First properties under contract, questions about tenants.

22 Replies

Good evening BP.  I have a few questions that I'd like to bounce off of the community regarding a couple properties that I have under contract.  

1)  Do I have to honor the full terms of the lease or am I able to move the tenants under my lease terms?  (One of the property owners doesn't require a pet deposit, but I do)  

2) Increases in rent.  The same owner of the property with no pet deposit is shorting themselves on the rent that they are charging tenants. 

3) Can I have the tenants "reapply"?  I'd like to get background checks on the tenants, as well as ensure that all occupants of the unit are listed on the lease.  One tenant has a boyfriend/husband that isn't listed on the lease.  

I appreciate your input on this as this is my first go around and I want to be fair, but I also want to do this properly and not take a loss.  

Thanks everyone, have a great night.  

Lee

You buy the property and you get to live with the lease.

Some states are more restrictive and punitive regarding this subject and you need to be careful. Google Louisiana Tenant Landlord Laws and read the booklet.

Good Luck


Hi,

You need to reviewed the "rented property rider." If it doesn't say "month to month" in the term, you need a copy of each lease.

#1 - If the rider has a lease term OTHER THAN "month to month," you need to honor the terms. If month to month, there are "no lease terms."

#2 - If month to month, YES you can increase it with proper (state specific) notice. Proper notice is usually 30 days or 1 month. If they are NOT month to month, no you cannot raise the rent until the lease term expires. What if you are buying a property with a 5 year lease with discounted rent!? Although this isn't likely, you must get the rider to find out.

#3 - Same as #2

Review this document before the attorney approval period expires.

Thanks Mark and Bob.  One of the clauses of the lease agreement is a bit cloudy.  Under the rent section of the lease, it states "The landlord may increase the rent for the property upon providing the tenant such notice as required by the act."  There isn't a definition of "the act" unless they mean the term of the lease in which, isn't defined.  

The issue with this property isn't really with the property itself.  The owners have treated their tenants more like friends than tenants.  For example, their response to some clarification that I requested seemed defensive.  I asked about raising the rent and they said that "I was not planning on raising the rent on the property until the lease was up...if then..."

Also, in the lease under pets, they don't charge a pet deposit, just a clause that says "A reasonable number of pets or animals are allowed to be kept in or about the property.  If, at the sole discretion of the landlord, this privilege is abused, or if the pets damage the property, or if the pets cause problems or interfere with the use and enjoyment of the property for the other tenants, the landlord may revoke this privilege upon (30) days notice. 

I know that I can increase the rent of one unit by $100/mo and the other unit can be increased by $150, but taking over the property with no security deposit for the pets (there are a total of 5 dogs between the two units) has me a bit on edge. Aside from that, the numbers make sense and would generate about $400/mo PCF even with the 6.5% 15 year term I have on financing.

They expire at the end of the year.

You run the risk of losing inherited tenants by making changes right away, or by making them "reapply". If you buy the property, you buy into the existing leases completely. Occupants who are not on the existing lease should provide a completed application at minimum to stay. Be prepared to lose tenants upon new ownership. It happens. I think it is sometimes best to start off with tenants you have selected. Screen. Screen. Screen.

"The act" likely means the local landlord-tenant law. Get a copy and get to know it. 

So you cannot increase rent until the leases expire.

@Lee Nugent  Think of the rental you are purchasing as a rent business machine. You are buying this business, which includes real estate, along with the "goodwill" of the existing customer(s). 

Granted, you might want to attract a better "customer" after you own it and are in control of management. However, you will at minimum be expected to honor all existing contracts with the "customer". 

It may be possible to raise prices for this "customer" however they will not see any benefit to them paying you more, despite many years of under market rent. If you were buying a small coffee shop, many existing customers might resent the increase without at least seeing improved services. We are creatures of habit and essentially, resist change.

The things that will free you is to have a written plan and great systems for handling rent collection easily and to be responsive to service calls (the latter area where I can improve).

