House hacking, Multi family, long term tenant way under market

[Nate Burnett]

Hi all,

We're looking at a property that has been owned by the same person for 40 years, they've had a tenant in the other unit for 10 years. Market rent is about $1600+ for the unit and they're paying $1200.

I don't want to be the big bad person coming in, jacking up the rent and possibly evicting them.  The unit hasn't been updated in decades and I'd love to be able to get more of its rent potential.  I also don't want to displace someone from their home. While it's a people business I'd like to also be more comfortable and have it be fair on both sides. I wouldn't jump to $1600, but as they're a month to month tenant... what would you do? 

If we end up with the property I was thinking about asking them to sign a new month to month lease and have a 10% rent increase on a yearly basis. The other issue is, the Tennant has no security deposit.  Is it appropriate at the new lease to ask for one? My concern is, most of their furniture isn't work moving if they move on. Its all clunky, cumbersome furniture that may or may not fit out the door so we may get stuck cleaning it out.

This is in New Hampshire so laws are on my side as far as increases go.

Thanks!

[Wesley W.]

In my short tenure as a RE investor, inherited tenants have been my biggest "X factor" when it comes to trying to stabilize a property with regards to cash flow and return.

My advice to you would be professional but firm with them, as the initial interactions will set the perception in their minds whether you are "fly by night" pushover landlord, or someone who is running a business.  Did they once have a security deposit and it was used up with late fees, etc.?  I think their response to your request for a security deposit will speak volumes as to how they are as a tenant.

I would definitely get a security deposit and as a courtesy, incrementally increase their rent over time (you decide an appropriate pace) until it reaches what you think is fair market rent based on the unit's condition.  They will shop around and realize you are still giving them a fair price.

I can understand your need to be "fair" but you also have to protect your investment.  Be careful about setting precedents that are unhealthy for your business relationship with your tenants.

Good luck!