Raising rent on inherited tenants. Advice needed ASAP!

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Raising rent on inherited tenants. Advice needed ASAP!

Rikako W.
Rental Property Investor · Union City, NJ · Member since 2015 · 31 posts · 12 votes

We are a few days from closing on our first deal! We'll be house-hacking a 2-family detached house in Union City, NJ, about 12 min bus ride from Manhattan Port Authority.  We are inheriting an existing tenant who is paying below-market rent.  They are on month-to-month lease and paying $1150/month.   After visiting other rentals in the area, I think market value is conservatively $1450, if not more.  It's 3 br, 1 bath, and has pretty generous living / dining area. Bathroom could use a renovation but otherwise it's in a pretty good condition. 

We are closing next week Oct 17, and in NJ we have to give 30 day notice to raise the rent. I have questions / concerns of how we should approach this. Which one of the following scenario is the best? Any advice is greatly appreciated!

Scenario 1:

After we close, let them know immediately that we are raising the rent to $1450 and give them the choice of signing a year lease. Most likely they will move out, and we have to find new tenants with a lease starting Dec 1.  (I don't know if it's hard to find qualified tenants in winter in Northern NJ? any inputs?)  We might take time to renovate the bathroom and rent it out starting Jan 1.  

Scenario 2: 

Offer a 6-month lease from Nov - April at something like $1200, and then raise it to $1450 (or more) next May. This way we will avoid having tenant turnover during holidays. This will also give us time to renovate the exterior siding, add laundry in the cellar (that tenant can use), and freshen the entry area.  

My concern is, if we sign a 6 month lease, and then a 1 yr lease with $250 increase, that is probably considered "unconscionable" according to NJ landlord-tenant law. 

Scenario 3:

just increase to $1200, and keep increasing by small amount ($50/yr) every year. We are limiting our income and obviously we want to avoid this. 

-----

The seller's 1-page lease is hand written and it's so illegible that I can't even read the date on the lease.  So I don't know how long the tenant has been there.  We've been trying to get clarification from the seller but we haven't had any success.  

We are super excited to close, but this tenant question is concerning us quite a bit. I would appreciate any suggestions. 

Thanks in advance!

Rikako

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John Errico
Attorney · Rutherford, NJ · Member since 2015 · 132 posts · 168 votes
9y

Hey @Rikako W.: I would keep them on a month to month lease throughout the winter season, and consider what you want to do next year, assuming they're paying their rent on time and etc. You could try to increase the rent by, say, $100 in the interim. If this is your first place and/or first tenant, the process of you guys moving in, possibly renovating the place, finding a tenant, etc. all within a month or two is going to be an absolute ton of work and stress, particularly in the slowest time of the year for renting in this area. It's probably better to have below market money coming in for a while as you get your bearings, particularly if the tenant isn't problematic. If you find out that their illegible lease agreement entitles them, in their opinion, to stay in the apartment for some term, I might consider honoring that agreement, even if the lease itself/its illegibility/etc. would mean that you don't have to--but again, a lot depends on how they are.

Good luck and congrats!

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  • Rikako W.
    OP
    Rental Property Investor · Union City, NJ · Member since 2015 · 31 posts · 12 votes
    9y

    @Jim Sakalis thanks for such a quick reply! I do think #2 makes sense, too, but I just don't want to be seen as unreasonable in any way.  I can definitely see that it's month-to-month lease for sure. Just can't read the date or their full names!  Thanks again for your comment.

    1Reply
  • Michele FischerPro Member
    Rental Property Investor · Seattle, WA · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    If they are currently on a M2M, I would keep it that way and convert to a lease with your next tenant once you have more experience.  A lease won't give you much more assurance of the tenant staying, and it gives you less flexibility.

    Our policy is to annually increase rent to the midpoint between actual and market rent.  So we would raise rent $150 now and if rents stay stable, another $75 the next year.  This rewards long term tenants and keeps them under market enough that they can't find a new place as easily, and continues to close your gap.

    Another tip is to offer to renovate the bathroom for them while they live there.  That helps them to see the benefit, and you have less vacancy later since it will be done.

    Another option that we have used once is to work a step up in rent over six months.  Raise it $100 every two months for 3 months, for example.  We didn't keep the tenant, but we both got a few extra months.

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  • Michael Boyer
    Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes
    9y

    Congrats on the deal! I think I might try an approach like #2 but much would depend on the facts and circumstances. 

