Purchasing an occupied property with rents below market rates.

[Brad Kirkpatrick]

My wife and I are closing on our first duplex this coming Friday.  Both units are currently occupied with long term tenants (one tenant told us she'd been there 30 years).  Currently they are paying about half of market rate for rent with a verbal agreement from the property owner that they take care of all repairs etc on the property.  They have been month-to-month all this time with no deposits or lease agreements.

The property is in need of rehab, repair and some upgrades (like electrical and windows).  We are estimating each units repairs at $25k per side to be competitive in quality of other rentals in the area and to collect full market rents. Once renovations are done we expect it to appraise for 30% or 40% more than our purchase price.

What we keep going back-and-forth on is should we let the tenants stay, make modest repairs (about $10k per side) and put them on a lease that raises the rent enough to cover expenses with modest cash flow (still below market). Or should we have the property vacated, do the rehab/renovation in full and then put it back on the market at full retail rental rates.

Any insight, experience or opinions your willing to share will be most appreciated.