Advice needed: existing tenant with below market rent

[Yang Zhang]

Hey BP folks,

I just purchased a duplex (2b1b x 2), with the following numbers.

- top unit: vacant (previous owner lives here)

- bottom unit: $650/month (good tenants, rent never changed since move in since 2012, market rent: $850/month) 

After doing some background research, I found both units could be rented for around $850 - $900/month.

I have thought about two options with the bottom unit:

Option 1: let them pay existing below-the-market rent $650 for another 2-3 months and let them go afterwards. Rehab the bottom unit a little bit and try shoot for market rent $850 or even $900.

Option 2: increase the rent to $750 (or $800?) and just keep them in the bottom unit, until they eventually move out. I have met them personally and they are good people. Have been there since 2012. 

Any advice is MUCH APPRECIATED. This is the first time I am taking over a property that has existing tenants, so not too sure what the best way to handle this situation. 

Many thanks,

Yang

[Nick Dumas]

Good tenants are key. One month vacancy would wipe out more than half of year rent. I would not raise rent more then 8-10% a year and I would still use caution. A new tenant could mean new problems. When their lease is up I would incorporate an automatic yearly rent increase, say maybe 5%. Bring the vacant unit up to average rent on the new rental. Tell the bottom tenant that you appreciate they are good tenants so u are only going to do X increases. See if there is anything you can do to increase their enjoyment of the property.