    For example, the quality of tenant (payment, following rules, caring for property, etc) might help guide your decision. 

    They may be someone you find that you want to keep through your upgrades or beyond, or maybe not so much.

    Inheriting month to month tenants gives you some flexibility. You may also see other possibilities, too, that meet your goals of avoiding an offseason vacancy and adjusting the rent to market levels. Like an 2.5 etc.

    If you are in the range of market rents, I think having an adjustment to market rates is probably not unconscionable should that person stay on.

    The seller being tight lipped about the renter could be a red a flag or maybe not. Maybe ask a bit more about rent payments, deposit, etc before closing.

    Perhaps plan a meet and greet with the tenant after you close. Inspect the unit, ask about any issues or concerns, let them know you will be improving the place and likely adjusting rents and generally do longer term leases (if that is the goal).

    I probably would not go in with an agreement on the first day but reflect some as you learn more about the situation. If it looks like someone you'd like to retain, schedule a follow up the next week to do some paperwork; let them know about your policies and expectations. You might even present them two options (both of which work for you, e.g. #2 or a slightly higher rate month to month).

    Best of luck

    1Reply
  • John Errico
    Attorney · Rutherford, NJ · Member since 2015 · 132 posts · 168 votes
    9y

    Hey @Rikako W.: I would keep them on a month to month lease throughout the winter season, and consider what you want to do next year, assuming they're paying their rent on time and etc. You could try to increase the rent by, say, $100 in the interim. If this is your first place and/or first tenant, the process of you guys moving in, possibly renovating the place, finding a tenant, etc. all within a month or two is going to be an absolute ton of work and stress, particularly in the slowest time of the year for renting in this area. It's probably better to have below market money coming in for a while as you get your bearings, particularly if the tenant isn't problematic. If you find out that their illegible lease agreement entitles them, in their opinion, to stay in the apartment for some term, I might consider honoring that agreement, even if the lease itself/its illegibility/etc. would mean that you don't have to--but again, a lot depends on how they are.

    Good luck and congrats!

    2Reply
  • Rikako W.
    OP
    Rental Property Investor · Union City, NJ · Member since 2015 · 31 posts · 12 votes
    9y

    @Michele Fischer Thanks for commenting!  It didn't even occur to me to offer a M2M lease, so that's interesting. (I've been a renter myself and signed only yearly leases.) M2M would definitely give us flexibility while we try to upgrade and get our bearings on being a landlord. I think the tenant may leave if we raise it by $150 now and we'll be faced with vacancy over the holidays... we might do this slowly. 

    @Michael Boyer Thanks for commenting! Great advice on scheduling a meet and greet,  and a follow up meeting to do paperwork.  For some reason I blindly assumed that we have to execute a new lease with them as soon as we close.  We've gone into their apartment twice now (during buying and home inspections), and they seem to take care of the place well. 

    @John Errico Thanks for commenting! It's on 24th St, close to New York Ave. your story of the tenant signing a lease with another tenant is absolutely horrible!! I'm guessing you got rid of your second floor tenant? This is our first time buying a property, renovating the place (planning on doing a lot ourselves), and managing the tenant. It'll definitely be a lot of work and stress!  I've been wanting to come to Hudson County Meetup... I'll make it to the next one!

    Thanks so much everyone for responding! I have a better idea of what to do... I think we'll offer a new M2M lease with $50 - 100 increase. We'll do upgrades in the mean time, and raise the rent to market next May or so. By then hopefully the upgrades are obvious that they won't say the increase is unconscionable. It's probably better to explain this and set their expectations during the first meet and greet? 

    It's only one tenant, but we want to do this right... it's better to be safe than sorry. thanks for great advice. 

    0Reply
  • Wade Garrett
    Montvale, NJ · Member since 2016 · 61 posts · 28 votes
    9y

    @Rikako W. I just had a similar experience, also in Northern NJ. First off, congratulations. 

    Second, I inherited a tenant paying ~ $300 below market rent. Personally I waited a month before notifying her of the rent increase. I wanted to get the property running as I wished, and wanted to observe the tenants' behavior before I committed to them. Ultimately I gave notice the next month of a $150/mo increase and only offered a m2m. You don't know these people, so be conservative with them and keep them on a short leash until they can prove they are worthy of a one year lease. (I am currently in the process of evicting her now, fwiw. So don't give them your trust until they earn it). 

