Unit Needs Renovation -- kick out the tenant or let them stay??

Question

Hello, fellow landlords! I bought a duplex in October that needed work. I inherited a tenant on one side and the other was vacant, so I went to work fixing and updating the vacant unit. It's now complete, and I was able to put tenants in at nearly double what my inherited tenants are paying!

Now I have the funds and the time to renovate the other unit... but how should I handle the tenants? They are on a month-to-month lease, so I could easily just give them notice to leave. But I could also do the "nice" thing and phase the renovations in such a way that gets the unit slowly up to date while also incrementally raising their rent. However, I know doing the updates with tenants in the unit could present liability issues. And I am not sure if they'd be able to go from the $750 they currently pay to the $1400 I know I can get once the unit is updated. (Plus, I already have one family who said they're interested in putting a deposit on this unit now and moving in after the updates are complete... they saw the other unit when it was listed for rent but weren't ready to move just yet.)

The inherited tenants have lived there quite a while and have kids, so I'm tempted to try the "nice" route... but I also know things will go smoother if the unit is empty. So I'm very torn. I'd appreciate your thoughts, BP friends!

Nathan Gesner · Answer

@Megan Greathouse you're making the same mental mistake many other investors make: emotions.

Your current tenant is costing you $650 a month or $7,800 a year. Did you buy this as a charity for tenants or as a business opportunity?

Your current Tenant cannot afford $1,400. They may claim they can. You may want to be nice and give them a chance. Don't do it.

Incremental rent increases require extra effort and will fail most of the time because the tenant can't honestly afford a higher price. Attempting to renovate around an existing tenant will also cost you more time, money, and frustration.

Be honest with yourself as a business owner. Rip the bandaid. If you want to be nice, give them 30 days notice but that they don't have to worry about cleaning and you will give the full deposit back as long as there's no damage. Get them out, renovate, and start making money.

Following my advice will earn you an additional $7,800. My favorite beverage is Suntory Toki Japanese Whiskey. Do with that information what you will. ;)

John Underwood · Answer

I personally would go the nice route and just start doing small rent increases.

Just because you can, doesn't mean you should.

Michael Craig · Answer

@Megan Greathouse

I recommend being open/honest with the inherited tenant. Let the tenant know about your plans and how you wish to update the unit and let them know the new rent amount. Ask the tenant if that is in their price range and if they want to continue living on premise. If they wish to continue living in the unit after the price increase great (be sure to screen and ensure they can afford the new amount). if not, let them know you're sorry but the arrangement isn't going to work out. Give the tenant their notice to vacate (follow local laws) and terminate the month-to-month lease.

If you want to be "nice" let them know that you're there to help them find new living arrangements and that you can help them move (even cover some of the moving expenses if need be).

Mike

Megan Greathouse · Answer

Thanks, again, for everyone's feedback here. I ended up sending the 30-day notice yesterday... they were actually paying on the 15th each month, so I gave them until July 14th at 11:59pm. I took the open and honest approach, explaining this was not a reflection on them as tenants. I let them know we'd tried to work with the contractors (who they'd seen walk through their unit) on a way to renovate around them, but that ultimately the safest, most efficient option was to empty the unit so we could do the full renovation needed to get it up to our company's standards. I also told them we were here to help with their transition, and gave them some heads up that I hoped would clarify what was coming. This included:

• Letting them know they won't have to worry about deep cleaning the interior of the unit, since we'll be going right into demo after they move out.
• Reminding them they must ensure their unit is emptied of all their personal property, but offering the option to reach out if there are any items causing them grief during the moving process. I'll talk to my construction crew about whether they can handle these items during the demo process so that they don't have to.
• Assuring them that, unless there is obvious, willful destruction of the unit, they will receive back their full security deposit of $750. There will not be withholdings for interior cleaning or minor maintenance items.
• Offering to serve as a positive landlord reference as they search for their next home.
• Offering assistance with their home search. While we don't currently have any vacant units, we have connections with multiple other property management companies who do!
• Finally, I let them know they could have first shot at the unit pending an approved application. However, it will not be ready until the fall, and the rent will be up to the market rate of $1,400/month at that point.