Here are some good resources to search for rental property management:

David Tilney - for higher-end tenants and minimal hand-holding

Fixer Jay Decima - for lower-end tenants and section 8 rentals

Mike Cantu - for mid-market properties and tenants. 

Hope this helps!

thank you both for your insight on this.  I'm out making sales calls but I'm going to review this more tonight.  I may have other questions and again, thank you both

You might also consider being up front with the current tenants.  Let them know that, while you will be honoring their current leases (they may not necessarily know you have to) at the end of the lease agreement, the rent will be raised to the current market value of $XX and a pet deposit of $XX will be required for the lease to be renewed.

Then offer them the option of, if at any time they want to vacate the lease, there will be no penalties as long as you are given 30 days notice.

This will give them time to prepare for the higher rent and pet deposit, if they want to stay.  And, if they don't want to stay, they might leave on their own before the lease is up and you can get new tenants in paying higher rent/pet deposit.  Win-win.

Jennifer T.

    I have properties in NC, SC and one in NYC the one i would like to bring up is in SC I bought a fourplex all rented leases in place BUT all four leases were cheep the apartments all looks like Vietnam going through the DMZ bombing raid. so I sent all 4 tenants a 30 day notice that they are to move within 5 days after each lease has ended we rehabbed the entire building as each one left pulled the carpet and got started. we have now finished half the building invested about $30k and re-rented the two finished apt's each went up by $250 a month plus pet dep and extra rent for the pets. and this took all the RIF RAF out and even got a thank you note from the local police and the mayors office for what we did. now in saying all this SC is VERY, VERY Landlord Friendly no rent by the 5th pay $40 bucks for first notice to pay or remove no rent still they have 10 days to pay or leave after that 14 days later the sheriff;s office removes the tenant and retake possession. I wish it ran like this in NYC one time i didnt get any rent for 6 months and still the judge didn't throw her out  

    Very helpful conversation going on here. Shows me more of the importance of knowing the tenant-landlord laws and rights in each state. I think the consensus from the posts have been to honor the leases but make modifications at the end.

    I definitely agree with @Jennifer T. on this. I would let them know the changes you plan to implement before so that they can make the decision to stay or to leave and they won't feel blindsided.

    In any regard, you want to be as amicable with them as possible and don't come in with the uncle sam "big stick" approach. Just have a conversation with them, let them know what you plan on doing and let them decide if they should stay or if they should go when the lease is over.

    I agree completely.  I want them to feel respected and know that we aren't trying to ruin their enjoyment.  However, there are certain allowances being made that we don't plan on continuing once the leases are up.  We do plan on providing them with a copy of the new contract and allowing them to make the choice of staying or continuing to rent with us at the end of their lease.  

    Thank you all for your input on this.  We are set to close this coming Friday, and really looking forward to learning this so that when we scale up, we do so correctly.  

    Originally posted by @Lee Nugent :

    Good evening BP.  I have a few questions that I'd like to bounce off of the community regarding a couple properties that I have under contract.  

    1)  Do I have to honor the full terms of the lease or am I able to move the tenants under my lease terms?  (One of the property owners doesn't require a pet deposit, but I do)  

    2) Increases in rent.  The same owner of the property with no pet deposit is shorting themselves on the rent that they are charging tenants. 

    3) Can I have the tenants "reapply"?  I'd like to get background checks on the tenants, as well as ensure that all occupants of the unit are listed on the lease.  One tenant has a boyfriend/husband that isn't listed on the lease.  

    I appreciate your input on this as this is my first go around and I want to be fair, but I also want to do this properly and not take a loss.  

    Thanks everyone, have a great night.  

    Lee

     1) Yes, you have to honor the leases that are in place as-is.  You'll need to give the proper amount of notice at the end of the lease for any changes or termination, etc.

    2) What I read, was that having a separate pet deposit can actually backfire, in that you can then only use that money for pet damage.  Whereas, if you just have a larger total security deposit, you can use it for whatever you need to - unpaid rent, damage done by humans, etc.

