Inheriting tenants, rent is way under market, and no lease-Help!

[Account Closed]

Hi BP Community!

This is my first forum post so I hope I'm doing this correctly.

My husband and I are closing on our first investment property on October 5th, a multifamily property with 4 units, one of which we will be living in.

The other 3 units are currently rented by people who have varying levels of relationships with the sellers, the rents are all way under market, and none of them have leases OR security deposits. We've been told that none of them have given notice, but because of the relationship with the sellers I'm concerned we may not be getting all of the information.

Given the timing, if we were to ask them all to leave they wouldn't vacate until Nov 1. Bringing us into the slow season for finding new tenants. 

We have the following two options, and would love your advice:

1. Keep tenants and raise rent marginally (+$25-$50 per month) while asking them to sign a 6-month lease, bringing us to Spring.

2. Plan to bring rent up to market pricing (+$200 per month) and ask them to sign a 1-year lease

Both risk us losing tenants that are currently in place, however if we are able to increase to market rents by Feb 1 with new quality tenants we could recoup the cost for the vacant months.

Again, we would love to hear your advice on pros, cons, and other options we may not be thinking of!

Thanks!!!

[Bill S.]

@Account Closed so there is some wrong advise above. I won't call out any names. In Colorado, any unwritten rental agreement is month to month. Colorado now requires 21 days notice to end a month to month rental agreement unless the written agreement states otherwise. 

You do want an estoppel statement from each tenant. The tenant must sign this. This protects you from them claiming they gave the landlord $10k security deposit. It stops them from producing a 5 year lease at half market rent after closing. The Colorado Real Estate Commission has a standard form estoppel statement. You should use that. Especially since the tenants have a relationship to the seller.

Even with no written agreement you can evict for non-payment of rent very easily and very straightforward. This is not a an owner occupied foreclosure situation so there would be none of those laws to come to bear on you after the closing. It's pretty much no pay no stay. If they don't pay Nov rent, it's likely with proper preparedness you can have them out before the end of Nov if the don't move on their own.

My strategy would be to bump the rent $50 each the first month (Nov) after closing. I would show up the day of closing with your new agreement in hand and give them 4 days to sign it. If they don't sign, issue the notice of non-renewal of MTM agreement on Oct 9. That would give you possession on Nov 1. Perhaps one will leave but you are still well below market so my bet is that everyone will stay. If one does leave, finding tenants at the holidays can be done. People are moving here all the time so the problem is that it's more of a hassle to you trying to do more in an already busy time of year. 

I agree with the month to month approach. That becomes very east to get rid of the folks that don't match your style. It cuts both ways but with them paying below market it's hard for them to financially justify moving. This lets you bring the rents to market when you want. You can send them packing or raise rents to market in the spring.