Purchasing Property with No existing Security deposits??

Question

Hello all,

1st of many posts im sure.

Im purchasing a 4unit building from an elderly owner.

Her husband who recently passed away, never collected security deposits from any tenant.

I don't know the reasoning, nor do I care.

What I do care about is, what I should do about it.

3 are long term tenants, and 1 is 3 years.  All seem eager to stay and are established in their units.

Another thing is their rent is about $150 below market.  So im raising that about $100 per unit.

This is a lower income area btw.

Any ideas?

Account Closed · Answer

First, congrats on getting nice long-term tenants.

I wouldn't worry about a security deposit at this point.  If you try to collect one, they may choose to move instead, and then you're dealing with a tenant moving out without a deposit anyway.

You won't be able to charge them for normal wear and tear, which will be substantial in a long-term tenant unit, and you also wouldn't be able to charge them for damage beyond the normal life expectancy of the carpets, flooring, appliances, etc., anyway.  So, you wouldn't likely be able to keep much of their deposit, if anything, anyway.  If they leave owing rent, yes, you'd have to sue them for that, rather than deduct it from a security deposit, but overall, I don't think you would benefit from trying to collect a security deposit now.

I'd also raise the rent less than you intend to.  Why don't you split the difference this year, and raise it $75.  The reason is, because they will hit the local rental ads when they get notice of a rent raise.  You want them to want to stay.  So, your raise must be enough below the market out there - for nice, new, shiny upgraded rentals - that they'd rather stay put.  If a nice new shiny, upgraded rental is only $50 more than what you're offering them, they may just say adios.  After all, they have nothing to lose as far as a deposit goes.

And keep in mind, if these long-term tenants move out, there will be a lot of normal wear and tear to the units that you can't charge them for.  Will the new flooring/carpets/painting/cleaning/cupboards, etc., cost more than the increase in rent over a year's time?  Plus, the lost rent while you're doing all this upgrading?

$150 x 12 is only $1800.  I bet you'll spend a lot more than that getting that unit ready for a new tenant - who is an unknown.  Will this new tenant stay longer than a year?  Will they get along with the other tenants?

In fact, you may just want to raise the rents $50 for now.  Maybe $60.  Then raise it another $50 or $60 next year, if you think you can get away with it - and if you want to keep these tenants.  Then, when tenants move out, put in the new tenant at market rent.  This was the strategy that the owner I worked for, and I, used and it worked very well for us.

Having a "happy house" is a beautiful and rare thing.  Meaning a building full of long-term tenants who are paying, not causing problems - and getting along with each other.

Turning over units is expensive.  Turning over units that have had a tenant in them for many years, is really expensive.

James DeRoest · Answer

^^^ this!

How much will a renovation/light rehab cost, how long will the downtime on unit be, and how long at new rent will it take to repay you.

When we bought a triplex it had two units long term rented. One guy is now on his 4th landlord, he's been there 20 years - do you think I want his unit back anytime soon? Nope. He pays maybe $100 less than market but what's the point of upsetting a good thing? He turns up on my doorstep 1st of each month with cash. Good enough for me.

Frankly I'd say leave the tenants alone - this is a proven financial instrument that doesn't need a new landlord screwing it up for minor and petty gains.

Michael Noto · Answer

First off welcome to BP @Michael Madden

The first thing I would do when you take ownership is make the existing tenants sign something saying they did not give a security deposit to the previous owner when they moved in and thus will not be entitled to getting one back when they move out.

Approach the long term tenants about the rental increase in a nice and polite manner especially if they are current with their rent and take care of their unit.  You do not want to lose people like that.

Lay out for them that you want to raise the rent by $100 per month and see where the conversation goes from there. Maybe raise it $25 per quarter for a year so it doesn't seem like a shock to the system.

These suggestions are based on the tenants being good people, if they are behind in rent and took advantage of a previously elderly owner then I would just say you are raising the rent $100 and hopefully they leave.

James DeRoest · Answer

Ummm....yeah....think it through for a moment...

"Hi, did you pay a deposit 5 years ago?"

They'll be queuing up to answer that truthfully. All you're doing is opening a can of worms.

Colleen F. · Answer

Make sure the tenants agree there is no security deposit.  I had a similiar situation as a tenant. I was moving out and went to the landlady whose husband had rented to me. He had since  died and when I  asked about my security deposit she said he never collected deposits.I went ustairs and got my reciept, good thing I kept it as they were cash only.

Account Closed · Answer

Another thought - if/when they move out, you should probably still send them an accounting of their security deposit, just in case.  I'd just send them a letter, within the time frame, and say since no security deposit was collected, there is nothing to refund.  And of course, if there were damages, you'd include a bill.  You can bet that if they can prove they did pay a security deposit, they'll be providing proof at that point.

Account Closed · Answer

Excellent point!  When I took over management of the building in Santa Clara, there were a bunch of tenants with zero paperwork.  We negotiated an agreed-upon deposit amount in writing.  Basically, whatever one month's rent was when they moved in.  When he ever did collect a deposit, that's what he did.  I know some tenants benefited from having amnesia LOL, but that's what they get for not keeping records.  Some tenants still had their copy of the original receipt.

Colleen F. · Answer

you don't ask you have them sign an agreement acknowledging current rent , security deposit and lease  end date. Usually goes in an estppel agreement. Have the current management handle it.   If they disagree you deal with it.  I think if they sign off it is managed before closing. If they want to stay and you want a security deposit you could hust get it in installments.

Purchasing Property with No existing Security deposits??

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