I looked at two duplexes (C Neighborhood). One of the duplexes has long-term tenants in place (years) but below market rate. If I were to buy, should I hang on to them assuming I can make some sort of profit or raise the rate and possibly lose them? If they were to move out, I would definitely have to update the units to get market rates. This will be my first rental property. A little nervous!!
@Bryan Quinn How much below market are the rents?
If it is not by an appreciable amount, you should stick with the existing tenants but have them re-sign a lease to make sure everything you want is covered. You can do this for free (don't charge them) and explain this is just because of change in ownership.
Unless you market is hot, you run the risk of attracting lower quality tenants. At the start of your RE journey, you should aim for the least amount of headaches/surprises.
@Omar Khan , the rents are $675 vs $900 market. Thanks for the info!
@Bryan Quinn That's a big difference! Also, you didn't mention the market and the asset type/class.
E.g. You should be able to get a tenant at the $900 rent if you live in a medium/big city and the property is in a decent location.
Alternatively, you can talk to a realtor/post an ad on Craigslist, etc to gauge market demand for your property. You can also look @ ads for nearby properties to give you a better idea of the market average.
Also, would suggest doing a cost/benefit analysis on rehab vs. just renting out.
But whatever you do, please, do not over-renovate the property or try to make it the BEST property in your neighborhood. You won't win brownie points for that.
@Bryan Quinn , I would think of market rate rent as what I can get for a unit pretty much as-is. Otherwise you have to factor in the cost of the value-add rehab into the equation.
So, if you are paying for a fair price for units in less than top condition and the rents make sense for the price (generate good positive cashflow), then you really don't have to worry about tenant turnover. Ride the current tenants at the current price and when the units turn over be ready to do a value-add rehab and raise rents to market rate for their new condition.
Also keep in mind good long term tenants are like gold. Vacancy eats your profits fast. A good long term tenant is actually an asset worth protecting in many cases.
I would just start with small annual rent increases unless you are prepared to spend money on doing a Reno to get up to current market rates. If you are cash flowing ok I'd go with this plan if not then you will need to get the rent up to where you are cash flowing decent.
Good information @Kevin Sobilo ! Thank you for your input.
You need to get your tenants to market asap. Good tenants are those that pay market rent.
Make plans to do a tenant turn over and prep the unit for good tenants that can afford the rent. Higher rent will attract better quality tenants.
Long term tenants below market are hurting your investment. Make sure you buy based on present rent then bring the rents to full market to increase the value of your investment.
The best tenants are long term at market. The worst, business wise, are tenants paying below market. Regardless of how long they have been there they are dead weight.