How do you effectively and ethically deal with inherited tenants?

Question

I'm evaluating a number of different multifamily properties for purchase that are 100% occupied but with month-to-month leases. The rents the current tenants are paying are well below market rent. Often, the tenants have lived in the properties for many years and would prefer to stay. This creates two challenges for me:

1) I'd like to do moderate to significant renovations on the units, and my business partner plans on owner-occupying one of the units, so we would need to permanently vacate one or, depending on the property, even all of the units.

2) In order to make the numbers work I'd need to dramatically increase rents (by several hundred dollars/month) to bring them up to market levels. I anticipate that the current residents will not agree to pay the higher rent.

I'd love to hear from others who've dealt with asking inherited tenants to leave. What was your approach? How did it work out? How long and what did it take (in terms of time, money, effort, stress, etc.) to get the desired result? Is there a way to ask them to leave that is humane and ethical? Waiting for inherited tenants to naturally leave on their own would likely be very expensive and financially infeasible, but perhaps there is some middle ground between waiting and asking them to leave immediately. I appreciate your feedback.

Kai Van Leuven · Answer

Hume, I have been in this situation before. The mistake I made was that I did not go in right away and raise rent to an appropriate market rent. If you do not want people. Give them a notice right away, if you can afford it. I made the mistake of letting tenants linger too long. What is the difference between you and the old owner at that point? It is being sold because you can see value in the property. Why spoil that because you feel an obligation to the current tenants? Do they feel bad about not paying market rent for the last year? Or 2? Or 10? Wouldn’t it be “fair” for them to do some back payments for the time they have been paying far below? I wish someone would have asked me these questions when I purchased my property with very low rents.

Account Closed · Answer

You fulfill the terms of the rental agreement, decide what your plan is for raising rents, explain to each tenant and give them an option to agree. You can phase the units, you don't have to do all at once. You can also give notice that you will be improving the apartments which naturally means an increase in rent. Most will simply move, some will pay the higher rent if it isn't to drastically different and some will be sour. They are renters. That means they don't own the property. You have to make the numbers work or don't do the project.

Hume An · Answer

Kai, thank you for your comment. It's helpful in allowing me to put things in perspective. Great point about there being a difference between the old owner and the new. It's something that the tenants should expect and be prepared for.

Hume An · Answer

Thanks, Nathan G. That's a great idea.

Hume An · Answer

Thank you, Mike M., Steve Bracero, and Thomas S. This is helpful information. The properties I'm looking at are in Cook County, IL where the laws are heavily in favor of the tenant. My concern is that tenants will refuse to leave, and I'll have an expensive eviction process on my hands. Has anyone had to deal with evicting inherited tenants who are unwilling to lead? For those who have dealt with inherited tenants at volume, how frequently is eviction necessary?

Nathan Gesner · Answer

The best option is to buy the property vacant. Let the current owner give them notice, get them out, and turn the property over to you empty. you can renovate and fill at market rate with tenants you've selected.

Thomas S. · Answer

"ethically" the best approach is to maintain a strict business policy. Give notice to the tenants that rent will be increased to full market, with proper legal notice, and let them decide if they are staying or going. Provided you follow all state landlord tenant regulations state codes eliminates concerns over ethics. Always keep in mind you are operating a business in which your tenants expect these issues to arise. With inherited tenants paying below market rents they know they have been on a free ride and will expect changes with a new owner. The best time to make big changes is immediately, supplementing your tenants rent when below market is charity not business. You will find in most cases of inherited tenants you will clean house in the first year and have all new tenants,screened to your standards, and all will then be at full market rent. Reno work usually assists/contributes to reducing your time line on tenant turn over. When inherited tenant leases are comming to a end give proper notice and prepare to get in, reno and find new tennats. If your inherited tennats are on M2M all the better. Time the notices to suite your schedule.

Steve Bracero · Answer

@Hume AnWell, two schools of thought here. If you think they are quality tenants, you can raise them over time, and let them know you will be improving the property. Just complete one job at a time. If you think it will be better to "get them out" this will give you ample time to complete said repairs, and then you will have the opportunity to find quality tenants (hopefully before winter!) and get the rent you are looking for. Take a look at vacancy cost vs keeping them there and slowly raising their rent over time