Inheriting Tenants with No Deposit

Investor · San Diego, CA · Member since 2014 · 11 posts · 5 votes

I am currently in contract for two duplexes. They both have paying tenants on month to month leases. The issue is that none of them have deposits. What are some suggestions for handling this situation? If anything at all. I'm ok with the current rents as is. As each tenant moves out, I will rehab and get more rent at that point. Thanks for any input.

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Nathan GesnerBusiness Member

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

Once you close on the property, give all renters an introduction letter with you as the new owner. Include instructions for rent payments, reporting maintenance, etc. Also notify them that all renters have XX days to complete an application, pass your screening, and then sign a new lease with a rate of $XXX and a deposit of $XXX.

Essentially, you are forcing them to apply just like you would a new renter.

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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
6y
I just bought a building with inherited tenants and a lease that ended in April (bought in December). I would either renegotiate their leases with a deposit after closing or give them a little bit of time to move out (say 2 months). Do you have enough money to rehab now? If yes, I'd probably go with the latter and then you can get tenants that you want. I'm not saying that those tenants are bad but it just lowers your risk.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
@Oscar Rodriguez Talk to them and see if you can add a bit to the rent to go towards the deposit and over the next 6 months or so collect a new deposit.
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Oscar Rodriguez
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Investor · San Diego, CA · Member since 2014 · 11 posts · 5 votes
6y
@Aaron Zimmerman Thanks for your feedback. I do have the money to rehab now. I was leaning towards your suggestion but I am not sure how motivated any of them will be to move. I'll see soon though! Thanks!
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Oscar Rodriguez
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Investor · San Diego, CA · Member since 2014 · 11 posts · 5 votes
6y
@Theresa Harris I have considered that too. Thank you for the input.
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Mike McCarthy
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y
@Oscar Rodriguez If the properties need rehab, I wouldn’t worry too much about the deposits. It’ll be tough deciding what you can withhold for anyway, plus you’ll be fixing/replacing much of it anyway once they move out.
I would focus more on increasing rents appropriately and ensuring they are good tenants. I know I’d rather get $25/mo in my pocket as increased rent as opposed to that same $25 going to a deposit that I’ll be most likely returning.
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Oscar Rodriguez
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Investor · San Diego, CA · Member since 2014 · 11 posts · 5 votes
6y
@Mike McCarthy Makes sense when you put it that way. Thank you for that insight.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
Once you close on the property, give all renters an introduction letter with you as the new owner. Include instructions for rent payments, reporting maintenance, etc. Also notify them that all renters have XX days to complete an application, pass your screening, and then sign a new lease with a rate of $XXX and a deposit of $XXX.
Essentially, you are forcing them to apply just like you would a new renter.
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Keaton M.
Austin, TX · Member since 2017 · 75 posts · 39 votes
6y
@Nathan G.
Is that only allowed because they are m-m? If they were year leases, would that be different?
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
Originally posted by @Keaton M.:
@Nathan G.
Is that only allowed because they are m-m? If they were year leases, would that be different?

Yes, if they are on a term lease (more than month-to-month) then you have to honor that agreement. You would still give them notice introducing yourself as the new owner, payment instructions, etc.

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Zac Boelkow
Port Richey, FL · Member since 2016 · 129 posts · 48 votes
6y
I have been here on almost every property I have bought. What I did was evaluate the "quality" of the seller and tenants while going through the purchase process. In every situation I was comfortable leaving things alone. It has worked out without issue thus far.
If I was in your shoes, and while going through the purchase, I was seeing things that were off or giving me cause for concern then I would do it differently. If I had serious concern for a tenant without a deposit that is a "red flag" and I would not want a tenant renting from me that is giving me red flags with or without a security deposit. So the "red flag" tenant(s) would go immediately.
If you have good tenants, and the security deposit still bothers you, an option might be addressing it immediately. I do not do month to month. So it would look like this for me. I would write a welcome letter to all tenants. I would explain that every tenant needs to be on a year lease. I would include that there is a security deposit that is required for my leases. I would give a total of 60 days for them to sort it out. Tenants having (or not having) money for security deposits is not my issue. If it is your rule to collect security deposits then do not let reasons, excuses, or justifications change your policies. Simple as that.
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