When to tell inherited tenants that their rent will be raised?

[Alan K Auman]

Hello all, 

I'm currently in the process of buying a duplex that has long term tenants on both sides. By all accounts the tenants are great tenants. Apparently they pay their rent on time every month, both times I've been to the property the units were clean and tidy, and they seem to be just good working class folks who take pride in their homes. On one side is a divorced blue collar kind of guy. He's got a bit of a bachelor thing going on in his unit aside from the pictures of his kids he has hanging on the wall. On the other side is an older couple who may or may not be retired. They look like they're still working age but they have both been home both times in the middle of the day so who knows. Their unit is impeccable although I did smell cigarette smoke and they have a small dog. So now that you all have some background here is my question:

Their leases aren't up until Oct so I can't do anything until then anyway but when it is time to sign MY lease they will be paying quite a bit more if they choose to stay. One unit right now rents for $450 and the other for $500. Both these units should be at $650 AT LEAST and could probably realistically fetch $750 a piece. They're mirror images of each other. Each is a 2level 3bd/2ba with about 1400sf. The property is a block away from the park and is within a .5 mile of a major hospital and within 3 mi of a major public university. I want to give these people as much notice as possible that there will be changes if they choose to renew (besides the increase they will also no longer be able to smoke in the unit, they will have to file deposits with me which for some reason they currently don't have, and any future pets will be subject to a pet deposit and monthly fee (I'm going to grandfather the current little dog in so he won't cost them anything)). I'm afraid that if I tell them right from the get go that there's always a possibility that they become difficult tenants in retaliation to the changes they know are coming. On the other hand I don't want to wait too long and blind side them. I honestly don't know if they have any idea how under market value they are as none of them strike me as the internet savvy type so I can't picture them cruising CL to check current market rates. 

So what say you all. Give them a lengthy heads up and risk turning good paying tenants into difficult tenants or wait until about 60 days out and leave them in a situation where they may be scrambling a bit to figure out their next step? I'm really quite torn.

[Adam P]

I have been running into a similar issue.  In my opinion;

1) You should never institute a no smoking policy for an existing tenant.  The damage is done.  More smoking when they already smoke won't cause any further damage.  Just make sure it doesn't impact the neighbors.

2) Dog probably has to be grandfathered in.  Especially until lease expires.  As with smoking, the dog damage is already done anyway.  

3) I typically raise rents to about $100 - $150 under market value.  Turning a property with a long term tenant is very expensive.  There are probably multiple issues you don't even know about that they just live with.  I just delivered 7 letters last week on 2 buildings we recently purchased.  Some tenants are paying as low as $450 per month on units that I can rent in current state for $850, and rehabbed for $1200.  I have raised everyone's rent to $750, which is still cheapest in neighborhood, but is a significant rise for some.  Last year when I went through a similar process with 4 units, 2 left, and 2 stayed.  Those that stayed actually asked about staying very long term.  They knew they had an under market rent for years with an absent landlord, and were happy to pay still slightly under market rent for their home.

4) Remember that turning a unit with a long term tenant is typically at least 1 month vacant (as it can be hard to show units with long term tenants), painting costs, and I would add in up to another $1k on the unknown issues.  For the sake of $100 a month, that can be 2-3 years to break even, let alone all the work you need to do.  

5) If you feel you can get $650-$750 on open market, I would raise rents this year to $600, and then next year to $650, assuming they truly are good tenants.  That $1200 you lose in the first year, easily is offset by turn costs, and saving work time.  Spend your time and money elsewhere to make more money.