Strategy for inheriting 2 (long term) underpaying tenants?

Question

I'm about to close on my first multifamily property in 2 weeks! I am buying the property because it is a growing area and current rents in 2 of the 3 units are much lower than they should be, but the catch is that all 3 tenants have been living at the property for 4+ years and don't want to leave. All are month to month on their leases. The main floor is Section 8 and very close to market rate so I plan to keep them. The other two are both playing between $300 and $400 under market value for each unit.

What do you think is the best strategy is to handle this situation? My plan was to give them until the end of February at their current rent before signing new leases on March 1st with increased rent if they want to stay. Is this being being too lenient or harsh? What could go wrong with my plan that I'm not thinking about because of my inexperience?

Thanks for your help!

Michael Craig · Answer

@David VanWinkle good questions. In NY, if you want to terminate/change a month-to-month agreement you will need to deliver a 30 day written notice.  Note, the 30 days begins on the next billing cycle (so if you deliver on 14 January, 30 days begins 1 February), learn your local laws.

Once you close and get situated, I would have a professional conversation with the tenants that sets the expectations - also, present the new lease with the new rent amounts and security deposits. Let them know that if they want to continue living on premise they need to be under the new lease agreement (month-to-month may not be a bad idea since you do not know the type of tenant they are and you haven't screened them - this will make it easier to evict if need be). Let them know they have a week (or what you feel is adequate) to review and sign new lease and provide the new security deposit. If they do not meet the deadline, present the 30 day notice and get them out.

Jay Hinrichs · Answer

maybe do something in the middle.. you don't want vacancy in Chicago in the winter .. and if U have a section 8 below your probably in a C class area.. and there is competition for renters..   So maybe you slow roll them to market rates over the course of the next 6 to 12 months so its not a shock to the system.. keep in mind a tenant in a place for 4 years means probably a few grand or more to turn it over and then you have the negative cash flow.. of vacant units.. and if its south side you have break ins to worry about as well. so think it through given your area.. time of year  risk of vacant units and so on and so forth.

Thomas S. · Answer

I would give them written notice when you take ownership of the new M2M lease effective March 1st including rent at full market.  You will want to know asap as to their intentions so you can prepare to replace them if they decide to leave.

There is no point in setting their rent below market, either they pay full market or you get a new tenant that will be paying full market.

Personally I believe finding new tenants that are willing and prepared to pay full market  will turn out to be a better choice. Long term tenants making a big jump to paying market usually does not work

Thomas S. · Answer

"I can definitely see it being a problem"

You should anticipate replacing them both. The longer you wait to pull the trigger the more you potentially lose. Giving notice for the first of March should not pose any issues in regards to finding replacement tenants. The winter months most to be concerned about are prior to January. After February there should be no problem.

I would give them the option immediately and clean house if necessary. This will get you moving forward on a much stronger footing. You could even stager their notices by a month to ease the transition. But the longer you wait the more you lose. Who knows they may even decide to pay market and wait till mid summer to move out.

Landlords that have tenants below market are usually just afraid to operate their business and always throw out the excuse that turn overs are expensive. Fact is that for them they probably are because they do not know how to do it efficiently and do not realise it's going to happen eventually and cost exactly the same regardless. They just don't want to manage their business they prefer to let the bsiness manage them..

David VanWinkle · Answer

@Jay Hinrichs I agree, we do not want too much negative cashflow early. The other two tenants are not Section 8 so I'm not sure if that will make it easier or harder for them to pay the new rent. Thanks for your reply

David VanWinkle · Answer

Thanks, @Thomas S.

I can definitely see it being a problem to get them to pay full market price after being at such a discount for so long.

David VanWinkle · Answer

@Michael Craig this is so helpful. I hadn't thought of just keeping them month to month to see what they are like as a tenant. I'll definitely read up on the my local laws in Chicago to make sure I give them the proper notice if I need to get them out.

Strategy for inheriting 2 (long term) underpaying tenants?

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