Buying a multi-family with long-term existing tenants in-lease

7 Replies

Hi BP. This is my first post, looking forward to hearing the thoughts of those who are more skilled than me. I know this question has been asked a million times with a million different scenarios. I’m thinking of purchasing a multi-family locally in Connecticut. One unit (2bed/1bath) is vacant and ready to rent, the other unit (4bed/2bath) has been occupied by the same tenants for the last 8 years per the owner, who also happens to be the selling agent.

The tenants recently signed for another 12 months that’ll take them thru June 2021. Fair market rent for this zip is $1,650/month, the owner gets $1,000, his choice.

I'd want to bring that unit to at least FMR, but don't know how to operate under an acquired lease. Are my hands tied until the existing lease is up?

How have you navigated or seen similar scenarios navigated?

Thanks and looking forward to connecting!

Updated 6 months ago

Turns out there are 7 people and 2 dogs living in the upstairs portion of the property, which differs from the 3 people the owner told me were on the lease. I brought my offer down to below asking because I know this is an eviction waiting to happen, he received two above-list offers from other investors as well. Clearly from investors who have seen this before and are better equipped to deal with the pending shakeup. Oh well, on to the next one!

@Gary Striewski welcome to BP. I bought a 12 unit 3 years ago that included a few really long term tenants-20 years. We have been nudging them up slowly and new tenants have all been brought in at market rents. Over time the long termers will get to market too, but I am not concerned the building is turning a great profit as it is. The tenants, new and old, are all on MTM leases, which is my preference.

In your case Gary you will be constrained by the existing leases. Your local jurisdiction may also impose additional rules about rent increases, so do check that. It is a trade off; if you increase the rent too much the tenant will leave and you will need to decide if that is a good thing or a bad thing; it can be either depending on what you want. Bear in mind there will be some expenses at each turnover; we have found that paint and flooring will get you a long way. All the best!

@Gary Striewski I can't help but add that the seller-agent knew what he was doing when he signed the tenants to a new lease at such a low rent. Are the tenants related to him by any chance? It is a dirty deal just the same as you will not be able to raise that rent for a year. Do you have other properties that you are looking as too?

Yeah the property even below the FMR is still in really good cash flow position (20% CoC vs 30% once FMR is obtained). I just didn't know if old leases transfer to new owners. Sounds like the seller was doing his good long-term tenants one final solid and I can't knock anyone for that! Will need to have the conversation with them tho and give them ample heads up that rents will be brought to FMR once their lease is up. The property isn't doing any of the surrounding ones any favors by only getting 61% of FMR.

The recently signed lease may have been the seller's way to purchase the tenants' "cooperation" during the sales process.  This is something I have seen before.  Makes you wonder if the tenants are the reason (or a main reason) for the seller's desire to get out of this investment.  Tread carefully.

@Gary Striewski it seems like you are going through a similar situation that I recently went through when purchasing my duplex.

Tenant has lived in their unit for quite some time. Rent was under market value and I had to honor their lease until it expires.

If you do make the decision to purchase the property. During the closing process, be sure you have the tenant complete an estoppel certificate to confirm security deposit, lease terms, and if there were any verbal agreements between the seller and the tenant and have a lease assignment agreement completed so you become the lessor of the property for the remainder of that lease.

Originally posted by @Darius Ogloza :

The recently signed lease may have been the seller's way to purchase the tenants' "cooperation" during the sales process.  This is something I have seen before.  Makes you wonder if the tenants are the reason (or a main reason) for the seller's desire to get out of this investment.  Tread carefully.

Interesting angle I didn't really consider. We're still early in the process so there are few things we'll get to where that may come to light if it's the case. Obviously hoping for best-case. Appreciate the perspective. 

 

Originally posted by @Calvin Stewart :

@Gary Striewski it seems like you are going through a similar situation that I recently went through when purchasing my duplex.

Tenant has lived in their unit for quite some time. Rent was under market value and I had to honor their lease until it expires.

If you do make the decision to purchase the property. During the closing process, be sure you have the tenant complete an estoppel certificate to confirm security deposit, lease terms, and if there were any verbal agreements between the seller and the tenant and have a lease assignment agreement completed so you become the lessor of the property for the remainder of that lease.

Awesome tips. I appreciate that, Calvin. Those steps have all been added to the checklist.