Month-to-Month Tenants, what would you do?

Question

Hi guys,

I went to look at my first rental property yesterday in CT.  I sat with my RE agent and we looked at the MLS and saw that of the three units listed (all 2bdrms), only the first two floors were rented, on a month-to-month lease for $650 each.  I would say that by looking at the MLS $650 is the average rental price in this area with the high-end being around $1,100 for a nicely renovated 2 bedroom unit with all the bells and whistles.  If I were to purchase the property I would want to increase the rents as follows, $850 (first floor), $775 (2nd flr), and $700 (3rd flr).  Should I stipulate in the contract that I want the current renters out and start from scratch?  Or see if they'll agree to the new rent terms with a 6 month lease?  I don't want a month-to-month and I also don't want to deal with problem tenants for a whole year.  What would you do BP members?

Jesse Waters · Answer

I would agree with @Jon Holdman on this one, don't kick them out, bring rents up after you take over.  Every property that I have purchased with existing tenants I have kept, although some view new management as a chance to not pay, and they end up getting kicked out.

If you have one vacancy, fix that unit up, don't go so overboard that your improvements don't give you a good return.  Then, ask a current tenant if they want to move into that unit at a higher rent with a year's lease, or rent it out to a new tenant, then give one of the other tenants a 30 day notice, and start your repairs on the second after they move out, repeat for the 3rd.

Just my thoughts.  Best of luck.

Jon Holdman · Answer

A range from $650 to $1100 is HUGE.  You MUST do more research to figure out the acceptable rents for your specific units.  There is something very different between the $650 units and the $1100 units.  The best way to get poor tenants is to overprice your units.  They've been rejected everywhere else and so will pay your higher price.  So, you really must figure out the correct rents.

IMHO, you're fooling yourself with six month leases.  Either go for one year leases or do month to month.  Personally, I prefer month to month.

You can always raise the rents for the existing tenants after you take over.  If you require them to be kicked out before you close, you're guaranteed to have some vacancy while you do the make ready and advertise for new tenants.  Leaving them in place avoids that.  Don't discount make ready costs.  You will almost always have some amount of repair and fixup between tenants.  And some of that is just "wear and tear" that you have to pay out of pocket.  Folks don't notice that little stuff as they're living in a place (walk around your own place and note all the minor work that would be needed.)  But they sure notice when considering a new place.   A raise from $650 to $850 is almost certain to produce a vacancy, though.  Unless your market is really tight.

Devon L. · Answer

Thanks everyone! That's why I'm here asking these questions now.  @Jesse Waters

I really like your suggestions.  @James Wise I'll do a comparison with the other building  just two houses over @775 to see what sets them apart.  I can tell you that they have an in unit washer/dryer combo.  Appreciate all the feedback.

Precious Thompson · Answer

What if the rent is raised while the existing tenants are still leasing can you legally raise the rent and expect them to pay or kick them out if they decided not to?

James Wise · Answer

The tenants are on a month to month lease. The landlord could raise rent or give notice to vacate with a 30 day notice.

If they were in a lease the landlord would need to honor that lease until the end of its term.

James Wise · Answer

woa.

Pump the breaks.

Worst thing to do is to buy the property and make waves. Although doesn't sound like waves in this case, sounds like a tsunami.

How much would you need to improve the units to garner the rental increases you describe? Is it really an effective use of time and capital?

If it is an effective use definitely don't want to do it all at once. Makes no sense. You are missing out on all of that rental income while renovating.

If you do it one at a time your making money from the other two.

I highly recommend taking things slow. Take over the building, leave everything as is for awhile. Feel out the tenants then make slow decisions as units turn over.

Steve Babiak · Answer

Bad idea to try to renovate a unit while a tenant is living there. If you render the kitchen or bath unusable for a few days, then what happens?

It's not like you are just attempting repairs while the unit us occupied.

Devon L. · Answer

sorry guys I left out some details.  I intend to completely renovate the units.  I would ask the tenants if they would mind is renovating while they were there.  I've done this with my dad in the past before he retired.  We would be doing most of the work ourselves.

Linda Weygant · Answer

You don't really say whether or not this property could command those prices.  You indicate that the current rents are about average for the area and that the market is higher for nicer units.  But you don't say whether or not your units are actually nicer.

You can't just increase the rents without either upgrading the units or determining that they are already nicer than the rest of the market.

However, that said...  Any time you can keep good tenants, it's a win.  If these tenants aren't good, then asking the seller to ensure the units are vacant is also a win, rather than having to do that yourself.

Month-to-Month Tenants, what would you do?

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