Hello everyone,

I’ve been stressing about this issue and was hoping for some advice. I’m a novice real estate investor and any suggestions would be much appreciated. 

I purchased a duplex a few months ago and assumed two tenants (top/bottom units). They are very nice and treat the property like their own. 

I signed a lease in February for 1 year with them. Soon after signing the lease an opportunity to build an adu came my way. I have the permits,drawings and trades lined up for a 700sf building to be built in the backyard. 

I know the tenants love the backyard and would be upset to lose it.

Any suggestions on how you would handle this situation? Would you offer a rent rebate for a couple of months? Or any other incentives to keep them happy?

The house is in an area that can be easily re-rented. 

Thank you for any advice

You can't just take the backyard away from them unless the current lease wording makes it clear the backyard is not included. Otherwise they'd have had a reasonable expectation that the backyard would be available to them and would not materially change. 

You may have permits, drawings, and trades lined up, but what you also have is a contract with the tenants and just because an opportunity came up doesn't mean you can ignore that contract.

Hey Greg,

Thank you for your response. So would you suggest I wait until next year after the lease is up to start. 

I was leaning towards approaching them and seeing if they were willing to allow me to build I would compensate them? 

@Manuel Grossi I would allow them to terminate the lease without any penalty if they agree and you can't wait. If they say no then you have to honor the lease or compensate them if they are willing. All that construction would be very disruptive; if I were the tenant that would not work for me.

What @Bjorn Ahlblad suggested is very realistic, you're changing the condition of the home for your personal benefit while reducing their quality of life and changing their quiet enjoyment. I would be honest with them and see how they'd like to proceed. 

Easiest thing is to talk to them and let them know that you intend to do it. Give them options:

1) I start to build now and offer you a rent discount of $300/month during construction and $150/month after construction until the end of this current lease.

2) I wait until your lease ends to build. Your current lease will be non-renewed.

3) We terminate the lease now. You will likely have to pay them something. 

I would definitely offer them rent rebate because they have been good tenants. You will be able to make the money back with the ADUs so might as well keep these tenants.