    1Reply
  • Rikako W.
    OP
    Rental Property Investor · Union City, NJ · Member since 2015 · 31 posts · 12 votes
    9y

    @Wade Garrett  Thanks for the advice! Did you sign any lease with them between the time you closed and you notified her of the rent increase a month later? And the rent increase won't take effect for another 30 days, right?   I'm just trying to understand the logistics of all of these.  

    0Reply
  • Wade Garrett
    Montvale, NJ · Member since 2016 · 61 posts · 28 votes
    9y

    I closed. A lease was already in place from the previous owner. Waited a month. Sent a renewal lease offer to her (unsigned by me) for maximum flexibility. 

    Her specific lease needed 60 days notice, so I abided by that. But learn from my mistakes.... I politely called back in late August and told her a new lease was coming effective Nov 1. She hasn't paid rent since, nor did she sign the renewal lease. I am in the process of evicting her. 

    But definitely give at least a month to get your bearings straight. A couple hundred bucks is a small price to pay to have a better understanding of the tenant you've inherited. 

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    9y

    @Rikako W. Congrats and good luck!  Not to be a downer or anything, but I've read about some people inheriting "staged tenants" who bounce and/or stop paying rent as soon as you close.  I don't know how likely that is, but just so it's on your radar.  I hope it doesn't happen to you, though!

    0Reply
  • John P.
    Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
    9y

    How long have tenants been living there?  If a long time, and good tenants, I might be inclined to just leave it unchanged and re-think the whole thing in late winter/early spring.  Why rock the boat for $50/month!?  Just a thought.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    IT makes no difference how you want to raise the rent, dependant primarily on your concern about a vacancy in December, you simply choose to keep the tenant or get rid of them. Your situation is less of a rent issue and more of a vacancy issue. All tenants should pay market rent so you need to decide when this unit will go to market.  Don't be one of those that subsidises their tenant rent, it is never necessary. As far as the lease is concerned I never have tenants on a term lease. All mine are M2M. This allows the owner some control of the property while limiting the tenants control.

    0Reply
  • Rikako W.
    OP
    Rental Property Investor · Union City, NJ · Member since 2015 · 31 posts · 12 votes
    9y

    @Simcha Davidman Thanks! I actually just found out today that the tenant has been there for 3.5 years. Finally got clarification from the seller after bugging them for a long time. (it's taking about 5 months to close and I asked about this in the beginning!) They signed the M2M lease 3.5 years ago, and the seller never raised the rent since then. I'm pretty sure they are not staged, but I've heard of those scary stories too!  The seller owned the house for 30 years and lived in it for the first 25. It seems like he's selling the house simply because he's getting old. 

    @John P. Good point. From what I'm hearing from everyone here, it doesn't seem like a problem to raise rent to bring it to market at a later date, if they are on M2M lease. 

    @Thomas S.  You are right. The issue is about avoiding vacancy / headaches during the holidays.  If we were doing this in spring / summer, I think we would raise the rent right away.  

    0Reply
  • Brandt Smith
    Cypress, TX · Member since 2016 · 132 posts · 49 votes
    9y

    @Rikako W. require them to apply/qualify for the rental unit, and don't loosen your requirements just because they are already in the unit. As for raising the rent, do it immediately (with the year lease). Just be 100% sure you know what market rents are. No renter will move out unless you are overpriced.

    0Reply
  • Matt H.
    Real Estate Broker · CA · Member since 2016 · 243 posts · 226 votes
    9y

    I was going to suggest what @Michele Fischer suggested and try to get that bathroom remodel done while they are in there paying rent. That has worked really well for me. I'd raise their rent on a 60 day from close to $1400 since you say market is $1450. And offer them the remodel. They won't leave most likely. And no need to offer them M2M, if they have that already you just raise them and the M2M remains. But here I can always re rent and I want near market rent. If you are concerned with the rerent and vacancy will be an issue for you then you take a more conservative approach. Also, if the lease is good I just raise, if the lease has issues I take that time to rewrite the lease with same terms except the $1400.

    0Reply
  • Michael Rabb
    Investor · Newton Centre, MA · Member since 2016 · 6 posts · 6 votes
    9y

    With a partner I recently bought a 2 family in Greater Boston with owner's unit vacant and second unit w/ long time tenant at $850/ mo- well below market (market = +/- $1800). Partner suggested we tell tenant he could stay for $1500- still below market. I figured he'd definitely leave but I asked. He stayed, signed a year's lease and I don't have to rehab his unit...yet. Anyway the point is don't be afraid to ask- if you offer a lease that is tangibly below market chances are tenant knows it, knows he'll have to pay as much or more to move, and might stay. Certainly found out it's worth asking. 

