Purchasing property with long term tenant under Market Value

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Purchasing property with long term tenant under Market Value

Stephen Friedman III
Member since 2020 · 2 posts · 0 votes

Hi all, 

My first time posting and potential first time buying a property. Looking at buying a 2 unit Multi-family, and plan to live in the 1 bed unit and rent out the 3 bed. Currently, the one bed is vacant while the 3 bed is occupied. The tenant has been there 10+ years, is on a month to month lease, and paying $1450/month including utilities and garage parking. Market rent conservatively puts this at $2100 a month so they are well below market. What are my options? 

Right now I believe my options would be to:

  • Put a vacancy contingency in contract/offer and then find a new tenant once it becomes mine
  • Raise rent slowly up to market value (risk pissing off tenant right away, losing a stable 10 year tenant, etc)
  • Raise rent right away to at or near market value (Definitely risk losing/pissing off tenant)
  • Come to some agreement with tenant (repairs, parking, etc)

Will the tenants being there for 10+ years mean anything in regards to squatters rights? Just a random thought I had. Any advice is welcome. Also, how much can I ask listing agent? Am I allowed to ask to see lease, why they are so low, questions like that before I have made offer? I have been pre approved for financing.

Additonal info: 

Property is in Jersey City Heights neighborhood of Jersey City, NJ

I have my real estate license, but have not done any deals besides 1 apartment lease (got it through work as a side/adjacent type gig. Main job is in Construction Management/Real Estate Development, and I only 23)

Vacant 1 bed is on Zillow for $1850 currently. 

Asking price is $525,000

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      Aaron K.
      Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
      6y

      So first off yes you are allowed to see the current lease and it would be a necessity for you to do so before purchasing.

      You can ask the unit be delivered vacant but the seller might not go for that as it means a longer escrow and they are left high and dry if you back out of the deal.  I would not keep the rent the same or raise it slowly, you are investing not running a charity (covid means you might not do it right away, but still would not be a multi-year proposition)

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      • Aaron K.
        Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
        6y

        So first off yes you are allowed to see the current lease and it would be a necessity for you to do so before purchasing.

        You can ask the unit be delivered vacant but the seller might not go for that as it means a longer escrow and they are left high and dry if you back out of the deal.  I would not keep the rent the same or raise it slowly, you are investing not running a charity (covid means you might not do it right away, but still would not be a multi-year proposition)

        2Reply
      • Karen Mills
        Member since 2019 · 11 posts · 3 votes
        6y

        How about give the renter 6 months notice (can't evict right now anyway) to move out or sign the new lease with the new higher rent.  If he is a good renter you might consider keeping the rent a  lower than the market to keep him there.  

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      • Stephen Friedman III
        OP
        Member since 2020 · 2 posts · 0 votes
        6y

        Thank you. I plan on raising rent to at least near market value, but I feel like best course of action would be to talk to tenant directly before I go into contract for this house. What if he becomes difficult and I have a huge headache on my hand right away? Feel like I could avoid this by touching base with tenant before hand but do not know the legality/possibility of negotiating potential lease terms while the house is still on market and I am simply an interested buyer. Basically I want to get a feel for this situation before I make a decision and do not know if I should talk to Listing Agent, Owner, Tenant etc. 

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      • Jerid Meagan
        Real Estate Agent · Albany, NY · Member since 2019 · 66 posts · 36 votes
        6y

        @Stephen Friedman III,

        I wouldn't worry about pissing the tenant off if the lease is month to month. That said, get a copy of that lease just to make sure you following proper protocol with respect to notices, deposits, etc. 

        To your other question about gradually increasing rents - don't do it. It will take you forever to get your rents up to market this way. I would provide 60-90 days notice of rent increase that will bring the monthly rent to market - $2100/month in this case. The tenant may actually be able to afford this, you never know. Otherwise, you are losing $650/month ($7800/year) in rent. At a modest 6.5% cap rate this equates to $120,000 in lost value by not raising the rent - ouch!

        Lastly, consider the timing of your notice and potential vacancy. This takes place in NJ, so you have to work with the leasing season. Dec/Jan are the two most difficult months to have a vacancy, and 3rd quarter is your strongest month. Also, consider the cost of your turnover to make this unit rent ready. 

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      • Mark F.
        Rental Property Investor · Northern NJ · Member since 2019 · 672 posts · 677 votes
        6y

        I've posted about this before but you need to stop, ignore postings in this thread that have to do with raising rent, and read NJ landlord/tenant laws asap. They are very specific. I'll link some basic PDFs. 

        In short, if you go from $1450 to $2100, they have the right to challenge that in court. Then the burden of proof is on you to prove to the judge what you did was fair. 

        Your absolute best bet is to get the unit delivered vacant like you and others have suggested. The problem? Landlords cant evict in NJ without cause. So it's not so easy as people say on here "oh just get it delivered vacant". New Jersey is a whole other animal. Another common misconception on BP. Read the PDFs I posted then read them again. 

        Also I just remembered. Do you have rent control in Jersey City? So I'm not even sure if you can raise rent like that unless it's new tenants. You may be exempt as an owner occupant. I dont deal in Hudson county for this reason. Here's a link to rent control but you need to investigate further. 

        https://hudsonreporter.com/201...

        https://www.google.com/url?sa=...

        2Reply
      • Angelo Mart
        Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes
        6y

        Review the Lease ASAP. Put a vacancy contingency in contract/offer and then find a new tenant once you close. I hate existing tenants

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