Raising Rents After a Purchase?

Question

Hello everyone. I am very new to bigger pockets and I am during my research (focusing on small multi-family) and savings phase right now in my real estate venture. I am planning on buying my first property early next year, but in the mean time I am trying to learn as much as possible. I have a random question that I just thought out, and I can't seem to find the answer yet. Please let me know if this has already been answered elsewhere in the forums though.

If you purchase a property that already has tenants living in the spaces, are you obligated to wait until their current contractual agreement is up before raising their rents? Or can you simply raise the rents after you have finished purchasing the property?

Thanks for the help!

- Kevin

John Warren · Answer

@Kevin Osborn this is incredibly location specific. Here in Illinois, the lease transfers with the property so you would not be able to raise rents if tenants are on a lease. If they are not on a lease, you could raise the rent after giving one month's notice. If they are not on a lease, they are on a "month to month" arrangement. This can be incredibly important when you are analyzing deals. I recently had a client who decided to pass on a four unit here in Berwyn, IL because the owner had just signed long leases with tenants at way below market. You have to weigh the lease duration carefully when taking over a property.

Miguel Castillo · Answer

@Kevin Osborn I think you might have the answer by now but I'll share my story. I bought a 2 unit back in 2015 that was fully occupied, I had a tenant who was month to month and had been living there for 15 years! Crazy right? anyways she was just paying $600 per month with gas and water included, there was no way I was going to afford that so I decided to give her a notice that I was going increase her rent. As you can imagine she said she couldn't afford it so she ended up moving in with a relative, I took that opportunity and remodeled the unit and brought in a tenant that now pays $1,000 for that same unit. I was not able to do the same with the other tenant who had 9 months left on her lease.

Nathan Gesner · Answer

@Kevin Osborn this has been answered a lot on BP. Existing contracts always transfer with the sale of the property and you are required to honor them unless the tenants are willing to agree to a change. I don't know of any tenant that will voluntarily agree to a rent increase.Study your state law. Some states allow you to raise rent with 30 days notice. Others require up to 90 days. Figure that out now and then develop a plan on how high you intend to raise them and how you will notify the tenants.I personally don't do the incremental. Either they can afford it or they can't. However, I do try to give them 2-3 months notice so they have time to prepare or to look for another place to live.

Thomas S. · Answer

Down load your state landlord tenant regulations and start studying. You are responsible for learning the laws and know them before you invest.

Christen G. · Answer

Co-sign on the 2-3 mo notice. Moving is stressful - the more time you can give someone the better - especially if they've been there a long time. Ideally you're acquiring the property and all the tenants are on M2M leases - your agent will get all this paperwork while they are doing their diligence. Then, according to your state law you can issue them notice about A) non-renewal of their lease: if you need to go in an renovate immediately or B) a new 6 or 12-mo lease at the new rate.

Kevin Osborn · Answer

@Nathan G. Thank you for your help in answering my question. I will definitely make sure to read up more on my state laws.

Rachel H. · Answer

@Kevin Osborn Welcome to BP! Yes, you'll have to wait until their lease is up to make any changes to rents. Though, I'd do it gradually especially if you have long term tenants living there. Good luck!

George Skidis · Answer

You must wait until their current lease is about to expire. It is legal to give them 30 days notice of a rent increase. You could also give them 60 days notice. They do not have to accept the new rent. They can move out.Hopefully your residents leases renew in different months. If you give everyone notice at the same time they can all leave at the same time. Rent increases staggered across your tenants is the best scenario.Tenants on a month to month basis need only 30 days notice. If everyone is month to month you can have a vacant building.Make sure the rent increase is within the market range. Don't defeat yourself in the first 30 days of ownership.

Kevin Osborn · Answer

@Miguel Castillo Thanks for sharing your story. It is pretty crazy that someone had been paying M2M for 15 years. I see now that everything is really situation dependent, but it's always best to be as cordial as possible and give the tenant a good heads-up on what you plan to do with future rents.

Kevin Osborn · Answer

@Thomas S. I will definitely do just that. I am still researching things I might need to know. There is so much that one needs to keep in mind, it seems a little mind-boggling right now. I know that doing is potentially the best teacher, but for now I am going to learn as much as I can before I fully commit. Thanks again.