Lose Good Tenant or Money due to Rehab?

Question

Hello, BP family!

In a little bit of a dilemma. Do I lose a good tenant or lose money due to rehab?

Here is my issue:

I have a duplex I purchased earlier this year, that I am house hacking. When I purchased the property, I inherited a great tenant (quiet, pays on time like clockwork!) that signed a new lease with the sellers right before they sold the property. The current lease is up January 31st 2019. They are currently paying $550 for a 2bed/ 2bath, which is WEEELLL BELOW market rent for the area (average is around $780). I am currently making improvements to the side I am living on (nothing major, just giving the unit a facelift). I informed them that I would be going up on the rent (to $700) back in July. I do plan on making improvements to the side they live on after I am finished with the unit I am living in (with my job, which is 90% travel, I am not inconvenienced by having toilets, shower, cabinets, floors, etc ripped out and taking a little while to get replaced) They recently reached out saying they would like the rent to stay at $550 if no improvements are being made to their side, currently. My improvements look to be finished before the end of the year.

Questions:

1. Do I move them into the improved side and charge them the $700?

a. With this option, what all do I need to do to make the transition as smooth as possible (utilities?, move out inspection?, deposit?, etc? that sort of stuff)

2. Do I keep improving my unit and get to their unit when Im done with mine? And have the tenant try their luck at finding a 2bed/ 2 bath for $550 (Ive done the research they aren't going to find that for that)?

b. With this option I don't want them living in a warzone while improvements are being made. Id have to be very particular on how I go about improving things

3. Or do I have them sign another year lease at the their current rent rate ($550)?

c. leave things as is and just save up for when it is time to make the improvements to their unit it will be somewhat easy. (I say somewhat because dealing with contractors is never EASY!!!)

Nathan Gesner · Answer

That's actually not true. I have hundreds of tenants paying market rent and they pay on time, every time.

Far too many Landlords think a lower rent results in better tenants. After all, they'll appreciate your generosity, right? WRONG! If you rent below market, you get below-market tenants that treat your rental like a below-market rental. And when push comes to shove, they will treat you like crap just to save a dollar.

Get them to market rate, find a middle ground that is in your best interest, or find tenants that will pay you what the property is worth.

Nathan Gesner · Answer

I would give them two choices:

1. Move units and pay the higher rent; or

2. Stay where they are at and pay a higher rent but lower than a renovated unit.

I had this happen recently. Tenant was paying $425 and had been there for 16 years. I wanted to renovate the unit and raise rent to $600 but she didn't want to leave and didn't want to pay a higher rent somewhere else. I bumped her rent to $525 and let her stay in the unrenovated unit. I'm making $100 more a month and I saved about $4,000 in renovation costs.

Think all the options through, consider all the costs, and come up with the best solutions. In my case, I would have had to evict her then it would sit vacant for 1-2 months while I renovate and try to find a tenant. That's $5,000 or more spent just so I can make an extra $100 in rent, which would take four years just to break even. It's a no-brainer.

Ned J. · Answer

Two options as far as I'm concerned...

(1) Raise the rent to the current market rent for a similar condition property and they can stay..... property stays "as is"

(2) They pay full market rent and you "swap" units once your is ready to go

Either way the rent goes up.....not negotiable. I hate to do rehab with the tenant in place, so I would lean towards option #1 and do the rehab on turnover. Unless its going to allow me to make a big jump in rent, I'm in no rush to do a rehab

Andrew B. · Answer

you should let them know that they can move into the renovated side for $780 (market rent according to your post) or slightly below market rent to stay. maybe $725. If they stay, you get basically market rent for no investment. if they go, you rehab the unit and get a tenant in that's willing to pay market ($780)

Corby Goade · Answer

First of all, good for you for taking the leap!

I am going to give you some unsolicited advice- sorry in advance. I've done what you are doing- being the landlord/owner out in the open, dealing directly with tenants. It sucks. Start a property management company, even if you have one door. You can be the on site PM, working for the company. That way, you don't get involved in personal issues like this. If the owner is raising the rent, you are the messenger and can sympathize with the tenant. "Yeah, it sucks, he's a jerk, sorry to be the bearer of bad news."

Secondly, if you simply want to charge market rent, it doesn't matter if they want to pay it or not, they get to choose if they want to live there or not, not what the rent is. We don't negotiate with tenants, it sets a bad example, but we are fair with them. Market rents are fair, you aren't asking too much. I think your offer to let them move in to the renovated side at market rent is fair, but them telling you that they'll stay in their side at their current rent? That isn't their choice. I am not saying you have to be rude or aggressive, quite the opposite, but you are running a business, not a shelter.

Good luck!

Maurice D. · Answer

1) Raise the rent in the current condition, to market rate (for that condition) non-negotiable.   they will move.

2) Fix the place and place on the market (Market concurrently with rehab)

3) Screen you next tenant very well, wait for the right one

4) you will have another long term tenant and much better cash flow.

Mitch Price · Answer

Would that be a good option to consider?

Mitch Price · Answer

@Jonathan G.    @Nathan G.

its not necessarily that they cant afford the $700, I talked to the previous owners and they simply just were oblivious to the rent market raising over the years and never raised their rent the whole time they were living there. They just liked how the tenant was on time every month! The reason they are on time every month because its so low! haha I was also thinking at keeping them at $550 in their current unit (with month to month lease....but rehab should be done before the year is out so I may not have to do month to month) till the rehab is done, on my side and just swap them to rehabbed side with $700 year lease once its finished.

What do you all think about that?

Lose Good Tenant or Money due to Rehab?

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