Inherited tenants don't meet minimum income requirements

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Inherited tenants don't meet minimum income requirements

Matt Kauffman
Rental Property Investor · North Canton, OH · Member since 2013 · 83 posts · 25 votes

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. 

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Marcia Maynard
Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
9y

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.

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  • Bettina F.
    Investor · Post Falls, ID · Member since 2016 · 606 posts · 699 votes
    9y

    Can you give notice, get them out and get the property rented before October?  Might you be facing an empty unit over the winter?  Even one empty month would wipe out all of your gains from an increased rent.  I would raise their rent $20 for now, and re-evaluate in the Spring.  

    0Reply
  • Matt Kauffman
    OP
    Rental Property Investor · North Canton, OH · Member since 2013 · 83 posts · 25 votes
    9y

    They are month to month on their lease. I can rent it quite quickly and easily before October. I wouldn't sit more than 10 days I'd imagine and that'd be because the tenants would be out the 20th of September. 

    0Reply
  • Joseph L.
    Baton Rouge, LA · Member since 2013 · 97 posts · 56 votes
    9y

    If you have information that they are responsible tenants, I would raise their rents no more than $600 and allow them an opportunity to perform. If they are not interested at that number, I would give them a notice. I've inherited a couple of tenants over the years and found that they always show some resistance at first. In most cases, once they realize that I'm cutting them a deal, things go over smoothly.

    3Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    9y

    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.

    8Reply
  • Matt Kauffman
    OP
    Rental Property Investor · North Canton, OH · Member since 2013 · 83 posts · 25 votes
    9y

    @Marcia Maynard Thank you for your advice. There's tons out there on raising rent on current tenants that you have history with but not much in regards to how to deal with inherited tenants and raising rents. This is an area that I've struggled with. I've had some accept large increases realizing they were getting a huge deal for years. Maybe giving someone a chance to prove it to me and themselves is worth it. Besides it'll be an 8 month term to get me back to the time of year i like my leases to end and begin. 

    0Reply
  • Christopher Giannino
    Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
    9y

    I really like what @Marcia Maynard had to say.  Question for you though..  Would it potentially be better to raise the rent and keep them on a M2M lease opposed to making them sign a 8 month term?  If they end up not being able to perform at the higher rent but are still on a M2M lease, it could be easier to terminate vs. the 8 month term.  If during that 8 months they turn out to be excellent tenants, then sign them up for the yearly leases that you're used to.

    I currently have no rentals so take this comment at face value.   

    0Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    9y

    @Christopher Giannino. I agree with that strategy. Actually we prefer month-to-month rental agreements over long-term leases. We've been doing this for over 20 years and know how simple it is to maintain good long-term tenants with monthly terms that automatically renew every month and can be changed at any time with 30 days notice.

    I've read many BP forum posts that point to the drama that occurs when someone breaks their lease. People will move when they want to move, regardless of the time of year and what their lease says. Lease renewal time can add a bit more work and drama to the equation too.

    By the way, we have several tenants who've past the 20 year mark, others who have passed the 15 year mark, and others who have passed the 10 year mark. We rarely have a tenant who stays less than 5 years. We can and do raise our rents periodically, but do so gradually and with great tact.

    1Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    9y

    @Matt Kauffman Our strategy for working with newly acquired properties and inherited tenants is as follows:

    1. Introduce ourselves as the new owners by letter, let them know we will not be raising rents at this time (this is what tenants fear and we want to start off by putting them at ease), and request an appointment to meet with them and inspect the unit for maintenance purposes.

    2. We arrange to meet with them in their unit. We talk with them about our management style and introduce our rental agreement to them. Even if they are on a long-term lease, they can choose to change to our month-to-month rental agreement. They are likely to do so if our terms are better than what the previous landlord offered.

    3. Instead of doing a rent raise right away, we look at other aspects that need adjusting first. Was the previous landlord paying for something that we typically require the tenant to pay for, such as variable utilities (water, electric, natural gas/oil, etc.) We would transition those costs to the tenant as soon as we could.

    4. During the maintenance inspection, we are talking with the tenant and building trust and rapport. We ask the tenant if there is anything that is not working or needs attention. We write out a punch list of things that we will commit to doing for the tenant to improve the condition of their apartment.

