Inherited multi-home property with renters far below market rate

Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes

1y

I at one point, in the 1980's started investing in 2 family and 3 family homes. But I spent months searching for each, finding flukes and got them at 25% below market. Many of them are owned by people who had them for 20 or 30 years or more, with tenants paying way below market. So, the question is, what to do?

My best education to this is I bought a duplex in 1984 for $180K when market values for them are $220K. The vacant property needed some work, and I spent a month or two rehabbing it, and patronized a bodega for snacks a few times a day. It turned out the bodega owner owned the 2 story multi use property as well as the 2-family building next to me.

This was in 1984, and the bodega owner bought the building next to me for $72K in 1972, and rented the 2BR units out for $400/month. In 1984, market rents for 2BR's run $650 to $750/month. Surprisingly, he kept the rent for one unit at $400/month, while the other at $600/month as there were some turnover.

Interestingly, I got into a long discussion of why he never raised the rent. So he started telling me stories where landlords kept rents low, rarely raising it, to one owner raising it every year to market. He said even with $400/month, he still cash-flowed, as he had a small mortgage, around $30K at 5% at 1972 rates, and he avoided the constant turnover of tenants in the neighborhood where owners charged market rent. On the other extreme, another owner charged market rents from the beginning, increased it every year to market, had constant turnovers, constant renovations, constant vacancies, that he had to sell it after several years of headaches.

The greatest thing was his $400/month tenant maintained the backyard, swept the hallways and stairs, and swept the sidewalk every morning. When I heard that, I spoke to his tenant next door to me, and for the use of my driveway, swept the hallway, stairs and sidewalk, take the garbage cans out for sanitation pickup and retrieval. Better yet, he stayed by his living room window watching the streets every morning for littering where the city issue citations.

In cases like yours, it's probably better you inform tenants that rents will be raised and give them time to move. I know of this in a number of cases, the tenants who lived there moved out to a smaller place and downsized. The $400/month next door tenant was still there when I sold the property in 2004, and when his landlord sold the property, he and his wife moved in with his son.

In another case, I rented a 1BR apt for $800 when market rents went for $850 to $900 and it was rented quick. Three years went by, and market rents went up to over $1,100. I advised the tenant I'll increase the rents to $850. She was shocked and threatened to move. I said "fine, I'll keep the rent at $800 for 3 months so you can find an apartment for $800. She came back a month later and frantically beg to stay for $850. I got a good laugh out of it.

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John Reagan Johnson

Gallatin, TN · Member since 2024 · 31 posts · 8 votes

1y

Number one financial pitfall from owning a rental property is vacancy time. That makes this a bit of a tedious situation. If you raise the rent too much, you risk having the tenants leave, which leads to vacancy time and lost revenue. May be worth contacting the tenants and discussing signing a new lease. In that conversation you can tell them that you'll be increasing the rate by a small amount due to the cost of everything going up. I do not know how much lower their rate is than market value, but having some money come in is much better than no money coming in. At the end of the day, it is a business that you are now running, so you have to do what is best for you. If the current tenants do not like the new rate, and move out, then I would recommend raising the rate to a competitive number because now it is a new listing in a different market than before. Just be careful to not make the rental rate too high, as it could extend the vacancy time!

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Caleb Brown

Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes

1y

With no leases what are the laws around tenants getting notice to leave? Since you inherited is there debt? If the debt is low or none I would get those 2 tenants out and have it a clean slate for the next buyers. If you are not able to do that then you'll have to bite the bullet and sell at a discount.

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Peter MckernanBusiness Member

Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes

1y

Hey! This is a great problem to have for sure! The challenge is that Oakland is a rent control city so that raising rents will be harder than another city that does not have these restrictions.

This is what I would do, while assuming that you increased the rents for the two units that went vacate to the current market rents that is a huge plus for this situation. For the month-to-month people in those units, keep them at a month-to-month because in rent control cities when selling/keeping tenants in with a locked in lease gives the buyer/owner less advantage.

I would keep the month-to-month, increase per the city guidelines as often as you can, I believe 3% once a year. The reason this is, is because once someone comes to buy the place you can sell as it is and that person could be buying as a primary and move one of the units out to live along with 2 units top rent and they can work on getting only one unit up. This is just one example of a plus for going to market and giving the market the ability to see what it is really going to value you the property at with the 2 units newly rented and two having long term existing tenants.

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Wilson Lau

Real Estate Agent · San Jose, CA · Member since 2023 · 182 posts · 104 votes

1y

Quote from @Mar Liu:

Hey all,

My family recently inherited a 4-unit property from our grandparents located in Oakland. We uncovered that our grandparents never increased rent over the 30+ years that they had this property. 2 of the 4 units did turn over recently, so those are now at market rate. However, there are 2 tenants who are living in units that are significantly below market rate.

Neither of these tenants have leases anymore and are essentially month to month. Also, for one of the units, we are currently unsure whether the original tenant is still occupying the unit. Her son moved in and we aren't sure whether he lives there alone now or alongside his mother.

We'd ideally like to sell off this multi-family property, but at the current rental rates for these 2 units, it doesn't make a ton of financial sense for a buyer. Would love advice on what we can we do to get both apartments back to market rate / what options we have with this property. Any other things / angles we should be thinking about?

For 4 units, your sales price is heavily dependent on the gross income of the property. If your goal is to get rid of the property, you can sell it as is. On the other hand, if there is not an urgent need to sell and you want to sell for top dollars, the best approach is to have a conversation with the tenants from those 2 units to see whether they are willing to relocate. Legally, you will need to give them at least a 60 days notice and explore options for just-cause or no-fault evictions. Each of these options causes time and money, so that's something to consider too.

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Inherited multi-home property with renters far below market rate

Inherited multi-home property with renters far below market rate

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