When to end tenancy?

Question

Hi!

I am in the process of buying a triplex that, according to the current owners, cash flows nicely at 2% (rare for this area!).  However, two of the units pay under market rents and the tenants in those units are very dirty.  But they supposedly do pay on time. Should we nudge these tenants out or just let them stay and keep paying? (They are on month to month leases.)

Market rents are $100-150 higher than what they are paying and the units would need about $2K of work each to make them attractive to regular renters.  Despite being pretty "icky", the units pass inspection.  It's tough as a new landlord not to make at least some basic improvements!

Account Closed · Answer

From a manager's perspective: many, many tenants are dirty.  If they are just "icky" but pass inspection, I suggest you leave them alone.

I suggest you bump their rent a bit, but leave them in place.  If you look at the lost income of one month per unit, then add in the cost to clean it up and fix it, and then put an "unknown" tenant in your units, I don't think you come out ahead.

So, I suggest a middle ground - simply bump up their rent, but leaving it below market enough that when they look to see their options on Craigslist, etc., they will see they are better off staying put.

They pay, they don't cause problems, and they aren't doing major damage.

If you get into their lives and tell them how to clean and live their lives, they'll move.  You'll lose a month's rent at least, and be out of pocket to clean, paint, etc., and you'll be putting in a tenant who is an unknown factor.

If you have a "house" that is working - tenants getting along and paying and not doing damage, and requiring minimal management - you have a very beautiful thing.  Leave them alone and let them make you money :-)

Daren H. · Answer

I say end tenancy when the tenant stops contributing to your goals.

Tenant pays rent on time, contibutes to my goals.

A tenant being dirty, not preferred but still may contribute to my goals (if still paying rent, not destroying property or causing problems)

Tenant paying less than market rent, not preferred but reduces vacancy loss, turnover costs, new leasing fees, etc., may still contribute to my goals

Being dirty, not paying rent on time, paying under market rent, definitely does not contribut to my goals

I definitely would not fix the place up with the current tenant in it. They showed you they are dirty. What do you think is going to happen after you fix it up? Save that money!

Al Williamson · Answer

@Kimberly Ashkenazicongrats on your new purchase!

I would start with a strong introduction of your expectations, then get a read on the situation for a couple of months. You really need a baseline of your expenses. The only real way to know is to go through a 1-year cycle, but you can sharpen your assumptions after a couple of months.

During the proof period, I would see if those dirty tenants follow your rules and meet your expectations. You would need to train them a bit. Don't be shy on giving feedback - all tenants need to be trained.

Anyway, after a couple of months you'll know which direction to chose.

For sure, the wrong direction is to loose control of your rental to tenants that don't meet your standards.

Best to you.

Marcia Maynard · Answer

It starts with having a good and comprehensive rental agreement in place. Then establishing your expectations in a friendly way. Then observing and guiding tenants back to the terms of the rental agreement if they stray. Then enforcing the terms... be swift, firm, fair, and polite.

The tenants will soon come to know your management style. They will most likely either fall in line or decide to move-out on their own. The last thing you want is to create an environment of animosity, as angry tenants can do a lot of damage on their way out.

Sometimes one must also be flexible. Set the expectation for periodic maintenance inspections, during which you can observe the tenant progress towards keeping the place clean and tidy. Spend extra time at the new property in the beginning so you really have a chance to see what is going on and the tenants have a chance to ask you questions. It is a good time for building rapport. Good rapport leads to loyalty, loyalty leads to long tenancies, long tenancies lead to better cash flow and less work.

I would use month-to-month rental agreements because you can change the terms easier, as the need arises. Do a few improvements to the property and then raise the rent a bit. This will make it easier for the tenants to accept the rent raise, as they will see the added value that you bring to the property. It will also show the tenants you care about the property and they are more likely to start caring for it as well. Incremental rent raises will let you maintain your current cash flow and gradually improve it, instead of taking on a big loss at turnover.

Kimberly Ashkenazi · Answer

@Al Williamson  Awesome -- Thank you!! I'll read up on tenant training. :)

Kimberly Ashkenazi · Answer

@Andy W.  Thanks!  3/1 units in this area should get at least $850 in rent and they are now rented at $600, $700 and $800. We are still waiting on their rent rolls and expense reports.  The sellers don't seem motivated to give us any proof of what the property's performance... :\

Andy Webb · Answer

@Kimberly Ashkenazi  One question first:  you mentioned that the sellers say the units cashflow nicely; what do your own projections say?  I would be wary of what the sellers tell you.

Is the $2k of work something you can do with the tenants in place? - that way you still have the cashflow going to support the cash out of pocket.  Let them know they need to clean the places up, and if they don't give them the boot.  I would bump the rent up to market as well, as that may move them out the door anyhow.

Andy

When to end tenancy?

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