I sent the notice of Non-Renewal of Lease via certified mail, as well as through the notice system in my property management portal. However, I sent all this detail above in a friendly "heads up" email beforehand. The tenant got back to me quickly, saying they were disappointed but understand that the unit needed work. She also said she'd appreciate help with the search and gave me their parameters (including a top end budget that would not have met the $1,400 we should get for this renovated unit). So, all in all, I think it went quite well and we're parting on good terms. Just thought some of you may be interested in hearing that. Thanks again for the great feedback, everyone!

Colleen F. · Answer

What is the unit worth unrenovated?  With just essential fixes in place? Is that what they are paying?  What I mean by this is Functional cabinets.  Intact floors, working appliances. You could fix essentials and put the rent at the market level for the space and leave it at that.   It won't be the most you can get but it will be market. See if they can pay it, if they can't you need to decide if long term you want to supplement a tenant.  If they can handle the increase to market value in current maintained condition maybe that is a win-win in that the tenant gets to stay and you get to keep your reno budget.  A fully renovated unit might not be necessary.

Or you could have them leave and do the kitchen and bath upgrades and re-rent.  If the price is double renovated I doubt that is all the reno but I don't know your market.

Myron Voorhis · Answer

@Megan Greathouse As soon as you finished the next door unit you should have gave them the option to move into that or move out. Now I think your best option is to lay it all out on the table to them, and give them the choice to move out or deal with updates and rent increase. If they wanted to stay in the apartment as is, they could have sacrificed, worked hard and bought the duplex like you did.

Anthony Rosa · Answer

Get the tenants out but do it nicely.  This is business and not personal.  $650 jump is huge and most likely they will say "no". You can tell them that you have to fix it up like the other unit and charge $1400 because you cant afford to keep the house with a $700 month rent.  If they complain ask them (in a joking way) if they want to buy the place.  You gotta do what you gotta do ;)

Megan Greathouse · Answer

Thank you all so much for your straightforward feedback! It affirms the thoughts that have been swirling in my head.

@Michael Craig, I agree with your comment on being very open and honest with the current tenant. Thanks!

@Colleen F., I'd considered this, but the tenants have been there for 10 years and there's a lot of basics to work on that would be difficult to clean up with them there.

@Jacob Sampson, I think a full update of the unit will be less than $30K... so at an additional $650/month that's about a 26% return on my rehab investment.

@Nathan G. I hear you - I definitely did not buy this so I could run a charity! (If I get you the whiskey, could I deliver it in person? My husband really wants to visit Wyoming!)

@Theresa Harris, I like the right of first refusal idea, thank you! I agree they probably won't move in, but it softens the blow after all the time they've been there.

@Bob Prisco... your comment made me laugh! Thanks... it is pretty simple at the end of the day, isn't it? :)

Thanks again to everyone!

Jacob Sampson · Answer

Megan, it's one thing when a tenant is under market by $50/month.  You can't give up $650/month in rent.  I think you CAN be nice by giving them several month to look for a new place.  But you need that $650.

As a side question, what is the renovation going to cost?  Meaning, how much will you need to spend to earn the additional $650 a month?

I also second @Michael Craig honest reasonable conversations with the tenant go a long way.  It seems that most landlords avoid them, which is unfortunate.

Brandon Trowel · Answer

Thank you for sharing what you decided to do @Megan Greathouse. I agree that business decisions MUST be made (quickly & efficiently) but that doesn't mean people need to be beat over the head or thrown out in the streets in the name of what's advantageous for the business. A situation can be win-win and I think your process helped you get what you want with your property while parting on good terms with the tenant. I've seen a post on a social media platform with a company culture slogan that expresses "don't be a dick"; the truth of the post can be argued but the sentiment is true, personally as well as professionally :-)

Unit Needs Renovation -- kick out the tenant or let them stay??

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