Inheriting a tenant that's not paying market rent...

[Jacob Henderson]

I am excited to say that I will close on my first property soon and will be inheriting tenants. The tenants and their two pets have been living there for 18 years and pay $475/month, no deposit, no pet fee and on an oral lease. I have spoken with an attorney who supplied an estoppel letter to me that both tenants were willing to sign. 

The market rent for this particular property is $700/month. My question is how do I approach this situation so that I can keep long term tenants but get closer to market rent for this property. I plan to ask them apply just like new tenants, have a deposit, but am willing to waive the pet fee since they have already had their pets living there long term. I want to have a paper lease signed as well. I have been debating back and forth on if I should do a month-to-month lease or annual lease and if I should gradually raise rent or just raise it to market value in one month. Like I said, I am new to real estate investing and would really appreciate any and all feedback on this. 

-Jake

[Nathan Gesner]

I have had this happen more than once. If you want to keep them, offer to bump it but keep it 10 - 15% below market. They should know they're getting a good deal and it will save them money if they don't have to move. If they don't recognize that or if they just can't afford it, let them go and find a good tenant that will pay what it's worth.