The first investment, how do you transition existing tenants?

Question

The offer on our first investment property was accepted today, time to start thinking like a property manager!

Its an older 3 unit property with tenants in the first two units and the third is partially remodeled/demo'd. The tenants appear to keep their units very clean and the property over all is clean in spite of the ongoing work the current owner has been doing. The current rents are pretty low, about 80% of the current market value. Its our intention to bring the property into good standing and bring the rents to market value. We should be closing in mid January and we'd rather not run the tenants out in the middle of winter by jacking rents.

With all that said, We have a plethora of questions. Hoping the BP community could share their incite and experience.

Whats the best way to take over managing a property where the rents are low and the current owners managing has been very "old school" and dated? We intend on using a variety of "service charges" to help manage the property. Late charges, pet charges, etc... Do you send out letters or meet in person?

Do you come on soft and work towards your goal or start with the lease how you want it to look?

Do you raise rents slowly over time or bring them where they should be from the start?

One thought of mine was to feel it out and have leases handed out in spring time so we are looking for new tenants at a better time if they decide to move on. Thoughts?

Im currently on chapter 5 of Land Lording on Autopilot. Im sure this topic will be covered well in the book, yet, I wanted to see how others handle these issues, local and abroad.

Ann Bellamy · Answer

Well, I'd first become familiar with NH landlord laws. It's not legal in NH to charge a "pet fee". You can't increase the security deposit either. You can, however, charge more rent for pets.

So I think your first reading should be RSA 540, plus A, B and C:

http://www.gencourt.state.nh.us/rsa/html/NHTOC/NHT...

Secondly, I learned from personal experience that the fastest way to empty a building is to buy it, and raise everyone's rent at the same time. So consider whether you have the time and financial means to have a fully empty building in winter, when you have to pay to heat it.

Take a month or two to find out if you have a problem tenant, and start with him. Then when you have that unit emptied, updated and rerented, consider the other two, one at a time. My advice based on my experience, your mileage may differ.

Mike McCarthy · Answer

I know everyone is advocating raising rents, but be sure to do the math on your own. Is it worth 2 months of no rent, plus the cost to reno the unit, then re-rent, for a some extra rent. Compare that to upping the rent a little for each unit (say $50/yr). See what makes the most sense. Sometimes good tenants are worth a little less rent per month for fewer problems.

Troy Zsofka · Answer

@Ann Bellamy is correct.

@Rick M. - while NH may not have a statute specifically addressing pet deposits, the security deposit statute is clear that only 1 month security can be held.

In other words, according to my understanding, you can charge a pet deposit, you can hold last month's rent, you can even hold a deposit for window curtain replacement if you like. Charge as many deposits as you want, and call them whatever you like, so long as they don't total more than 1 month rent.

Personally, I hold 1 month security and charge additional rent for pets.

I know that a lot of landlords take security and last month. They are breaking the law.

Just my opinion; I'm not an attorney.

Ann Bellamy · Answer

@Rick M. I prefer to use the actual law rather than a summary, which may be incorrect. In this case, please read:

http://www.gencourt.state.nh.us/rsa/html/LV/540-A/...

and

http://www.gencourt.state.nh.us/rsa/html/LV/540-A/...

for the definition and limitation on security deposits in NH. this is not the first time someone has referenced this summary you provided. That doesn't mean it is correct.

Thomas S. · Answer

@Patrick M. @Matthew Olszak

I agree 100% with both Patrick and Matthew. Give them the new leases, keep them on M2M, with all new changes and full market rents. They will most likely stay but if not they will still probably stay till the spring. M2M leases are ideal for you and them in this situation.

You are starting a new business, no games, just get it done and move forward.

Peter M. · Answer

Meet them in person with a letter detailing your policies. Focus on rent payment because that is the most important thing. I would raise the rent gradually (whole boiling frog analogy). Maybe do 6m leases at first that way if you don't like them, theyre out after 6 months and if they don't like you they can leave sooner rather than just bailing in the middle of the night. Tell them you will be strict with your policies and follow through or they won't take you seriously. I'd also stagger the leases by at least 2 months so you don't have a mass exodus and thousands in repairs with no income.

Matthew Olszak · Answer

First, if leases are in place, you have to honor those. If not, issue a notice of non-renewal, but also present a new lease so they know its not that you are trying to get rid of them but rather just establishing the terms going forward. For rent increases, go right to the market rate once you are ready for them to either pay that or be gone. Step-increases only prolong the inevitable, and leave tenants thinking you are just trying to nickle and dime them every few months. They can either pay market rate or be gone. Of course, consider your vacancy cost of obtaining a new tenant depending on the time of year.

Don't come off too soft, but you also don't need to go insane. Implement terms your property class and locality support. Understand the difference between class A and class C tenants. Call the tenants and ask them if there are any unattended-to issues in their unit, and let them know that you'll be addressing those in the coming months. That helps to set the standard that you aren't going to jump when they say so, but you also open to hear their complaints.

Here is my letter when we take over a property:

I also include a copy of the Letter of Attornment and a separate sheet on how to pay their rent.

John McKinnon · Answer

I appreciate all the feed back. We are closing in a week and are trying to get all our ducks in a row. When the property transfers to us, how are rents handled for the month? Is the rent transferred and pro-rated basis on a daily basis or is the rent just left or the previous owner?

Also, the current tenants are both on a month to month and their rents are actually higher than disclosed preciously. We have a fair amount of work to do to put he third unit (vacant currently) on the market. We are going to keep the rents where they are until we get the big repairs completed and have a chance to feel out the tenants... and our new role as property managers.

Bjorn Ahlblad · Answer

@John McKinnon I highly recommend joining your state LL association. They have good forums for networking and excellent resources for LL tenant law and all the nitty gritty details helping you to be confident about the business. Between BP and the LL Association I have become a pretty saavy PM.

Axel Ragnarsson · Answer

@John McKinnon What we do when we buy a building with below market tenants is dependent on how significantly below market the rent they are currently paying is and what time of the year (lease cycle) it is. If we buy a building in the winter and the tenants are only slightly below market, we'll issue a slight increase to get them closer to market with the intentions of getting them all the way to market rent within six months. If they vacate, that's fine, we can now lease the unit at a peak time of the year. On a side note, we've found that issuing rent increases to tenants who are paying extremely below market rates (for example, $550 when the market rent is $1,000) typically doesn't end up well (the tenant feels you are taking advantage of them, doesn't believe the rent you are charging is market rate, the relationship between management/tenant becomes contentious). In that scenario, we typically just issue a notice to vacate, turn the unit over, and lease it at market rate.

Of course, this is all assuming that the tenant is M2M. In NH (and most states) you only need to give 30 days notice to issue rent increases/notice to vacate that everyone in this thread has mentioned.

The first investment, how do you transition existing tenants?

The first investment, how do you transition existing tenants?

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