Purchase with non-cooperative tenant?

Question

I am considering purchasing a duplex with BRRR strategy. One unit is vacant. The other unit is occupied at under market rent (very under at almost half of current market rents) with 3 months left on the lease. According to the current owner, the tenant is not cooperative with allowing showing of the unit that he occupies. The units will require renovations that could take 4-6 months as we would do the work ourselves outside our 9-5 jobs. On one hand it may be a positive to have some income coming in from the remaining lease while we update the first unit. On the other hand, I would not renew the lease at under market rent and this tenant could carry over uncooperative behavior with me as the new owner.

What pitfalls should I be aware of and what actions should I take as we consider the purchase?

Matthew Becker · Answer

I buy stuff like this all the time.  You don't renew the lease and deal with them being difficult for a few months.   The way to make money is by buying things like this that landlords don't want to deal with.  When things are under rented, that is a positive thing for you because that generally means they are undervalued.  Do your value ad, raise the rent to the above market, and get a new appraisal.  Refinance and take out 100% of your money, Cash flow, and have the next one ready.  You might have to deal with pain in the ass tenants but it is not that difficult.

You only have to worry if you are in a Pinko Commie state like WA or CA. Then, people can not move, and you are stuck with them not paying rent for a year. I would not buy in places like that. Most states are OK.  Moderate blue states are fine; you can't be in the wacky places.

If it is not under value, don't buy it.

I want to advise you on making as much money as possible, which I assume is your goal.  You need to provide more information.    City, State, Value, Beds, Bathroom, Sqft. Can you add bedrooms or baths?  What kind of remodel are you doing?  Budget, how much will rent be, interest rates, how much down, and more.

For example, I have seen many people make the mistake of doing everything themselves.  If you buy a duplex that rents for $3K a side and take 6 months to do a remodel, you will lose $3K plus the interest you are paying, taxes, insurance, and utilities if we estimate $1500/mo for that stuff.  Now you have lost 4500x6= $27K.  You will pay for materials and probably sub out a plumber and electrician.  You might be better off finding someone to help you. This is an example: I don't know your numbers.  I would find someone to help me.   A lot of construction guys do side jobs on nights and weekends.  If you speak Spanish, that will help.  You can go to job sites and ask guys if they will do side work.  Sub out the demo, Framing, flooring, and painting to someone who does it for a living.  The job will be done better, faster and you will make more money.

Sam Kahl · Answer

If the tenant is not cooperative, are they current on rent? Can the landlord provide documentation of their payment history? I would NOT advise a client to ever purchase a tenant occupied property with uncooperative tenants unless they are very experienced investors or the property purchase price comes at a discount that reflects this fairly major issue they are conveying to you with the sale.

How long has this place been on the market? If the landlord is desperate, they should be willing to help pay the tenant to cooperate or vacate.

I would also get familiar with the landlord/tenant laws where this is located.

Make sure the landlord has a plan to allow your inspector and appraiser (if any of these apply) access to the occupied unit.

I did a piece on buying tenant occupied properties awhile back and and got some fantastic responses... maybe something here could help in your situation. Link here.

I hope it all works out great for you in the end!

Jessica Kiely · Answer

Matthew, thank you - well stated that if it's not under value, we shouldn't buy it. It is assuring to know you buy in these situations.

Jessica Kiely · Answer

Sam, thank you - this is very helpful. I will require documentation of the tenant's payment history, their current lease, and inspector and appraiser access. The property has been on the market for 15 days. It is listed at $9K over Zestimate and needs renovation. We would offer less than market. It is one street over from the single unit we bought last year (our first rental) so it's very conveniently located and in a familiar market. I read your piece and am glad to know about the Estoppel Certificate. Thanks!