    5. After we have successfully transitioned the tenant onto our rental agreement (month-to-month) and have had a few months to see how the tenant performs, then we make adjustments as needed.

    6. If we plan to raise the rent, we first add some value for the tenant. It can be as little as updating the porch light fixture or mailbox, or doing something like a total yard clean-up, which also serves to reset the property to our expectations as to how it should be maintained. Tenants have an easier time accepting a rent increase if they feel they have gained something in the equation too.

    7. Our goal is to establish good long-term tenancies, reduce tenant turnover, welcome tenants into our community, or if they are unable or unwilling to perform to our standards, then negotiate a move-out plan that make our parting easy and as stress free as possible.... for all parties concerned.

    -------

    We once bought an 8-plex that was occupied by some undesirable tenants (a stripper who had frequent late night "guests", pit bulls in two units, a single mom who couldn't afford the rent, smokers, and a guy who had lots of cats). After establishing our position as their new landlord, introducing them to our management style, rental agreement & property rules, several moved out on their own and several adjusted to our terms. We didn't need to serve notice to end tenancies. Those that left, did so on their own volition, quietly, politely, and without damaging the property on their way out. This all occurred within the first six months and gave us time get to know the property and the people who had made it their home. As the natural turnover occurred, we were better prepared to seek out and embrace new tenants to fill the vacancies. Downtime and loss of rent was kept to a minimum. For some tenants it was a breath of fresh air and their desire to stay in the community and contribute in a positive way as great tenants made the transition for us favorable as well. Two of those tenants are still living in their original apartments 12 years later.... sweet!

    6Reply
  • Matt Kauffman
    OP
    Rental Property Investor · North Canton, OH · Member since 2013 · 83 posts · 25 votes
    9y

    Appreciate all the feedback. I offered them several things if they increased the rent. One of them was an upgrade in electric service and breaker box since their lights were flickering when they run certain appliances. The whole building is bad and needs upgraded. They also needed some things done in the bathroom that needs addressed asap anyhow that I offered to do and will do regardless. I also offered to paint her place to a color she liked as well. So I didn't demand anything without offering something. I'm with you, you need to offer something so they feel like they're getting something in return. 

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    If you wish to operate as a charity then compassion is appropriate otherwise but on your business pants and get rid of them. You are subsidising your tenants rent for what reason ??????

    If a turn over is quick and easy as you suggest what is the problem with operating your business to make money.

    1Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    9y

    @Matt Kauffman

    Any update? Were you able to save the tenancy and make it good for all parties involved?

    0Reply
  • Deanna McCormick
    Minneapolis, MN · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    As new owner Incoming tenants would need to comply with new set criteria.. this is only a duplex,, I wouldn't worry about current tenants to qualify..

    I'd give them the extra grace of a 60 day notice of rent increase, if you want to do upgrade touch ups while occupied fine, offer that. If they stay, they stay,, 

    You have no guarantee with any lease how long someone will stay.. it only guarantees the amount they are suppose to pay,, PEOPLE leave out of apartments everyday, with a year lease, month to month.. or whatever.. 

    0Reply
  • Matt Kauffman
    OP
    Rental Property Investor · North Canton, OH · Member since 2013 · 83 posts · 25 votes
    9y

    Actually they are opting to move out. They'll be out in less than a month. We'll update a few things and get it rented quickly I'm sure. all my other units like this one don't last very long. Thanks for checking in though. 

    Thanks @Deanna McCormick for the input. 

    0Reply
  • Deanna McCormick
    Minneapolis, MN · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    I bet they rent quick,, 1000 sq ft apt for even more than what your thinking,, why not start setting the bar a bit higher..   You sound very under market and if your trying to be a bit above everyone else.. then put some fresh plants outside.. do a nice paint fresh spritz on the trim around the front entry doors. maybe new Fresh updated mailboxes,, they always help set the place along with brand new house numbers that are updated and easy to read.

    I'd go 739.00 to start and limit occupancy to 3 people..   especially if it's the upper floor.. less people on 2nd.. 

    That's a very nice size sq ft unit.

    0Reply
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