Real Estate Investor · Waukegan, IL · Member since 2013 · 367 posts · 80 votes
I'm looking at a fully rented 3 unit. The tenants are all on M2M (month to month) leases with rents that I believe are below market.
My issue: I'm looking to restart investment career by owner occupying to avoid that big chunk of down payment. Let's say for the sake of conversation the numbers work, my questions are:
1) How would I handle one of the current tenants? I imagine I would want to relocate the most unfavorable. How would I know that at this point, was my next question to myself.
2) Would I just say "Hey, you time is up, you've got to go."? (Obviously not like that)
3) Would I want to help relocate them? (the nice guy in me creeps up some times)
4) How would I go about raising the rents?
I had more questions when I woke at 5am this morning thinking about it, but I've forgotten some during my slumber. I'm sure I'll remember the rest later.
I would give the most unfavorable tenant plenty of notice. I would let them know that you purchased your new home with the intent on living in it. I would ask them how much time they would need, with a maximum of two months, to find a new place to live. If they don't move out you'll have to take them to court to evict. You'll win easily because no judge would ever deny homeowner their right to live in their own residence.
Owner occupied loans have a provision that require you to actually occupy them within a certain timeframe. I believe it's 90 days, but you might want to search a bit for that or ask the lender. Than gives you about enough time for an eviction if you need to do one.
Typically in an owner occupied unit the owner will pick what unit to live in based on personal choices, not which tenant they want to give the boot to. Afterall, if they are all mo-to-mo, you can get rid of any of them if they are bad tenants.
Some things to consider when choosing which unit to occupy:
-size/quality. Is there an "owner's unit"?
-income. Do you want to take the unit that would bring in the least income if you rented it out instead?
-repairs. Do you want to fix up any of the units while you live in them to hopeful command higher rent in the future?
I haven't gotten in to view the property yet, but per my realtor, the units are all the same layout. If that is correct, no problem. If there is a unit that would fetch a higher rent, I would not occupy that one. Thanks for the responses.
@Michael Seeker why would I not want to look for the better tenant and dismiss the 'bad' tenant? For instance, they all things being equal, but one 'bad' tenant is damaging the unit. Or one 'bad' tenant has paid late. Etc. Shouldn't that take precedence over my preference? I only plan to live there as long as required (1yr) and on to the next.
@Arthur Banks - That's certainly something to consider. If all units are exactly the same configuration, same finishes, same rents, etc. then I'd wait a month or so and see which is the least desirable tenant. Depending on your area though, you may have a hard time getting rid of somebody that doesn't want to leave, so it would be good to have a backup plan.
Check with what legal requirements are concerning terminating a M2M. Here in PA , you need to give 30 days written notice. you are under no obligation to give a reason or to provide any moving assistance, but maybe if you point the tenant in the right direction that could expedite the move.
Since you don't own the building yet obviously you can't give anybody notice until you are the owner.
Didn't about that. I'm sure there are some legal requirements that must be upheld. Thanks.
I just read another post where it was suggested to make the purchase offer with the condition that one unit is vacant, thereby putting the responsibility on the owner.
We're doing exactly what you propose right now. We had existing leases on all four units, we took the one that was up the soonest, which was also the top floor, largest unit, roof deck, etc. so it worked out in that manner. FHA gives you 60 days to occupy, not sure about others requirements. I'd pick the unit that was either most favorable to you for layout, size, location, etc. If that's not a consideration, I'd pick the unit that needs the most work so you can get it up to your standards ASAP.
Check the leases and state law, even if they've reverted to M2M, there could be something saying you need to give them 60 days notice or the like. We only had to give 30 but gave as much as possible. Once we were sure we were closing we let the tenants know, then the day after closing I hand delivered and also mailed a certified letter stating we'd need them to vacate by X date. I explained it wasn't our choice, it's a condition of our mortgage and we didn't want to violate federal law, etc. They have been understanding and are on track to be out by the end of this month.
Again, check the leases as part of your due diligence.