First time buyer - Inheriting tenants/raising rent - need advice

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First time buyer - Inheriting tenants/raising rent - need advice

Jason Hines
Member since 2020 · 20 posts · 4 votes

We are set to close on our first duplex next Monday in Pennsylvania. We will be living in 1 unit and would like to continue renting to the existing tenants in the other unit. They have been there 10 years, have taken excellent care of the unit, and were very nice when we met them during the showing and inspection.

My questions are in regards to taking over the tenants, timeline for certain things, and general tips. 

Their lease is set to end at the end of October (currently month to month) and the seller will be giving us the prorated rent for October and will transfer the security deposit to us as well. Now this is where it gets fuzzy for me. The unit should rent for around $1250/month but they are only currently paying $800/month. We would like to raise it $1200/month at least which I will assume make them unhappy and possibly unable to pay.

We plan to make them reapply to rent the unit and do a full background check, which should allow us to determine if they can afford $1200/month. If we determine they can't afford it, how quickly can we force them out? Since we're new owners and since they're not under a lease as of 11/1, can we legally make them leave on 11/1? Now, I'm not a jerk and I realize that 3 weeks notice to move out is rough, especially in today's current world state and the holidays upcoming. We've budgeted for and are OK with letting them pay current rent, or $1000/month through the end of the year so they can find a new place. If we do that, what specific verbiage should I use in the lease to make sure I can get them to leave in Jan or Feb? If that's a bad idea, please tell me. Any advice you have would be greatly appreciated. I truly don't know.

Now, if we determine they can afford it, but they refuse to pay a 50% increase, can we force them out on 11/1? 

And finally, if we determine they can afford it and they agree to pay the increase, should we have the new lease start right on 11/1? Should I also collect the extra money for the security deposit at that time? I feel like the answer is yes to both of these questions. This seems the easiest for everyone, but might not happen. 

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Brian ValdiviaBusiness Member
Investor · Kingsville, MD · Member since 2017 · 102 posts · 20 votes
6y

@Jason Hines Congrats on your upcoming closing.  I'm all for raising rent a little bit, but keep in mind that there is a value in the fact that they have been there for 10 years and may stay another 10 years.  The PA market isn't something with which I'm very familiar; but in my market, an eviction is going to cost me 3 months of rent.  Given the COVID situation, evictions may also be backed up to a longer than average period (assuming they won't just move out on their own).


Also, if they've been a good tenant for 10 years, what's to say they may not stay another 10 at a lower than market rate.  Even $1,000/month could save you quite a few turnovers in that time frame.  Just things that I would heavily consider.  I do agree that $800 is way too low.  But I would be likely to keep the rent lower than market in order to keep them happy & in the property.

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  • Joseph Firmin
    Rental Property Investor · Smyrna, GA · Member since 2018 · 974 posts · 645 votes
    6y

    @Jason Hines Be sure to check your local and state laws regarding notice or rent increases. Some states require long notices for long-term residents. NY state in particular has somes strict laws about this. If your local law permits you to give them 30-60 days notice of rent increase, then it is a personal call on how quickly you'd like to get the rent up vs. it going vacant. The winter is a tougher time to get a place rented generally, but your market may be different and demand may be excellent for a duplex unit at $1,250. If that rent is at market, then show the resident the data and why you need to rent it out for market rates or slightly below - Maybe $1,100, especially if they are a great resident and have taken care of the property.

    1Reply
  • Jason Hines
    OP
    Member since 2020 · 20 posts · 4 votes
    6y

    @Joseph

    @Joseph Firmin Thank you! We were thinking about instituting a slightly lower rent to have the security of a good tenant so I'm glad you mentioned that. I'll take a look at those laws today.

    0Reply
  • Brian ValdiviaBusiness Member
    Investor · Kingsville, MD · Member since 2017 · 102 posts · 20 votes
    6y

    @Jason Hines Congrats on your upcoming closing.  I'm all for raising rent a little bit, but keep in mind that there is a value in the fact that they have been there for 10 years and may stay another 10 years.  The PA market isn't something with which I'm very familiar; but in my market, an eviction is going to cost me 3 months of rent.  Given the COVID situation, evictions may also be backed up to a longer than average period (assuming they won't just move out on their own).


    Also, if they've been a good tenant for 10 years, what's to say they may not stay another 10 at a lower than market rate.  Even $1,000/month could save you quite a few turnovers in that time frame.  Just things that I would heavily consider.  I do agree that $800 is way too low.  But I would be likely to keep the rent lower than market in order to keep them happy & in the property.