    3) If the tenants are paying the rent on time, then I would not put them through a reapplication process.  You'll just alienate them.  If the boyfriend is not causing any problem, what you can do is just give her written permission to have him as a long-term guest.  This is what I used to do.  If you keep him off the lease, then she can kick him out, and you still keep your tenant.  If you force the issue to have the boyfriend on the lease, they may be put in a difficult position.  Maybe she's not ready to be tied to him that way financially, or commit to the relationship to that degree.  At any rate, it worked really well for me to just give them written permission to have the boyfriend be a long-term guest, and include in your written permission that if there are any problems, that the permission will be revoked.  I also would not require any credit checks, etc., of the boyfriend.  That would make him a tenant - and now you have to deal with him as a tenant, and he has tenant rights, etc.  I know this is not the popular way to handle this, but in my experience, this worked best for me and my tenants.

    Finally, I wanted to bring up the cost of turning over an apartment.  If you're talking about raising the rent by $100, and that causes your tenant to move out, what will you actually gain?  How much is one month's rent?  Plus the cost of cleaning, painting, possibly replacing carpets, etc. that you can't charge the tenant for?  Does that add up to more than $1200?

    And if it is close, consider that this new tenant may only stay a year, and then you have another lost month's rent and costs to turn it over again.

    And a new tenant is an unknown.  Will they be good tenants?

    Now, is the current tenant a good tenant?  Pays on time, doesn't create problems? Isn't doing major damage?  Someone likely to stay for a few years?  That's worth a lot.  If they're good tenants, I think you should really consider the cost of losing them as well as the cost of turning over a unit.  

    If they're good tenants, and long-term tenants, I really don't think it's worth it for $100/month, which you will probably not realize as profit anyway.

    @Sue K. , thank you very much for sharing your thoughts on this.  

    for 2) What I read, was that having a separate pet deposit can actually backfire, in that you can then only use that money for pet damage. Whereas, if you just have a larger total security deposit, you can use it for whatever you need to - unpaid rent, damage done by humans, etc.

    I have heard that, and since changed my wording in my lease to a non refundable pet fee, which should take care of any disputes. 

    For the reapplication, you are correct and I do not plan on rescreening them.  I do like the idea of writing in the tenant's boyfriend as a long term guest.  

    I understand that I may initially lose tenants by increasing the rent on the unit, but honestly the current owners are really selling themselves short.  The duplex has a 1br and a 2br unit, for a property that has been completely renovated in the last year.  This is an apartment within walking distance to a well known college, low crime rate area, centrally located in the city.  If I lose the inital tenants, but do an increase and make that back over the course of the year, I will continue to make the increased rent amount for the duration of the time I own the property.  

    I plan to meet with the tenants once we close and have a discussion with them and provide them with a copy of the lease that I will be using when their lease expires, as well as my intentions to increase the rent at the end of their lease.  I plan to do this respectfully, and open lines of communication with them so that they don't feel alienated.  I want them to know that they can approach me, but I am in this business to build wealth.  Again, thank you all very much for your input and perspectives.  This is one of the many great things about the BP community.  Have a great night

    Originally posted by @Lee Nugent :

    @Sue Kelly, thank you very much for sharing your thoughts on this.  

    for 2) What I read, was that having a separate pet deposit can actually backfire, in that you can then only use that money for pet damage. Whereas, if you just have a larger total security deposit, you can use it for whatever you need to - unpaid rent, damage done by humans, etc.

    I have heard that, and since changed my wording in my lease to a non refundable pet fee, which should take care of any disputes. 

    For the reapplication, you are correct and I do not plan on rescreening them.  I do like the idea of writing in the tenant's boyfriend as a long term guest.  

    I understand that I may initially lose tenants by increasing the rent on the unit, but honestly the current owners are really selling themselves short.  The duplex has a 1br and a 2br unit, for a property that has been completely renovated in the last year.  This is an apartment within walking distance to a well known college, low crime rate area, centrally located in the city.  If I lose the inital tenants, but do an increase and make that back over the course of the year, I will continue to make the increased rent amount for the duration of the time I own the property.  

