Inheriting a tenant that's not paying market rent...

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Inheriting a tenant that's not paying market rent...

Jacob Henderson
Real Estate Agent · Wichita, KS · Member since 2018 · 37 posts · 31 votes

I am excited to say that I will close on my first property soon and will be inheriting tenants. The tenants and their two pets have been living there for 18 years and pay $475/month, no deposit, no pet fee and on an oral lease. I have spoken with an attorney who supplied an estoppel letter to me that both tenants were willing to sign. 

The market rent for this particular property is $700/month. My question is how do I approach this situation so that I can keep long term tenants but get closer to market rent for this property. I plan to ask them apply just like new tenants, have a deposit, but am willing to waive the pet fee since they have already had their pets living there long term. I want to have a paper lease signed as well. I have been debating back and forth on if I should do a month-to-month lease or annual lease and if I should gradually raise rent or just raise it to market value in one month. Like I said, I am new to real estate investing and would really appreciate any and all feedback on this. 

-Jake

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
8y

I have had this happen more than once. If you want to keep them, offer to bump it but keep it 10 - 15% below market. They should know they're getting a good deal and it will save them money if they don't have to move. If they don't recognize that or if they just can't afford it, let them go and find a good tenant that will pay what it's worth.

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  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    8y

    What does the area look like? If you are SURE you can get $700, then raise the rent to $700 (if you are able in your city), and see what happens.

    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Suggest you ask them to look elsewhere. The increase is so much that they are not going to take it.  You are running a business.


    2Reply
  • Abdul Shishi
    Member since 2018 · 82 posts · 40 votes
    8y

    Must smell horrid. 2 pets?  I'd bite the bullet and pray they move. 

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    I have had this happen more than once. If you want to keep them, offer to bump it but keep it 10 - 15% below market. They should know they're getting a good deal and it will save them money if they don't have to move. If they don't recognize that or if they just can't afford it, let them go and find a good tenant that will pay what it's worth.

    The DIY Landlord Book4.7248 Reviews
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    5Reply
  • Dick RosenPro Member
    Property Manager · Gilbert, AZ · Member since 2009 · 1k+ posts · 451 votes
    8y

    I would not bother with a new security deposit at this point, you have no idea what the property condition was when they moved in or what has happened over the past 16 years making it very difficult for you to hold them accountable for anything. You could do that with a new inspection and have them sign off on the inspection. I would do 12 month lease with small increase and I would increase every year until you reach market rate. Any increase larger than that may cause them to leave, that's your call if you want to take the chance of losing them or not. You have to weigh out the difference of the lost rent because they are under market versus the cost to turn it over and find a new tenant. 

    2Reply
  • John Meirose
    Brandon, FL · Member since 2017 · 70 posts · 32 votes
    8y

    Hello Jacob,

    This is a tough situation...you want to get the proper amount of rent, per market but don't want to lose a long term tenant.  My recommendation is to speak with the tenants and have them understand the value has increased over the last 18 yrs and you want to try and get as close as possible to the current market price.  If anything, do a staggered pricing on the lease so it increases over a period of time that works for both parties.  Either way, get them on a lease and in my opinion, 12 month is better than m2m.  Good luck 

    1Reply
  • Jack P.
    Columbus, GA · Member since 2017 · 88 posts · 115 votes
    8y

    One more thing to consider:  How much is it going to cost to rehab the unit if they leave?  I'm assuming carpet, paint, and who knows what else.  While you may be able to bring up the rent to $700/mo, it may take you $10k or more to put the place in a condition where you could demand $700.  So assume you could get the full $225/mo more, and it takes $10k to rehab, it'll take you 45 months to recoup the difference from what you are currently making, not including additional turnover or rehab time.  Does it make sense to encourage them to leave if it'll take you 4 years to begin to see a profit?

    In this case, I'd fine it hard to ask them to leave, but may ask for a small increase in rent to cover costs as they've increased over the years...such as taxes and insurance.  

    Have the conversation and be honest with them.  Someone with 20 years at the same residence probably doesn't want to leave.  See if they can do $500 or $525 and ride them until they leave on their own.  Either way, definitely get a contract on paper!

    3Reply
  • Jacob Henderson
    OP
    Real Estate Agent · Wichita, KS · Member since 2018 · 37 posts · 31 votes
    8y
    Thank you for the input everyone! I will have a conversation with them tommorow and let you know how it goes from there
    0Reply
  • Jacob Henderson
    OP
    Real Estate Agent · Wichita, KS · Member since 2018 · 37 posts · 31 votes
    8y

    I realize this original thread was from months ago but I have finally logged back into BP. Definitely miss the forums and need to get more active on here. I figured I would fill you in on what I did and what happened. 

    I ended up raising the rent to $620. It took three months to get to this amount, the first month they paid $475 (originally what they were paying), the next they paid $550, and then they signed a one year lease for $620. I was up front with them and told them the plan from the very beginning. I wanted to be transparent and let them decide if they wanted to stay or not. At first they did not like the idea but I told them that I would be making much needed repairs on deferred maintenance. After I fixed their hot water in their bathroom sink they were less hesitant. I was able to fix most of the deferred maintenance myself so for very little cost I was able to keep long term tenants. I decided to go with $620 as incentive for them to stay (below market rent of $700) and it almost covers my mortgage which is $624. I am house hacking the duplex so I am able to live very cheaply and save for the next property. In the meantime I have completely renovated my side of the house (1 bedroom, 1 bath loft) which will now be able to command $550 when I move out. Overall I am very happy with my first househack. I wouldn't have been able to do it without BP, so thank you everyone!

    0Reply
  • Dustin Burke
    Investor · Wichita, KS · Member since 2017 · 133 posts · 41 votes
    8y

    Great Job @Jacob Henderson!  Sounds like you handled this first deal well. What part of town is your duplex in?

    2Reply
  • John LaBanca
    Investor · Atlanta, GA · Member since 2018 · 59 posts · 78 votes
    8y

    Wouldn't the security deposit be part of the negotiation when purchasing the house? Presumably the previous owners were holding a security deposit.

    0Reply
  • Jacob Henderson
    OP
    Real Estate Agent · Wichita, KS · Member since 2018 · 37 posts · 31 votes
    8y

    @Dustin Burke Thank you! I am excited to find my next deal. The duplex is near the northwest corner of Douglas and Hillside. 

    0Reply
  • Jacob Henderson
    OP
    Real Estate Agent · Wichita, KS · Member since 2018 · 37 posts · 31 votes
    8y

    @John LaBanca I think generally they would be transferred with the purchase. The previous owner did not require a security deposit though, so there was no deposit to transfer.

    1Reply
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