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  • Jason Hines
    OP
    Member since 2020 · 20 posts · 4 votes
    6y

    @Brian Valdivia Thank you for the response! I really want to avoid eviction so I may take your advice. Would it be a true eviction since they wouldn't be under a lease anymore on 11/1?

    Also how would you feel about a provision in the lease stating that rent would increase from $1000 to $1200 after 3 (or 6) months in case they want to leave?

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  • Brian ValdiviaBusiness Member
    Investor · Kingsville, MD · Member since 2017 · 102 posts · 20 votes
    6y

    @Jason Hines I'll defer on the eviction question to someone that may be able to better answer.  My gut says that if they don't move out (whether because they can't or don't want to) then you'll have to go through the process.

    To the other point, I would be more likely to have a casual conversation and just explain to them.. look, market rent is near 1200.  If you would be open to signing a 2 year lease, I would hold your rent at 1000.  They've been there for 10 years, and I'm sure they are probably nervous about a new landlord coming in.  I would make it seem as though you weren't going to change a whole lot.  The longer the lease they sign, the lower the rent I would consider.

    Remember that if you get that 1200, versus 1000 per month, that's 2400 extra per year.  2 months of no rental income is 2400 at market rent (I usually assume a turnover is 3 months including time to get the tenant out, reno, and time to find a new tenant).  Granted ($2,400 x years stayed) can add up quickly.  

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    6y

    @Jason Hines  I believe you are confusing an eviction with the end of a lease.  Since they are month to month, you can likely give them 30 days notice on non-renewal (pending confirmation that is what the current lease states and that notice complies with your local laws).  But that does not guarantee that they will move out, given the current COVID issues.  If they refuse to move, then you must file for an eviction.  You can not force them out, if they do not leave voluntary then they must be legally evicted.  Given that a lot of courts have stopped evictions (for non-payment of rent) during the COVID pandemic, you might be stuck.

    Personally, I would not try and raise the rent on a current tenant 50% all at once.  I just don't think it will work.  I also think making the current tenant reapply and do a full background credit check is not a good way to start your relationship.  They have 10 years of rental history, you have inspected the place, so you should have a good idea of the kind of renters they are.

    Lastly, if you are convinced you can rent the place for 50% more than they are paying, I would wait until your local courts allow eviction for non-payment of rent (current CDC guidelines limit evictions for non-payment of rent until the end of 2020).  Once you know that you can legally get an eviction, I would provide the current tenant with notice to end the lease.  I would not even offer them the 50% increase unless specifically ask.  In the meantime, I would collect the current rent rate of $800 until I provide them with the notice of non-renewal.

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  • Jacob Lapp
    Rental Property Investor · Souderton, PA · Member since 2020 · 124 posts · 106 votes
    6y

    @Jason Hines

    Congrats on the first deal! Where are you at in PA I just closed on my second multi-family in bucks/montgomery county and had the exact same dilemma.

    They were paying $800 and I know I could get $1250. The number I needed to collect to cover the mortgage/utilities while we live there for free was $1120. I told the tenants of 5 years that they have been getting a really good deal and personally I couldn’t find another 2 bed 1 bath in the area for under $1250 and that the lowest I could offer them without losing money was $1150. I also asked them if there was anything I could do for the price increase I offered new flooring in the bathroom or new paint. I also did a lot of exterior work to the house which they saw and appreciated. They paid up the $1150 with no problem and we have a good relationship living there.

    I hope everything works out for you guys!

    1Reply
  • Jason Hines
    OP
    Member since 2020 · 20 posts · 4 votes
    6y

    @Brian Valdivia - Thanks for doing that math. I like the idea of a longer lease to solidify the income, even if it's a bit lower than market. I'll have to think on that one...

    @Mike Wood - Normally I would agree with your call to not have them reapply. One thing I forgot to mention in the original post is that the father was evicted due to non-payment less than a year ago, so the mother moved in to help the son. The original tenants were the father/son and now its mother/son. I would feel better having them checked out.

    I like your train of thought about evictions though. I don't want to have to go through with one on my first go, especially if the courts aren't even open for them. One good thing I have going for me is that the seller told the tenants to expect a rent increase of at least $100 and they didn't seem bothered by that. Maybe an increase to $1100 would be a nice middle ground.

    @Jacob Lapp Congrats! I am in the Lehigh Valley. Funny that we were in the same situation. I can only hope that my outcome is similar to yours. I like the idea of juicing the deal with renovations that I was planning to do anyway. Did you talk to the tenants right after closing? Like did you just knock on their door and hash it out? I would love to know how you started that conversation with them and whether it was in person/via email. Also, did you have them reapply?

