Inheriting severely under market tenant

[Richie Linnon]

Hey BP!  I’m getting ready to close on my first duplex within the next two weeks and very excited!

I’m inheriting a tenant who has lived at the property for 24 years and never missed a payment.  Issue is he is paying 750$ a month for the 3br/1ba unit.  Any recommendations are greatly appreciated.  He is month to month so all I would have to do is give him a 30 day notice of rent increase.  How would you all handle this situation? Thank you!

[Nathan Gesner]

I don't recommend small increases over a long period of time because it increases the chance of mistakes, it may still build animosity with the tenant, and the tenant may eventually reach a point where he can no longer afford the increases and he will leave. Just rip the Band-Aid off and be done with it.

He's been there 24 years. If he has half a brain, he knows the rent is super cheap. It will cost him a lot to move, plus the time and trouble, and he'll end up paying much more for the new place.

I recommend you show him a few examples from Zillow so he understands the market and what your property is worth. Give him the option of staying in place with a major increase, but keep rent about 10% below market to encourage him to stay. If he chooses to stay, review his finances to verify he can afford the new rate, then lock him in with a new lease.

If he can't/won't accept the rent increase, give him 60 days to find a new place. Renovate the rental and rent it at market rate.