At what point is raising rent on inherited tenant unreasonable?

[Joseph Matarazzo]

Hello BP Community,

So I have the opportunity to purchase a 4 family where the rents are drastically below the going rate. 

-Each unit is currently rented for $800. 

- BP Rent Estimator says a comparable unit is $1600

- Rental listings in the area are $1800-2300. 

So If I buy this property, I need to raise the rents in order for it to cashflow (break even is around 1300). I have looked for posts like this from the past and the examples are a difference of going from around 450 to 600 in rent.  Not going from 800 to 1600-2200 (double or almost triple current rent).  

How would you all go about raising these rents in this extreme situation? There is such a large difference here that on one hand you almost have to get rid of the tenant and get a new tenant in there. On the other hand, it seems unethical to more than double the rent on someone. 

[Wesley W.]

To be honest, I would terminate the leases and rent out the units at market rates.  It's ripping off the proverbial band-aid, but it's almost guaranteed the inherited tenants will not be willing to pay what the rest of the world would for those units.

[Joe Villeneuve]

First, why dd you buy the property if the rents are so low now on the existing tenant and it appears as though if you don't raise the rent, you will lose money (negative CF)?

[Wesley W.]

To be honest, I would terminate the leases and rent out the units at market rates.  It's ripping off the proverbial band-aid, but it's almost guaranteed the inherited tenants will not be willing to pay what the rest of the world would for those units.

[Kim Meredith Hampton]

Joseph

This is reality right now and see this scenario constantly this past year. You “need” to raise these rents to market, the investment makes no sense to be negative. You can offer the tenants the new rent, if they can’t, give proper notice to vacate and re-rent at market rate. I will tell you some can afford, and some can’t. But if they go out into the real world, they will see what going rents are doing, plus they have to pay for a mover, new deposits etc…

[Joseph Matarazzo]

Thank you for your replies.  I think I just needed to hear it from others to confirm in my head what you are all saying. 

Also to reiterate, I did not buy the property yet, but I am going to make an offer because the potential is definitely there. 

[Greg M.]

I would need to know why the units rents are so low. Is it in a rent controlled building? Are the units in need of serious remodeling? Lousy landlord who never raised rent?

Chances are the people renting them won't be able to afford market rent. No big harm in offering them a lease at market rent just to see. I'd give them a few days to decide on the renewal and maybe 60-90 days to leave. 

I suspect that if rents are so low, the units haven't been updated in a long time and will need lots of work. 

[Patrick Drury]

@Joseph Matarazzo
I would say offer them an opportunity to pay the market rent and if they can't then don't renew their lease and turn the unit and ren-rent it. Depending on if you have a crew or a property manager, assess how fast they can turn the units and get them rent-ready. If you don't have the bandwidth to turn all 4 units in a reasonable timeframe, then break it up and do 2 units, then the other 2. 

[Nathan Gesner]

Best option: make the purchase contingent on the Seller presenting it to you vacant. That makes them responsible for removing the tenants. If you go this route, ask for it to be vacant two weeks prior to closing so you have some flexibility and time to do a final walkthrough.

Second option: give tenants notice on the day of closing, in accordance with state law. You have to get them out if you want to turn it around. When they're more than 15% below market, I wouldn't even bother offering them to stay at the higher price because they probably can't afford it and, even if they could, they may grow to resent you or fall behind on rent.

[JD Martin]

Quote from @Nathan Gesner:

Best option: make the purchase contingent on the Seller presenting it to you vacant. That makes them responsible for removing the tenants. If you go this route, ask for it to be vacant two weeks prior to closing so you have some flexibility and time to do a final walkthrough.

Second option: give tenants notice on the day of closing, in accordance with state law. You have to get them out if you want to turn it around. When they're more than 15% below market, I wouldn't even bother offering them to stay at the higher price because they probably can't afford it and, even if they could, they may grow to resent you or fall behind on rent.

 Agreed. You're never going to make this work with the current tenants. They are there *because* the rent is so cheap. And you should look really, really close at the property. You usually don't see other investors giving away that much equity unless they're ancient and don't care or inherited the property and don't care.