New duplex, great long term tenant WAY under market value

7 Replies

Hi all, I'd appreciate your opinion on what to do in this situation - 

Just purchased a duplex today ( 7/6/18 ) with long term tenant paying same rate of $1100 since 2011 for a 4 bedroom 1600+ sq ft, 4 BR 2 car unit in a great location, the top school district in the state, and large yard. I averaged out similar properties cost per square foot and the avg is $1.24/Sq Ft. ...... A duplex next door is 3BR 1 car renting for $1600... 3 BR Houses are being rented out for $2600 in the area. 

The tenant is currently at .92 cents per sq ft. Even at $1.00 per sq ft of 1600 in rent is below market avg. 

I thought $1,500 / month is a good middle ground for a great tenant year lease starting off, then I'd increase next year. instead of dropping the bomb of $1900+/month at market average off the bat. I'd really like to keep him as a tenant. He had a deal with the previous owner where he cuts the lawn every now and then and does some snow removal on the property. Does not do the best lawn care but its nice to have someone cut it. I wouldn't require him to cut the lawn with this increase I think he would push back. 

How would you approach this situation? I need him to at least be at $1400 to hit half of the house monthly payments not including my utilities.... 

Thank you so much for helping me here. I really appreciate your input. 

@Stephanie M. Congrats on the purchase. I’m going to assume you’ve done your homework and that your numbers are all accurate. If so, I would increase rent to match the market rate at the first chance I got (lease renewal.) To have rent that far below market and leave that much cash on the table would be a huge misstep. Don’t get caught up trying to “meet in the middle” or help out the tenant. You need to look at it like the business it is and maximize your profits.

You mentioned at the end wanting to, “at least get the tenant to cover half your house payments.” Going off this, I’m guessing this property is not cash flowing. Is this the case? If so, even more of a reason to increase the rent and maximize income. Good luck.

Hi Stephanie, I have a few minutes questions.

1. What area is the property located in?

2. Do you live in the other unit?

I agree that this situation isn’t one of those “meet in the middle” situations. However, I hope you budgeted in losing the existing tenant, repairs, and vacancy because any major increase of rent = this reaction. Before you do anything I would first do this:

1. Be 100% certain of what the market rent is for the unit in question is. Don’t use online resources as a primary source of data to base your decision making on when investing in RE. As an industry professional I will tell you these are only good as secondary sources, not primary. Get in touch with a local expert who deals with rentals in this area everyday. If you don’t have someone then interview a few (not at the property) and arrange to show the unit to your top pick.

2. Since this person will have the most reliable info on what your unit can rent for ask them that of course but also make sure you’re both on the same page with the condition the unit needs to be in for them to achieve this rent; this includes not only what repairs might need to be made but also any functional or cosmetic improvements.

3. Once you have a clear estimation of expenses associated with losing the current tenant, repairing/improving for a new tenant, leasing fee, vacancy/loss of rent, decide if you’re financially ready to initiate the action which will cause your current paying tenant to move?

Definitely increasing the rent to market rent is the best business move. But know what needs to be done, approximately what it will cost, and that you can handle taking that on now BEFORE you initiate. The ONLY scenario in which I would recommend waiting, and by waiting I don’t mean forever but just however long is necessary, is if you presently don’t have the financial resources to cover the expenses associated with doing what’s necessary in order to make increasing the rent possible right now.

Hope this is helpful and best of luck!

You need to decide if you are operating a charity or a business. Any tenant paying below market is not a good tenant they are in fact a bad tenant because they are hurting your business. You need to turn them into a good tenant by having them pay full market rent or you find a good tenant that will.

If market rent is $1900 anything below that is charity. Plenty of charity landlords in the world charging below market rent, some lamely attempting to arguing it is a good business decision. You decide if you are joining their ranks.

I'm not exactly sure what makes them a great tenant? I'm under contract on a similar property right now. When I take ownership I'm giving the month to month tenants a 60 day notice that rent is going up. If they want to stay they and pay me a fair price that's fine, if not it gives them a cushion to leave. I will not be subsidizing their housing and/ or letting them pay hundreds of dollars less than someone a few doors down.

really great points, thank you for the input I really appreciate it. 

It will be owner occupied so I will be on the other side. @John Thedford They are currently month to month. 

@Angie D. Thank you for your suggestions! Yes I will live in the other side. Who would be the right industry professional to look for? A realtor in the area that owns duplexes? The area is a nice quaint area, property is .56 acres, stately landscaping with evergreens and shaped shrubs. the back yard has a cute river/creek down a little slope from the house. walking distance to little downtown area and park, 2 miles down the road from the top high school in the state, and 5-10 min from department stores / home depot / walmart / strip mall / nice salons and spas etc. hope that helps answer your question. 25 minutes from downtown Milwaukee, WI. a lot of lakes in the area. 

I do have repairs I need to do on the property, roof repair $1800, fix a sump pump that isnt working, and electrician to look at a box in the garage.