professional business or as a hobby. The distinction is based on how your management decissions translates to your biottom line.
Based on his post looks like he inherited the tenants. I like to buy a property that is vacant, but if the old landlord doesn't want to kick the tenants out, and deliver to you vacant, not much you can do. RE market is heating up. It's a seller's market. Seller can very easily go to another buyer and strike a deal. Lot of sellers don't want to be the bad guys who kicked out paying tenants, just for the sake of the transaction.
under no circumstances should inherited "not screened" tenants be put on long term leases. even given the opportunity to screen them, inherited tenants should not be put onto long term leases. and just to clarify, when I say long term, I am talking about 1 year term leases. these tenants should only be offered month to month.
Based on his post looks like he inherited the tenants. I like to buy a property that is vacant, but if the old landlord doesn't want to kick the tenants out, and deliver to you vacant, not much you can do. RE market is heating up. It's a seller's market. Seller can very easily go to another buyer and strike a deal. Lot of sellers don't want to be the bad guys who kicked out paying tenants, just for the sake of the transaction.
under no circumstances should inherited "not screened" tenants be put on long term leases. even given the opportunity to screen them, inherited tenants should not be put onto long term leases. and just to clarify, when I say long term, I am talking about 1 year term leases. these tenants should only be offered month to month.
Agreed, but let me play a bit of devil's advocate here. What if the tenants are already on say 18 month lease, and 3 months into it, the landlord sells the place, and if their leases have no clause in them by which they will be nullified or become M2M (most leases don't) what are you going to do then? You don't have much control, do you? In a seller's market, are you going to walk away from a perfectly good deal?
Point is that in seller's market, you have very little control on these things.
Based on his post looks like he inherited the tenants. I like to buy a property that is vacant, but if the old landlord doesn't want to kick the tenants out, and deliver to you vacant, not much you can do. RE market is heating up. It's a seller's market. Seller can very easily go to another buyer and strike a deal. Lot of sellers don't want to be the bad guys who kicked out paying tenants, just for the sake of the transaction.
under no circumstances should inherited "not screened" tenants be put on long term leases. even given the opportunity to screen them, inherited tenants should not be put onto long term leases. and just to clarify, when I say long term, I am talking about 1 year term leases. these tenants should only be offered month to month.
Agreed, but let me play a bit of devil's advocate here. What if the tenants are already on say 18 month lease, and 3 months into it, the landlord sells the place, and if their leases have no clause in them by which they will be nullified or become M2M (most leases don't) what are you going to do then? You don't have much control, do you? In a seller's market, are you going to walk away from a perfectly good deal?
Point is that in seller's market, you have very little control on these things.
You seem to be discussing hypotheticals now, which is no help to OP who has already closed on property. I stand by my original statement, but I'll also answer your hypothetical. If the tenants are on an 18 month lease, you run your analysis using current rents as projected income. this lowers your purchase offer, and punishes the irresponsible landlord for offering an 18 month lease at below market rents when he planned on selling. if the lowest price he is willing to accept is calculated using market rents, then you compare your risk aversion and capability to carry the property at a loss for 18 months to determine if it is worth buying still. likely not depending on how far under market rents are.
We are going through the same situation currently with a duplex we expect to close on next month. Both units are substantially under market on M2M leases and there was quite a bit of deferred maintenance. Our plan A is to give 60 day notice of rent increase and offer some cosmetic upgrades to help justify it. It doesn't matter to the tenant if you can logically prove their current rent is below market, they'll still want something for the increased rent and they won't care how much deferred maintenance you've had to fix that their old landlords neglected. Our plan B is that we're prepared to update both units at the same time should both units become vacant, and if you're not ready for plan B it might be easier to leave the rents where they are.
Cameron
I personally never waste my efforts stroking inherited tenants and usually prefer they just leave. This avoides any resentment they may have for having their rents increased to market. As for giving them upgrades I would never do that either. Firstly market rent is based on the unit as is and there for upgrades are unnecessary and a waste of money. Secondly I would prefer they leave so I can get in a tennat that appreciates what they have and are willingly paying market.
With dealing with inherited tenants severely under market you are not doing your business and especially not yourself any favours hanging on to them at market rent. They will never be happy and neither will you.