    About your journey so far, I have a couple questions if that's ok? It sounds like you are going to live in this new property, so am I right in assuming that your first deal was also a multifamily that you also house-hacked? Is that first property now fully rented to tenants? 

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  • Jacob Lapp
    Rental Property Investor · Souderton, PA · Member since 2020 · 124 posts · 106 votes
    6y

    @Jason Hines

    So it was a strange situation. When I went through the open house I saw a picture on their wall and recognized the tenants they were friends of friends who I’ve met a few times. I actually had the guys number and called him, told him I was considering buying the place and he told me the previous landlord offered to sell it to them 2 years ago. But they didnt want to unclog strangers toilets haha. (Gave me some leverage to lowball his asking price) was asking 240k and got it down to 195k. So I talked to him on the phone prior to settlement. They kept the place in very good shape and because I knew their job history I did not have them reapply. When I raised their rent the only stipulation they had was they wanted to stay on a month to month lease as they are looking to buy their own house soon. Which was fine with me because the sooner they leave the sooner I can increase the rent.

    To your second question, yes. My first deal was a triplex in Quakertown ( single family house with a detached split level duplex in the back of the same property) we rented the single family and the downstairs unit of the duplex. Luckily I bought this one completely vacant and was able to find my own tenants and charge what I wanted. Bought Aug 28 and both other leases started Sept 1. We lived in the top unit and enhanced the value with a nice paint job new flooring and added a ceiling fan, added a half bathroom in the single house and lots of exterior work. We were cashflowing $400 a month living there. And are now flowing $1700 a month with it rented. (Using facebook marketplace I put it up 2 months before our year was up with an anticipated start date of sept 1 to move in. So I had time to find solid tenants. The one tenant currently pays a little less in rent and takes care of the grass and snow.

    So long story short. In 1 year we have created a free place to live and $1700 a month in passive income. The house hacking method has been working for me and I plan on continuing this method for 2 more properties hopefully 12 total units total and at least 5k a month in passive income. Then Save up to the point where I can put a down payment on a larger commercial apartment complex 10-30 units.

    1Reply
  • Account Closed
    Member since 2020 · 9 posts · 6 votes
    6y

    @Jason Hines

    If you propose the rate increase and they accept, make sure your new lease includes language surrounding annual 3% rate increases. So as long as they stay, their rent will continue to increase. They may be more likely to stay and at least you’re not locked into below market rates.

    0Reply
  • Randy Gutierrez
    Investor · NY · Member since 2019 · 171 posts · 80 votes
    6y

    The biggest issue I think here is the inability to legally force someone out due to the closure of the courts and the eviction moratorium. Increasing rents isn't all that hard, you just send them over a new lease. It is much easier to do during the transitioning of new landlords as there isn't really a relationship between you and the inherited tenants yet. I would personally do a month to month lease at $1000 and then when you finally have the ability to legally force someone out I would then issue the 30 day rent increase notice. While 30 day is what you legally can do, I would probably do a 45 day rent increase notice to give them some extra room to look for a new unit if needed. I think $1000 is the right balance of getting additional income without risking non payment of rent from the tenant. Then when the time comes to increase to market rents you can justify it by saying things like the previous landlord had a lower mortgage, taxes have gone up, utilities have increased, you paid significantly more for the property versus the previous landlord, or your rents are significantly lower than market rents (use percentages/print out reports from rentometer) etc.

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  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    @Jason Hines you kind of buried the lead there with the previous eviction. A few thoughts:

    1) best time to do something is early

    2) Very few budgets could withstand a 50% increase so doing that is tantamount to telling them to move. 

    3)You risk a real "fight or flight" response here if they have nowhere to go...be prepared to fight..and learn the rules you will be fighting under

    4) How would you want to be treated?

    5) They might just pay an increase, but I wouldnt count on it

    Without knowing the particulars I might try talking to them, showing them the market rate (1250) and saying you need to raise the rent to that. Let them know that as a courtesy to them and their longstanding good (?) tenancy you are prepared to accept 800 through January and 1000 for Feb/march spring/prime rental season. ETC.  Let them know you understand they will have to make some choices and that if they choose to transition you will do your best to help and you are doing this to give them lots of time. This does a few things including giving them a chance to save money so they CAN move. You haven't altered your ultimate goal of getting to market, but you have mitigated the risk of having it blow up in a fight where you WILL lose money even if you succeed.

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