Inheriting underpaying, 11-year tenant

[Dillon Alder]

I am under contract on a SFH where there are tenants in place who have never missed a payment in 11 years. They are a retired couple in their late 60's; the previous landlord hasn't maintained the property perfectly or kept up with market rent. This property is in a small town where my parents know the tenants and my parents live within a block of the property. Current rent: $625. If I put $15,000-20,000 rehab I could get ~$850-$900 in rent. The rent as is could be in the $700's. It is a 3bd/1ba around 1200 sqft. (My dad is a plumber and could add another bathroom) $75,000 purchase. I am wondering what I should do. I am not planning on raising rent right away because they have been great tenants and they always pay. I don't think I could do any renovations while they are in the home. What options do I have? Thanks in advance

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Originally posted by @Dillon Alder:

I am under contract on a SFH where there are tenants in place who have never missed a payment in 11 years. They are a retired couple in their late 60's; the previous landlord hasn't maintained the property perfectly or kept up with market rent. This property is in a small town where my parents know the tenants and my parents live within a block of the property. Current rent: $625. If I put $15,000-20,000 rehab I could get ~$850-$900 in rent. The rent as is could be in the $700's. It is a 3bd/1ba around 1200 sqft. (My dad is a plumber and could add another bathroom) $75,000 purchase. I am wondering what I should do. I am not planning on raising rent right away because they have been great tenants and they always pay. I don't think I could do any renovations while they are in the home. What options do I have? Thanks in advance

First let's acknowledge that you might be able to get them up to $750/month rent.  

And you should realize that there is no such thing as renting their unit as-is, really, because if you kick them out or they leave, you'll end up with having to paint and replace things and clean and not be able to charge them for it because it will be normal wear and tear.

But, let's say you kick them out and put $15,000 (minimum) into rehab to get $850.  

To get $225 more per month, it will take you 150 months or 5.5 years to recoup your investment, before you start profiting on it (not including any annual rent increases or vacancies, etc.).

Plus, you would have to depreciate the upgrades as opposed to writing them off as repairs (depending) in the year you do the work.

If it was me, I'd just raise their rent.  If they're truly under market by $100 - $125, and you raise it by say $75 - $100, when they check to see their options, they'll discover they can't get a better deal and they'll stay.  They probably won't like it, but worst case scenario is - not that they leave, which is probably what you'd prefer - but that they stay and now all of a sudden they want you to fix everything.  

Unfortunately, it sounds like an awkward situation for you.  But, business is business.  If you can sit down with them and show them comparable rentals and that you're charging them under rent (meaning your new higher rent amount) than other places, and that you do hope that they'll stay but you're sure they understand that you need to raise the rents, then hopefully, there won't be a ton of animosity.  Well, and as I said, if there is, hopefully they'll move out and let you make a decent profit.