    I plan to meet with the tenants once we close and have a discussion with them and provide them with a copy of the lease that I will be using when their lease expires, as well as my intentions to increase the rent at the end of their lease.  I plan to do this respectfully, and open lines of communication with them so that they don't feel alienated.  I want them to know that they can approach me, but I am in this business to build wealth.  Again, thank you all very much for your input and perspectives.  This is one of the many great things about the BP community.  Have a great night

     Just be sure you are allowed to have non-refundable fees.  In CA no non-refundable fees are allowed.

    So many new landlords take the stance that they have the right to higher rents, and more strict rules, etc.  And if this worked in the real world, it would be great.  You would realize the profits you imagine.  But, there are humans involved here, who have their own needs.  If you can find a balance between your need for profits and you tenants' need for a good home, then you'll have it made.

    In regards to reapplying rather then do this I included contact sheets with an intro letter asking them to return  the needed info.  Basically it asked  for phones, email addresses, places of employment,  emergency contact,  general work hours (I have some night workers), list of occupants. In your case I would also collect information on pets.  I would  find a nice way to remind them of the pet language in the lease and let them know that you consider the current pets to be the limit of what you consider reasonable. Additional pets will not be allowed for tenants that already have them.  As for the Pet fee, if it is allowed just charge a higher deposit for pet owners. good luck.

    Colleen F.

      Originally posted by @Sue K. :
       Just be sure you are allowed to have non-refundable fees.  In CA no non-refundable fees are allowed.

      I think you might have meant non-refundable deposits are not allowed? Because non-refundable fees (like late fees, for example) are allowed everywhere.  You bring up a good point though that it's important to be careful what you call it, since a deposit implies it's refundable whereas a fee is usually not. 

      Originally posted by @Kyle J. :
      Originally posted by @Sue Kelly:
       Just be sure you are allowed to have non-refundable fees.  In CA no non-refundable fees are allowed.

      I think you might have meant non-refundable deposits are not allowed? Because non-refundable fees (like late fees, for example) are allowed everywhere.  You bring up a good point though that it's important to be careful what you call it, since a deposit implies it's refundable whereas a fee is usually not. 

       In CA you can't collect anything that's not refundable, no matter what you call it.  And any late fees, etc., are to only be an amount you can prove is your actual out-of-pocket cost due to their paying rent late, etc.  Of course, people do this anyway, but legally, you can only charge fees for actual out-of-pocket damages.  And any and all charges for anything other than rent (pet fees, etc.) must be refundable, and the total of all of these, no matter what you call them, can only be the limit for security deposits - twice the rent amount for unfurnished, three times the rent for furnished.

        

      Originally posted by @Sue K. :
      Originally posted by @Kyle J.:
      Originally posted by Sue K.:
       Just be sure you are allowed to have non-refundable fees.  In CA no non-refundable fees are allowed.

      I think you might have meant non-refundable deposits are not allowed? Because non-refundable fees (like late fees, for example) are allowed everywhere.  You bring up a good point though that it's important to be careful what you call it, since a deposit implies it's refundable whereas a fee is usually not. 

       In CA you can't collect anything that's not refundable, no matter what you call it.  And any late fees, etc., are to only be an amount you can prove is your actual out-of-pocket cost due to their paying rent late, etc.  Of course, people do this anyway, but legally, you can only charge fees for actual out-of-pocket damages.  And any and all charges for anything other than rent (pet fees, etc.) must be refundable, and the total of all of these, no matter what you call them, can only be the limit for security deposits - twice the rent amount for unfurnished, three times the rent for furnished.

        

      To say you can't collect any non-refundable fees is just not correct.  Many types of fees (i.e. application fee, late fee, dishonored check fee, etc) can be, and are routinely, collected by most landlords. Even the California Association of Realtors own lease form allows for these fees. More importantly, the California Department of Consumer Affairs expressly says it's legal.  The test is what is specified and agreed to in the lease, and whether the fee is reasonable. 