    2Reply
  • Lorenzo W.
    Investor · Boston, MA · Member since 2016 · 12 posts · 8 votes
    9y

    Well done ... like you I don't believe in bleeding people how ever you have to eat as well. Boston is in such a high demand right now, I don't  foresee you having any problems finding a replacement tenant. Some places are more desirable than others, but Boston as a whole is on fire.

    1Reply
  • Rikako W.
    OP
    Rental Property Investor · Union City, NJ · Member since 2015 · 31 posts · 12 votes
    9y

    Thanks everyone for commenting! very interesting. @Matt H. and @Michele Fischer, there is only 1 bathroom in the tenant's unit.  How do you remodel a bath while they live there? I don't think you can if there is only 1 bath?? (there is another bathroom in the cellar which is not a legally occupiable and is separate from tenant's unit. we wouldn't want them to be using that bathroom though.) 

    0Reply
  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
    9y

    @Michael Rabb Good work.

    I'm catching up with my Tenants North of Boston $25-50/month increase a year but if most of them moved out I'd get a $100/month more:-(

    0Reply
  • Maureen F.
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    9y

    There is something to be said for reducing risk by keeping a good, known tenant, plus reducing turnover expense ... perhaps raise them to somewhat less than full "market" rent.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    It is best if you can find a good new tenant that is willing to pay full market. They provide the maximum income and you know from the start that you do not need to subsidise their rent to keep them happy. Win/win as opposed to you losing money.

    I prefer to screen and select my own tenants knowing that they are happy and willing to pay full market. They also have no issues with annual rent increases meaning they stay at market so I do not lose any income..

    0Reply
  • Stephen E.
    St Thomas, Ontario · Member since 2013 · 575 posts · 408 votes
    9y
    Originally posted by @Thomas S.:

    As far as the lease is concerned I never have tenants on a term lease. All mine are M2M. This allows the owner some control of the property while limiting the tenants control.

    Greg I have seen you post that all your leases are M2M on several occasions. I can see that this has real impact in the US where in many jurisdictions tenants can find their lease is not renewed with thirty days or so notice. But you are in Ontario and here tenants have tenure. They cannot be told to go, and they stay for as long as they like provided they pay the rent and do not engage in behaviors that are extreme enough for a landlord to get an eviction from the LTB. So M2M in Toronto, where you are, just does not have the same benefits or connotations as in the US. The benefit I do see is if you are considering selling the property or wish to move yourself or a relative into the unit. In either scenario the tenant would be able to stay until the fixed term lease expired.

    0Reply
  • Eric Inman
    Investor · Orlando, FL · Member since 2016 · 5 posts · 10 votes
    9y

    Rikako,

    I'm in FL so really have no clue about your rental market up there.  A rule of thumb I use here is ZERO VACANCY!  If you can keep the existing tenant and get a reasonable bump (even a little below market) its worth considering.  The cost of cycling a tenant between lost rent, time showing the property, refresh (paint, repairs, etc) can be costly and takes time to recoup.  If I was in your situation, since its a new purchase, I'd meet them in person and try to negotiate something between current and market rents and buy yourself some time.  If they will sign a one year at an acceptable increase, you can approach them in 8-9 months and discuss bringing it to market at renewal.  If they do not agree, you can start marketing early (per your lease agreement) and hopefully avoid any vacancy.

    Best of luck!

    0Reply
  • Judy Parker
    Rental Property Investor · Closter, NJ · Member since 2015 · 884 posts · 722 votes
    9y

    @Rikako W.  Congratulations on your new investment property.  Regarding the tenant, a) if their Lease wasn't renewed and was instead converted to Month-to-Month, and b) they know the house is up for Sale, then they already expect that their rent is going to be increased by the new owners and/or they will have to vacate.

    0Reply
  • Nate Ginsberg
    Rental Property Investor · Leominster, MA · Member since 2019 · 42 posts · 22 votes
    7y

    @Rikako W. I’m going through a similar situation now, and curious to know how your house hack turned out?? We’re closing on our first duplex next week and have tenants paying ~$350 below market rent. Not sure how to handle it yet. What would you do, having been through it yourself?

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