Should I raise Rent after puchasing tenant occupied properties

Question

I am in the process of closing on two properties. Current rent is well below market value due to seller having a lot of free and clear properties so any cash was a bonus for him.  It my understanding that he has never had a formal lease so eveyone is month to month. I plan on raising rent at least by 50$. Is that too much or should I gradually increase overtime. Property will cashflow at normal rental rate.

John Underwood · Answer

I would gradually raise the rent over time or at least stagger the rent increase between properties in case this caused everyone to move on you at the same time.

Sedgrid Lewis · Answer

@Wesley W. you are right they probably will bail. A part of me just want to start over since there is no lease in place

Wesley W. · Answer

Inherited tenants are a wildcard.  Most of them will hit the bricks (either on their own or after you've paid your attorney) when it comes to rent increases or - shudder the thought - rules.  There is also a fair amount of entitlement that you may encounter as well.

The well-maintained and managed properties with good tenants at market rent are almost never for sale.  You are usually cleaning up someone else's mess with a multi-family purchase.  Like @John Underwood said, I would stagger the rent increases so you don't get more than one vacancy at a time.  I would start with the most tenuous tenant or, everything else being equal, the unit under market rent by the most.  Or alternatively, the unit with with the most (or least) deferred maintenance.  Do a risk assessment of these factors, then develop your strategy.

You will have a stabilization period with possible negative cash flow, but once you get through it you will have a much easier time with your own tenants and lease.  Good luck!

Sedgrid Lewis · Answer

I would think some of the tenants would be relieved that they would not have to move and find a new location.