New Single Family Rental Dilemma - Tenant on a month to month

4 Replies

Purchased a new single family rental 3B\2B in North Texas. The tenant is currently on a month to month lease and their family has been renting the property for the last 8 years. Here is the dilemma - They are paying WAY below market rents as the old owner never increased rent for the past 8 years. Currently paying $1200\month but market is between $1750\$1800 per month. They have improved the property over the years with paint, flooring, fixtures, etc.. and have been a solid tenant.

Thoughts on whether to give them a discounted increase for 12 months or push for full market rates out the gate.  All-in expenses are $1360\month.  New to BP - Thanks in advance.

Hi @Todd Sortor ,

Communication is always best.  I would inform them of the situation and be honest with them; rent has to go up but you would prefer to work it out so they stay.

  • Condition of Home:  If they tenants moved out, how much work would it require to renovate/repair for the next tenant?
  • Multi-year Lease:  You can always have them sign a multi-year lease that ramps up over a short period of time.  For example, rent goes to $1,400 immediately but after 6 months it bumps up $50/month until you've reached your $1,750 market rates.
  • Vacancy Discount: How long will it take for you to find a new tenant? That will indicate how much leverage you have in the negotiations. Granted this rent is significantly below market, but you need to determine how much vacancy you can afford before it's a bad decision to lose a long-standing tenant for rent increases. For this situation, it's an easy choice. However, if you're comparing them accepting $1,400-1,500 vs. $1,700-1,800, then that's a 5 month pay off if it sits vacant for a month between tenants.
  • Find Justifications:  Tenants need to understand that rents are bound to go up.  However, do your best to be prepared with justifications.  There are annual increases in taxes and insurance.  Personally, I only increase rents every 2 years with tenants that stay long term.  It's long enough not to force them to move out.

Best of luck!

  

Thanks Kenny. All great points. I would prefer to keep them in place as the old owner was very pleased with them (paid rent on time, minimal calls and easy to work with). Have scheduled a sit down for tomorrow to go over the current market conditions. Shooting for a happy medium for the first 12 months with an understanding of further increases. Plan to talk with them about any property concerns and offer a few improvements that they may be wanting. Thanks again.

1) Am I reading this correctly? Your gross revenue is $1,200 but expenses is $1,360 (assuming debt service is in there too). So you are loosing $160/mo. 

2) When you say the market rent is $1,800 you probably mean once it is all updated. It is probably not realistic to ask the current tenant to pay market rent. How much rehab work will be required to fix the house so that it will get you that rent? Does it make sense to spend that money to get $1,800

My philosophy with inherited tenants is always to raise rent just under what it would be if the unit was fully updated. If they stay, (they are still getting a good deal) you get almost market rent with no rehab cost. If they leave, you can rehab and rent it at FULL market to the next tenant. Its a win-win.