Increase rent to market and risk losing good inherited tenant?

Question

Marcia Maynard · Answer

@Jared Mcgrew  You will receive a variety of different opinions on this forum. As a landlord for over 22 years and one who pays attention to the human element of property management, I would not be so quick to follow the advice of previous posters.  If you press the seller to deliver the property vacant, you could very well miss the opportunity to buy this property.

I love buying properties that already have good tenants in place!  A good tenant in my book is one who is polite, considerate, communicates openly and honestly, follows the terms of the rental agreement, pays rent on time and takes good care of the place. From what you've shared, the tenants appear to be doing all that their current landlord is asking of them. You can't fault them for that.

Obviously the relationship between the seller and the tenant is important to both of them. Honor that relationship and work out a win-win. It is likely the seller and tenant are both aware that their current arrangement is coming to an end.  Renting the unit well below market rate and without a written rental agreement is not reasonable or sustainable. You can offer to rent the unit to the current family on new terms. Make the terms reasonable. Everything is negotiable!

For me, it speaks highly of the tenant that they are keen on taking good care of the property. They have a vested interest in staying in the place they have lovingly made their home. Let them know that although you will need to raise the rent, you would like for them to be able to stay. Then ask them what they think is a fair amount for the place they are currently renting. Their answer may surprise you! They may already be aware of the housing market and may be  prepared to pay quite a bit more than you think. Their answer will be the starting point for negotiation and you are showing respect to them by letting them be more involved in their fate.   For you, if it means accepting a  little under market rate to make it easy for them to stay, and thus easier for you to manage, then by all means consider doing so. If they just can no longer afford to live in this home, then work with them on a move-out plan that is respectable.

I've seen too many landlords chase the mighty dollar by keeping rents high and then lose much more in turnover costs. Factor in what it will take to keep your investment profitable and also how your role as a housing provider contributes to the fabric of the community. Also take into account other positives that a tenant can bring to the community and their landlord, other than just the amount of money they pay in rent. All the best to all of you!

Andrew B. · Answer

There is no such thing as a good tenant that is paying under market rent. Anything substantially under market is being subsidized out of your pocket. Your best ebt in this situation is to ask for property to be delivered vacant so you can clean it up and put in a tenant that can pay market rent.

Terrell Garren · Answer

Pay attention to what  @Marcia Maynard as experience is invaluable.  Intelligence knows a tomato is a fruit. Wisdom knows you do not put a tomato in a fruit salad.  You can make money by selecting and retaining great residents by discounting the market by 5 to 10%.

Thomas S. · Answer

You have been give the right advice. Don't think of it a losing a good tenant think of it as getting rid of a bad tenant. If you intend to operate as a legitimate business a tenant paying under market is not a good tenant. You want to invest not operate a charity.

Additionally being a employee of the present landlord is a bad sign.

Sai T. · Answer

This maybe your 1st property. My 2 cents do not take decisions based on your emotions and “flowers and decorations”

Peter M. · Answer

I would say it depends. Talk to the tenant and current owner about it. Maybe they are only staying because he works for the current owner but they want to move. Maybe they are willing to pay market rent to stay. I wouldn't jump straight into getting them out like @Marcia Maynard said. There may be a win-win situation but you will never know unless you communicate. Just make sure you get it figured out before you buy because if you are basing your numbers on market rent and something happens like a long drawn out eviction, you may be hurting more than if you had simply not bought the property.

Account Closed · Answer

I knew a landlord who owned a fourplex with four long-term tenants paying below-market rent.  All parties liked the arrangement and no one wanted to rock the boat.  The landlord kept the rent low and the tenants remained wonderful tenants.  Since the fourplex was purchased (early 1970s) before a major market appreciation, it cash-flowed well.

Account Closed · Answer

Let's say you kept the tenant and was able to raise the rent to market.  Now pretend something comes up in the future and you have to evict the tenant.  Would you be able to do so?

Krishna Chava · Answer

Agree with @Thomas S. though I haven't been as rigorous about practicing that advice myself. I have extended several under market rent leases and continue to do so for some of my elderly tenants on fixed income. I do however raise the rent by $25 to $50 every year and point out that we are leasing under market. I manage my own properties, so I have this discretion available.

For other long term tenants, I give a notice of large rent increases at least 4 months in advance. If they find a new place that suits better, I promise them to let out of lease early. That way, I have already reached a middle ground with them and they don't see me as a hard nosed property manager. So far, everyone renewed and no one moved out.

Increase rent to market and risk losing good inherited tenant?

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