Inherited tenants don't meet minimum income requirements

[Matt Kauffman]

Good Evening, 

I just closed on a duplex in the same neighborhood as my others. They all rent for $650/door or better. Tenants pay everything except sewer. 

I met with one of the new tenants tonight to go over things with them. They currently pay $550/mo and had their water bill included in rent. The unit is completely rehabbed, although I might like to redo the bathtub surround, but regardless. If I'd put it on the open market I'd get $650 easy or more if i redid the bath surround. So what's the problem?

As I shared with them that area rents are $650 they immediately said they couldn't afford that. I told them that didn't need to go to that level right away, but that'd we eventually need to make it there. 

I have no history with these people, but they seem solid, keep the place really clean, and are probably not a problem. They told me they only make about $1500/mo in net income. I told them that they wouldn't even have qualified to rent at the rate they are at now. 

So what do i do? I don't really want a vacancy. I can make money at $575/mo with them paying the water bill, but even then that would put them even further below the minimum income requirement that I set for other tenants and rent will increase next summer as I'm having them sign an 8 month lease so that it ends in the summer. 

Wondering if I should terminate their month to month and stand firm on my offer of $625/mo and them paying the water bill or if I should exercise some compassion and take a little less to avoid a vacancy. Either way i see a vacancy coming down the road or they get in financial trouble and then they have no reserve to pay and then we're in trouble. I'm feeling like I should be leaning towards sticking to the higher rent and dealing with a vacancy, since the difference of $50/mo in rent is equal to the cost needed to turn the unit. 

Any advice is appreciated. 

[Marcia Maynard]

When we establish minimum requirements for screening new tenants, it is to reduce the chance that a tenant will be a problem and to reduce the chance they will default in paying their rent. When we purchase properties, we are better off transitioning tenants onto our rental agreement and saving tenancies of tenants who are performing well.

We've bought properties with tenants in place who had income far below our minimum requirement. Who cares? If they're able to perform and maintain their tenancy, even with the occasional rent raise, then we're good.

If a tenant comes in as a new tenant with a specific income, then loses their job and their income drops below our "minimum", we don't terminate their tenancy. Instead we let them continue to fulfill the terms of the rental agreement and keep their home.

Income of three times the rent is an industry standard, but we've had tenants who had income of only twice the rent who led a thrifty lifestyle and had no problem. We've also had tenants who had income of four times the rent, who lived paycheck to paycheck or didn't have money left to pay rent on time because of their wasteful spending habits.

You will be better off keeping responsible tenants and working with them, than forcing them to move from their home. If you must raise the rent, do so gradually. Give them a chance to show they can afford to continue to rent their unit. Make sure you don't say anything that will make them feel less less worthy or less welcome.