Raising rents on acquired property during COVID
Chicago, IL · Member since 2017 · 26 posts · 6 votes
Hiya all;
We're closing on a property in the next few weeks and struggling with balancing the business and the human side of what we do. The property has tenants in place but are between $130-200 / mo under market at the current state of the place. Way more if we revamp it a bit. We realize this is an incredibly hard time to ask for a rent increase, but we don't see how we cannot as a business. One idea is to give them a free month and then start again with the new rents, while also giving them the option to break the lease if they want to. We do want to provide homes for people, but we can't lose money right off the bat!
I can't get a fully straight answer about the rental market at the moment, everything seems too volatile, but it does mean we'd have some time to spruce up the homes and get better rates. We also run the risk of not getting tenants for a while.
Anyone going through something similar in these unprecedented times, or have any suggestions?
Thanks!
You sure you want to take on a project during these times? Sure you want to be on the offensive? If you have a good paying tenant during these times you are already winning. Timing is everything.
If you have good paying tenants in place you can ask them if they prefer unit upgrades for an added cost. You might be able to use your current tenant base to fill in some of your "new" product.
You might run the risk of vacancy right now as people aren't dying to move around, especially into higher priced units. This all depends on your market and how employment has affected your area.
Being conservative, you can also only upgrade a percentage of your units and keep some at their current rates. That way you aren't fully exposed to the change you're making.
What's your plan to spruce up the rentals? Are we talking an extended rehab with contractors coming in and out in during lockdown, or is it you that's going to be doing some DIY sprucing?
Thanks . That's partially the idea, the property itself needs some love. New fencing, new mailboxes, some patching up of mortar and paint, and a serious lawn mowing. The inside needs a slight update and cleaning up, but things that are hard to do with tenants in place. Our idea was to implement new rents to match market at the current condition of the units. We'd still clean up the outside of it. If they want to break lease we'd give them right of first refusal to come back at higher rates once the units inside are refurbished.
@Jim K. like I mentioned above we have an initial round of cleaning out the curb appeal and the privacy of the current tenants. New fencing, mortar and paint, lawn, mailboxes, etc. The inside of the units isn't terrible but we would reconfigure the kitchen to make them more usable, create a laundry room/division for the bottom unit, put a washer from this century. Definitely new floors all around and some new windows. The carpet seems ancient and there's a trend here to vinyl faux wood that seems to be doing well.
You sure you want to take on a project during these times? Sure you want to be on the offensive? If you have a good paying tenant during these times you are already winning. Timing is everything.
@Frank Wong no, definitely not on the offensive. Paying rents is great, but it gets tricky when it doesn't cash flow. The point here isn't to be offensive or defensive but to navigate the line between providing a home and running a business. We do need the loan to get paid, and I can't imagine these guys not expecting some rent increase from new ownership.
The exterior project is sweat equity and some materials. If we end up having to take on the interior before we planned, that'll be the case whether we want to or not.
Thanks . That's partially the idea, the property itself needs some love. New fencing, new mailboxes, some patching up of mortar and paint, and a serious lawn mowing. The inside needs a slight update and cleaning up, but things that are hard to do with tenants in place. Our idea was to implement new rents to match market at the current condition of the units. We'd still clean up the outside of it. If they want to break lease we'd give them right of first refusal to come back at higher rates once the units inside are refurbished.
@Jim K. like I mentioned above we have an initial round of cleaning out the curb appeal and the privacy of the current tenants. New fencing, mortar and paint, lawn, mailboxes, etc. The inside of the units isn't terrible but we would reconfigure the kitchen to make them more usable, create a laundry room/division for the bottom unit, put a washer from this century. Definitely new floors all around and some new windows. The carpet seems ancient and there's a trend here to vinyl faux wood that seems to be doing well.
Ignacio, I've been the guy to tell people this too many times in this website in these days, but you're not going to get a kitchen remodel done by a third-party contractor reliably during this time in your neck of the woods. You're just not, unless the guy is your brother or your father-in-law and even then it'll be iffy. If this is an OOS buy, the problems will be even more magnified.
If you bought at a price that makes it imperative that you have to remodel using third-party contractors NOW or go broke, yes, you've got a serious reserves problem.
Other than that, my best advice is this: now is the time to be as resourceful as a cockroach or rat in the real estate world. Do what it takes to survive. If that means wheeling a nonagenarian to the curb and leaving her there with her oxygen next to her, you do it if it comes down to a choice between your family and their family. If it doesn't, you don't. And you always remain aware that after this is over, whatever actions you take during this pandemic will be remembered and you will be judged.
