how to handle the existing tenants

[Dong Yan]

in process of buying a duplex, the duplex has tenants who live there for 4 years already. the rents are way lower than the market rent because the seller hasn't raised the rent for 4 years. Not sure shall I vacate the renters or just raise the rents?

Also what else shall I watch for when inheriting the tenants?

Thank you in advance!

Stella

[Joe Homs]

@Dong Yan there is plenty to watch out for an evaluate in this situation.  

Vetting the current tenants:

1.  Make sure that you have a copy of all the current contracts, rental applications, and other related items for each tenant.

2.  Are they on month to month or yearly leases as you may NOT be able to raise rents if they are on a year lease.

3.  Do a comprehensive exit interview with each tenant.  Verify all the information above.  Ask if there are any concerns or repairs they need to have done.  Are there any hidden items that the seller has NOT disclosed to you?  Make sure that they are not violating the current rents with additional tenants or pets.  There is a lot of information that you can gather from a tenant in this situation.

Vetting the financials:

1.  Raising rents may be easy and should be done on a periodic basis, but that is just the beginning of the decision process.

2.  What is the condition of the home now and are the rents reflecting those issues?  

3.  If you decide to raise the rents then the tenants MAY move out of the home leaving you with having to rehab the unit to make it "rent ready" again.  If you raise the rent $100 a month/ $1200 a year what is the payback if the tenant decides to move out and you need to pour in $4800 to bring it back to "rent ready" condition.  You are looking at a 4 year payback period.  Is this a good decision or maybe you should only increase the rents gradually.

Let's talk about "rent ready" vs "saleability."

1.  When I purchase "buy and holds" I put my properties in a "rent ready" condition.  This means new flooring, painting and making sure all the appliances are in good working condition.  NO need for a new kitchen.  NO need for expensive flooring.  Etc...  Lower costs...

2.  When I get ready to "sell" the unit is when I do a complete rehab so that i can get the best value and be able to recoup my rehab costs in a timely manner.

One last tip:

Never tell the tenants that you are the owner.  Please tell them that you are the "Property Manager" and you will need to check with the owners on all improvement requests.  This will reduce any tension between you and the tenants as it is not your fault that the owners said NO to an improvement.  Also, NO improvements without an increase in rents.  For example:  The tenants want new carpeting.  This costs me about $1200.  The answer is "Yes the owner will install new carpeting, but your rent will increase by $100 a month.  My break even on this is one year.  The choice is up the to tenant on what they want to do.  (Obviously this is a month to month tenancy.)

Good investing...