      For example, regarding the dishonored check fee, the Dept of Consumer Affairs' own website says "The landlord also can charge the tenant a fee if the tenant's check for the rent (or any other payment) is dishonored by the tenant's bank.  In order for the landlord to charge the tenant a returned check fee, the lease or rental agreement must authorize the fee, and the amount of the fee must be reasonable."

      Originally posted by @Kyle J. :
      Originally posted by @Sue Kelly:
      Originally posted by @Kyle J.:
      Originally posted by @Sue Kelly:
       Just be sure you are allowed to have non-refundable fees.  In CA no non-refundable fees are allowed.

      I think you might have meant non-refundable deposits are not allowed? Because non-refundable fees (like late fees, for example) are allowed everywhere.  You bring up a good point though that it's important to be careful what you call it, since a deposit implies it's refundable whereas a fee is usually not. 

       In CA you can't collect anything that's not refundable, no matter what you call it.  And any late fees, etc., are to only be an amount you can prove is your actual out-of-pocket cost due to their paying rent late, etc.  Of course, people do this anyway, but legally, you can only charge fees for actual out-of-pocket damages.  And any and all charges for anything other than rent (pet fees, etc.) must be refundable, and the total of all of these, no matter what you call them, can only be the limit for security deposits - twice the rent amount for unfurnished, three times the rent for furnished.

        

      To say you can't collect any non-refundable fees is just not correct.  Many types of fees (i.e. application fee, late fee, dishonored check fee, etc) can be, and are routinely, collected by most landlords. Even the California Association of Realtors own lease form allows for these fees. More importantly, the California Department of Consumer Affairs expressly says it's legal.  The test is what is specified and agreed to in the lease, and whether the fee is reasonable. 

      For example, regarding the dishonored check fee, the Dept of Consumer Affairs' own website says "The landlord also can charge the tenant a fee if the tenant's check for the rent (or any other payment) is dishonored by the tenant's bank.  In order for the landlord to charge the tenant a returned check fee, the lease or rental agreement must authorize the fee, and the amount of the fee must be reasonable."

       We're saying the same thing.  The test of what's reasonable, is your out-of-pocket costs.  

      The CA Dept of Consumer Affairs is a great website.  If you click on the footnotes, you can learn the actual code, if you ever need it or want to read it.

      In case someone here is curious, the following is cut and pasted from the CA Dept of Consumer Affairs website:

      http://www.dca.ca.gov/publications/landlordbook/li...

      Late fees and dishonored check fees

      A rental agreement cannot include a pre-determined late fee. the exception to this rule is when it would be difficult to figure out the actual cost to the landlord caused by the late rent payment. even then, the pre-determined late fee should not be more than a reasonable estimate of costs that the landlord will face as a result of the late payment. A late fee that is so high that it amounts to a penalty is not legally valid 110

      Additionally, in some communities, late fees are limited by local rent control ordinances. (See Rent Control.)

      Regarding non-refundable fees:

      http://www.dca.ca.gov/publications/landlordbook/wh...

      "...The security deposit may be called last month's rent, security deposit, pet deposit, key fee, or cleaning fee. The security deposit may be a combination, for example, of the last month's rent plus a specific amount for security. No matter what these payments or fees are called, the law considers them all, as well as any other deposit or charge, to be part of the security deposit.89 The one exception to this rule is stated in the next paragraph. The law allows the landlord to require a tenant to pay an application screening fee, in addition to the security deposit.90 The application screening fee is not part of the security deposit. However, any other fee charged by the landlord at the beginning of the tenancy to cover the landlord's cost of processing a new tenant is part of the security deposit.91"

      And by the way, the application fee maximum is set by law, which is around $42.  And even then, you are only supposed to charge actual out-of-pocket costs - up to the maximum.

      Unfortunately, a lot of contracts, even those written by associations and lawyers, are not really legal according to the law.  I wouldn't be surprised if the CA Association of Realtors did have a contract that was not legal.  It happens.  There are a lot of lazy lawyers out there, and like I said, the odds of a tenant learning the law and calling you on it are slim - but it can happen.

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