If Grandma needs to go for $200 per month because your reserves are just that thin, you're in a very rough position. I see that you're assuming that the existing tenants would reasonably know that there was a rent increase coming. I really wouldn't bank on that. People in financial distress have a way of blocking out ugly realities in their lives, and tenants in low-rent situations are usually, by definition, people in financial distress.
Thanks Jim. We're definitely not in this to kick anyone out of home just because, and we don't have to remodel in order to keep rents going. We would like to remodel to get higher rents but that was something we'd leave until the leases end, amongst other things to make up revenue, and we're going to fix the outside now because we want this to be a place they're happy to live in, and it's currently pretty unkempt. We'd break even at current leases with 0 cash flow which isn't ideal, and I do hear you about financial hardships making people close out the ugly. We'll monitor the market and see what happens, and have an honest conversation with our managers and realtors to see where they stand.
I really appreciate everyone's input, it's so much easier to go through things when there's a sounding board.
New purchasers always seem to think that their units are below market "As is" and should be raised. Many times they fail to appreciate the nuances of their market and their units.
In other words they don't realize that their units are at market for their units.
I am confused by your saying: "we will raise the rents but allow them to break the lease if they want." There is no lease to break? You come in with a notice of rental increase (30-60 days depending on MTM or lease) and there is nothing to break.
What are the current rents? $700 a month or $2000. Makes a difference in the percentage of increase. What are the market restrictions if any (laws/rules).
It doesn't sound to me like you have any plan on renovation. Fix the fence, new mailboxes, shrubbery??? Bud, take it from me- save your cash for the new kitchens and bathrooms, the HVAC. The other stuff is for your neighbors and you can get that done when you get good paying tenants in.
I think you are ill prepared for this jump- I suggest settling in, learn your tenants, learn your buildings specific market, increase rent appropriately and move accordingly. And hold off on the shrubbery.
Thanks for the insight Patrick. To be perfectly fair, the market rents that we got were “as is”, there’s definitely higher rents to be had once we renovate. We’re not trying to be greedy or shoot over the moon.
the downstairs unit is currently paying $725 and market rents that were given to us were $900. Fixed up more like $1100. These guys have been grandfathered in for a couple of years. They do have a lease until next year which we’d transfer over to us upon closing.
The outside cleanup is for the neighbors, for future tenants as well. The fencing is literally falling down, the mailboxes are zip tied to a random freestanding door. Mowing the lawn and installing some fence won’t cost us much, and we don’t want to own the crappy house in the block! We definitely will save cash for the bigger reno when it comes.
That said “I suggest settling in, learn your tenants, learn your buildings specific market, increase rent appropriately and move accordingly” are wise words.The shrubbery is free :-)
I would check the local housing guidelines,and what the current lease says, but in some cases if you inherit a tenant with a valid lease, then you can't rent increase until it comes time to renew the lease next year (unless there is a clause in existing lease reference change of ownership
@Ignacio Rosenberg is there an eviction moratorium where you live? I could easily see this going south...big rental increase and they know they won’t be kicked out if they don’t pay? Lots of people would stop paying altogether.
Maybe better to do nothing for the next month or two. A bird in hand right now is a good thing. You could Lose a LOT of money
That’s a good point. We’re going to do that. We’ll continue with nominal rents, at most give it a $50 increase if we see it works, and see where stuff goes the next few months. It’ll all work out. We don’t want to evict anyone during this time even if we could.
@Ignacio Rosenberg Hold on, if they have a lease you can’t change anything anyway.
I don’t think 100$ raise will make people to move. Generally speaking it cost more to move than paying slight rent increase.
@Ignacio Rosenberg Hold on, if they have a lease you can’t change anything anyway.
True! We're still in disclosure with the current owner. For all we know they may have a clause on the lease, or nothing at all, or just a rental agreement. We'll see. Above everything we want to be good landlords.
@Ignacio Rosenberg Hold on, if they have a lease you can’t change anything anyway.
True! We're still in disclosure with the current owner. For all we know they may have a clause on the lease, or nothing at all, or just a rental agreement. We'll see. Above everything we want to be good landlords.
Ignacio, one of the many things you have to do is get letters or certificates of estoppel from the existing tenants before you close. That's a fancy real estate expression for make the existing tenants state, in writing, every agreement they have with the landlord. "Rental agreement" and "lease" often refer to the same thing in this business. When does it end? If you buy the property and they have an existing written agreement with the landlord until a certain day, whatever it is, you have to honor it. You can't hit them with a rent raise if they have an agreement lasting until next year, for instance. I've been burned by this myself in the past.
