How to deal with tenants paying super low rent?

Question

Hi everyone!

I currently have a property that suits my criteria, but their is one big problem. The property is a quadplex that has tenants paying less than half of market rent at this moment. To maximize my cash-flow on this purchase, I would like to increase rents to the market value by finding new tenants but I am not sure how I could get the tenants out. Their lease ends in 6 months, so is their any way to fix this problem? Also, I am from Quebec, Montreal so the laws will differ from some other place.

Any advice would be so appreciated, thanks!

John Leake · Answer

Unless they are in breach of their lease in some way shape or form you will likely be required to honor the lease. However if the deal makes sense and its just a matter of waiting the lease out it will likely still be worthwhile. Part of a good deal is having to work through the mismanagement of others. If you can afford to float the property or even better if it cashflows now I wouldn't be as concerned about the short term. I'm from the United States but this is more general advice.

Denis Marcotte · Answer

C'est difficile de pouvoir augmenter les revenus autant au Québec. La meilleure option est toujours le cash for keys (entente à l'amiable) ou tu pourrais acheter en étant "propriétaire occupant" pour l'une des unités, puisqu'il s'agit d'un 4plex.

Will Armstrong · Answer

Hey Felix, I actually just recently had this same conversation with one of my friends. He recently acquired a property and rents were way under market. He didn't even realize this until he asked me if I could look at the deal and give him my opinion.

As the others mentioned, you will need to honor any existing leases. As soon as their lease ends though, you can raise the rent to what you feel is fair. At that point, they will need to decide if they would like to stay and pay the rent increase or if they will vacate. The best thing to do is to just be honest and upfront with them. Give them a heads up a few months before their lease ends and let them know how much you're thinking of raising rent by. That way you give them ample time to think about it, but also give yourself some time to start looking for a new tenant if they decide to leave.

My friend felt guilty doing this, but at the end of the day, you own a business and need to make sure you do what is best for you. Many people feel bad about raising rents on their tenants and end up losing a lot of money in the long run.

Moataz Mobarak · Answer

Hi Felix, yeah as other people mentioned, you have to respect the existent lease agreement (specially in Quebec where the laws heavily protect the tenants).  What is your investing strategy and what is your exit strategy?  do you plan on holding for many years or flip it for a profit?  Just figure out what your goals are from RE investing and based on that, you can tailor your strategy.  For example, if you plan to buy and hold, then owner occupied can be a good option to take one unit, and possibly take other units for immediate family (parents, children).  However, make sure that everything is done according to the laws, otherwise they can be very punishing (for good reasons).  Lastly, as a personal advice, it's important to always remember that we deal with people and we have significant impact on their housing, so it is important to stay humane and reasonable.

Also, consider "cash for keys" and generally talk to your tenants, they are people after all.. You would be surprised what you can achieve by working on your people's skills and negotiation skills.  They will take a long way in real estate investing.

I am also an investor and a broker in the Greater Montreal Area, so feel free to reach out.  I am more than happy to help.

Hope this helps, cheers!! :)

Mary Smith · Answer

I would recommend that you wait it out, since it is just 6 months more. Once their lease is up, you can raise the rent amount to the current market price. Also give the tenants a heads up a few months before hand, that way they can look for a new property if they do not wish to renew their lease with you.

Hoi L. · Answer

@Jeff HubertIIRC, month to month lease only requires 30-60 day notice for rent increase or renewal cancellation (dependent on state laws).  We had our previous owner raise rent about 8% in order to start catching up the below market rents for my 5 unit property.  Currently, they are still ~8% below comps in the area market and after I took possession in late July and told my tenants I am holding rents stable for 1 year, they feel grateful.  If you let your tenants know what you are to expect, they can give you ample time to find new tenants if they choose not to pay the expected rent increase (they most likely will stay, no one wants to go through the hassle with moving just to go to another place with comparable rents in your market).

Jeff Hubert · Answer

Going through now myself. Last two years the rents have rocketed up in Fort Lauderdale. Have great tenants, but with taxes and insurance increases and able to increase rents to market rates is a must. The conundrum is they're great and pay on time. Guess I'm just venting here, lol. When you're talking at least 400 less than market per unit, each month that goes by your like ooops there's another 1200 of rent income lost... One tenant is month to month and the other two leases end in Dec and March. I really appreciated any input from you guys and girls. Have a nice day!!

How to deal with tenants paying super low rent?

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