Positive Cash Flow Duplex

9 Replies

Hey guys, my wife and I️ recently purchased a duplex with 25% down. The owner we bought from is older and needing money for health issues, so she’s liquidating all her assets. Unit A tenant has been there for 7 years and has never missed a payment, Unit B tenant has been there for 16 years and never missed a payment. We are cash flow positive $250/mo, but rent could be raised $200 per side to match comps. Do we risk driving out good tenants right out of the gates for an extra $4800/yr? Maybe increase $50 per side or wait a year to increase? We’re their new landlords, so they probably expect some sort of increase right? Any suggestions are much appreciated. Thanks!

How much are the current rents?  Going from $400 to $600 is likely to produce a much stronger reaction than from $2000 to $2200.

What's the demand like?  If the existing tenants move and you can quickly fill the vacancy you're better off than if you have a long vacancy.

What work will be needed?  Work is always needed when you have a turnover.  After seven years you probably need extensive work and after 16 its probably a full remodel.   Don't make the mistake of comparing your dated and used units to recently updated ones when determining rent.  Honestly given the length of occupancy I'd expect to spend $10K or more to update these units.

Current rents are $1000/side. Comps are renting for $1300-$1400. Carpet will need to be replaced for sure. Vacancy is less than 1% in the Seattle area, it’s tough to find anything to rent. I️ guess the biggest question is if we want to risk losing good tenants who treat the property like their own and pay on time for tenants who could be the exact opposite. I️ don’t want to be chicken little and play the what if game, but I️ also like the idea of decent cash flow with good tenants vs great cash flow for the unknown...

Wait til rainy season is over and let them know rent is going up $150 and that you will be putting in new carpet. The tenants might like the new carpet and be ok with rent increase. Or they could leave but then you have a rental available in June/July or just after rainy season.

With the competitive market for rentals, I'd think you're safe to make the gamble with bumping up rates.  Turning over the units would also give you a chance to clean them out, do repairs, and justify the extra rent.  Rentals are in-demand in the area, so I'd capitalize on that.  Plus, just because the tenants have paid on time doesn't mean they might not be high maintenance or have other issues (hoarders? calling for every little issue?).  You're inheriting THEIR expectations of a landlord, which could be good or bad.  Putting in new tenants that meet your requirements (and not the previous owners') could be wise.

Thanks.

I had the same situation with my most recent property (a four-plex in burien, WA).    of the 3 occupants  (4th unit was vacant at closing)  2 were long term tenants (7 years, 15+ years).    They were paying between $630-710 a month.   (Market rents were probably 50% more)

I first wrote a letter introducing myself and explaining my long term goals for the property including enumerating the (long) list of needed repairs which I was going to begin tackling immediately,  as well as pointing out the amount that expenses had gone up for the building in the 10 years during which the prior owners never gave a rent increase.    I then laid out a 2 year initial schedule for how much rents would increase and when so that the residents could plan for it.   I then met with every tenant to discuss the same with them and answer their questions.   The rents were still below market at the end of that 2 years but the building was  cash flowing and no longer at imminent risk of major systems failures.

Obviously I was trying to be very transparent and accomodating to the existing tenants, in part because I knew they had limited incomes and options should they have to move.   But I think it worked out well.   The other 2 units have had turnover at this point,  but both aforementioned residents are still there today with rents a lot closer to market rate, though with unit overhauls I could get more.  

Basically I was transparent with the tenants as to my needs, plans, and expectations and I made sure to demonstrate that I was reinvesting in the property concurrent with asking more from them, and in general I tried to show I am an attentive and responsible landlord.

@Jared Skov - slowly increase rents overtime. Sounds like there good tenants and you don’t want to force them out. Also consider your tenant turnover cost. 

@Jared Skov I have been faced with this same dilemma many times now. 15 times to be exact. And the answer is....it depends...depends on your goals, how active you want to be and how much you want to pump into the property.

First property I purchased I barely bumped the rents (Maybe 5-7%) in order to keep the great tenants and avoid turnover costs. It made my first property very easy to manage and ease my way into landlording. I opted to save my cash and buy more properties rather than dump lots into that first property.

Now, when we buy places we typically bump rents to a little under market value regardless of how long tenants have been there. Probably $1250 in your case. If people move we fix up and rent at market. If they stay we are sitting nice still and rents raise on standard basis thereafter.

I think @Jon Holdman lays out one of your most important considerations—what and how my much costs await at tenant turnover? I’m in a similar situation. If/when the tenants turnover, I want to to significantly update. The question is as Jon alluded—do you have those reserves now? Higher rents are good, but capital limits what you can do now, there may be a compromise in the situation. Slight increases for next year or so while you build reserves for the updates you want.

Best Regards

Mike