Thanks Jim, we will do exactly that. Still have a few days of due diligence and disclosures, should clear all of this up.
I just purchased a 4-plex, i sent a notice to one of the tenants that i had to raise his rent buy $350. that is still under market by about $150 but given the circumstances i figure i would wait until next year to raise it to market. i just couldnt let him rent my largest unit with the only laundry hook up for less then my smallest cheapest unit rents for. what i did is i gave him over 3 months before the rent increase will take in affect. that will give him time to find a new place or figure out how to come up with money.2 of my other units are under market also but only about 100 and im fine with that during these times. i think its all about choosing your battles.
Few things to breakdown here. First, it overall sounds like you’re buying a property where the numbers don’t work but your goal is to stretch it and make numbers work. Possible but I agree with others in that I would let the current rents ride for the next few months. You’re not negative, give you a chance to build a relationship with tenants, and see if they are worth keeping at all.
I haven’t seen a property where trimming the bushes and fixing a fence will warrant a 25% increase in rent, much less a 40% increase. Someone above said $100 l/month isn’t worth a move. To someone who can only afford $725/month a $100/month is a lot.
Not sure if the reno is worth it, you’d have to run the specific numbers on that one. You might be trying to squeeze to much out of this one
end of the day, if you’re going through with the deal and the tenants have been good, I’d spruce up the outside, keep them at current rates, and reproach in 4-6 months to either renovate and raise rents to $1100 if market supports or bump very light rehab and go to ~$800
@Ignacio Rosenberg. Market rents are not "given" to a landlord. A landlord needs to determine these things after learning his building and market.
Please don't rely on some realtor who wants to close a deal or someone else that doesn't mind having someone else's unit listed for 6 months.
You can be confident that you are correct on an increase after renovation. And that can be a big win, just make sure your numbers play out, if you are buying a negative cash flowing building and sinking cash in to gain maybe an additional $400?
How many units? And you are married to the downstairs tenants for a year.
You should ask yourself why the current owner locked in a below market tenant for another year when a justified increase would have made his building sell higher and been more attractive. (the correct answer is never "because he is a nice guy.")
I watch my market like a hawk. I too benefited from repositioning the buildings I have and dealt with inherited tenants. If I listened to what people said about market rates I would have long vacancies. I continue to see units sit on the market for some sum that is 4- 8 months above the current market.
@Ignacio Rosenberg.......although it wasn’t during COVID 19 times, when I purchased my property one tenant was paying close to $500 below marker rent. Let her pay what she had been paying for the following month and then I raised the rent. I, of course, told her in advance but she stayed on a month to month basis, she stayed for about a year after that.
Since we are in the times we are in, I would give them a couple of months advance notice and the option to leave if they don’t want to pay the new rent. I would also base my decision or whether they were affected by COVID 19 (laid off, got sick, etc.)
@Ignacio Rosenberg you don't want to be "that person" who is talked about on social media by everyone for increasing rent on people who may even be out of work. It also puts you and your tenants on the wrong footing with a bad first impression.
Take care of your sweat equity tasks to make the place look a bit nicer. Hopefully we get out of this soon, the tenants will like that you are putting a little money in vs the last owner and it will likely facilitate an increase in rent if one is justified.
As to your idea of giving them a free month of rent then boosting it - does this make financial sense? If you dropped a month of rent you are losing $XXXX, if you increase it $150 you are ahead by only $1800 - $XXXX on the year. Is that worth it to you?
I personally would let this ride out first, only fix what is needed then get to sweat equity followed by a "not aggressive" increase. Vacancy is a real cost and in many cases it takes a few years to break even on an apartment remodel.
Agreed on all fronts. Look we’ll break even and barely cash flow at current rents. We’re good. We just had a massive disparity between what we researched and what is charged. We still have an inspection and disclosures so final price may even go down. Or we may pull out if we find something odd.
It’s less about being on the news and more about standing by what our company means to us, and to the people that choose to live in our properties. We never bought a place with tenants before so this was all new to us.
Thanks everyone. Incredibly appreciative of all the input.
@Ignacio Rosenberg If you were you planning on raising the rents day one, that wouldn’t work because you’d have to honor all the previous leases. The business plan should have been developed to do it with natural lease turnover. If there are any month to months, you could do it right away for those tenants. For tenants whose leases are up in the next month or so, you could maybe sign a 6 month lease and let them know the rents increase will occur after that time. Keep us posted on what you end up doing and how it works out!