Rent Increases for an inherited tenant

[James Herbert]

We purchased a bundle of foreclosures from the bank. We inherited tenants and the current rents are month to month and have not been raised in years. (8-10 years) some Tenant’s have leases to prove some don’t, the stories are consistent across all and the houses are not to close to each other. We are believing them on the rents. To bring rents to market we have to go up 40-60%. My question is do we do this in one big increase? we will loose some tenants, one in particular we would like to see them find a better fit for themselves. Others we want to stay. Or do we have graduated increases over the next 2 years. I have my opinion but want to leave the door wide open for comments.

[Eric Gutierrez]

Raise rent on the difficult ones to full market.  Let the others remain the same while you deal with those vacancies so you dont get overwhelmed them.  Continue to bring more units to market in manageable increments.  Obviously if you think some are worth keeping then figure out how much keeping them is worth it to you.

[Thomas S.]

Graduated increases are a major mistake. What it does is postpone the inevitable and create tension over a longer period of time. In the end all you will achieve is to lose money.

The right business decision is to put every tenant to full market and clean house. There is no reason to hold on to any tenant that can not or will not pay full market rent. Ultimatly it will only come out of your pocket.

Depending on how many units you have you time the rent increases every month or two to allow you  to fill vacancies in stages. I would put the ones you believe will stay up to full market rents first to maximise your returns.

[Dick Rosen]

My personal preference would be to leave them alone but start one at a time, starting with the least desirable tenant, getting a new 12 month lease signed at the new market rate. Assuming he moves out you have a vacancy to turnover and then move on to the next. If they are desirable I would give smaller increases but still insist on a new lease with 12 month term 

[James Herbert]

Eric, Thomas and Dick,Thanks for the input, In your opinions what are the pros and cons of each? I imagine my market would also have something to say about how I handle this. 

[Nathan Gesner]

Did you buy them as a business investment or as a social experiment?

I don't know many investors that enjoy kicking tenants out or forcing them out with major increases but you need to run these like a business if you want to enjoy the rewards of a business.

Determine market rate and bump them. I'm merciful in the sense that I would give them three months to find a new home. Graduated rents are more work for you and the tenant will probably still end up leaving.

If you ever buy an occupied rental again, you should seriously consider using an estoppel certificate. What is an estoppel certificate? I'm glad you asked!

Your offer to purchase should include a requirement that the seller provide all documentation and agree to sign an estoppel certificate (also called estoppel form or agreement). The estoppel certificate is a form filled out by the tenant and then confirmed by the Landlord. It's designed to ensure there are no surprises after closing. For example, you buy the place and the tenant could claim the Seller allowed them to paint the walls black or that their security deposit was twice what the Seller claimed. How will you know? An estoppel certificate fixes this problem.

Some things it may include:

1. Tenant name, contact information, and address

2. Occupancy date

3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate

4. Are there any modifications to the written lease?

5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?

6. Current lease term (expiration date, month-to-month)

7. Current rent rate

8. Rent due date

9. Security deposit amount

You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchange "doc" with "pdf" for more options.

Here is an example and explanation: estoppel certificate

Some have a lot of legal jargon but this document does not need to be so detailed. This is an important tool for anyone buying a tenant-occupied property.