How should I handle inherited tenants and implementing changes?

[Garett H.]

I originally posted this on another forum, but figured someone here has some input to give also. 

I’m looking at a property that has the potential to be a decent cash-flowing place, but it’s currently way under market.

The current rent between the 2 units is $1000/month with a market of $1100/month, and the owner currently pays for their heating oil, water, sewer and garbage. This totals $215 a month. Typical for the area is garbage, and mayyybe water/sewer, but definitely not heat.

So, that’s a decent return, but the problem is that’s a lot of change for the currently stable long-term tenants. Totaling a $265 per month increase.

I’m wondering if it’s going to be best to make the adjustments in increments:

1. 1. Have tenants sign an active 1 year lease and start charging for heating oil ($125/month)
2. 2. At year 2 update a 1 year lease and require tenants to pay water and sewer ($66 a month)
3. 3. At year 3 update a 1 year lease and raise rents $50 a month to market value

So at year 3 you finally are at market value and making a bit more profit than before.

Or, I could go in, require a lease, increase their rent by $50, and have them cover the $215 utility costs all at once.

Even if they do move out and I have a month or even 2 of vacancy I would still come out ahead by making all the changes at once and getting fresh tenants in. This would also give a bit of time to inspect the units and make any necessary fixes or updates.

A poster on the other site brought up the point that a long term tenant will be much more valuable in the long run, so it would be best to make the changes gradually to try and not drive them away. I didn’t consider how large the impact of constantly changing tenants would actually be so I tried to put some numbers behind it.

After taking a look at the numbers it shows that for the initial 6 years it would be beneficial to immediately raise the rents by a total of $265 and if the current long term tenants leave I may be stuck with short term year to year leases for awhile. After year 6 though the Long Term tenant comes out ahead due to avoiding the short terms with costly vacancies, cleanings, and repairs between tenants.

After year 20 having a long term tenant equates to a ~$75k advantage over the short term cases which is quite a bit more than I expected.

So there’s something to think about, if you have any input I’d appreciate it.