Purchasing an occupied 4plex - are my tenants actually squatters?

[Patrick Menefee]

Yes, yes they are squatters.

I'm in the process of purchasing an occupied 4plex that has been on the market for quite some time (will be an exciting post in the Completed Deal Diaries forum once it's all complete). There are a number of issues/questions here so bear with me, but the bottom line is that the leases all expired when the house was listed and no month to month lease was signed. The tenants have still been paying, but in effect they are kindhearted squatters who pay (minimal) rent. This could either present a great opportunity or a great big problem.

I have 3 total goals once I close: 1) Get them to sign a lease immediately; 2) raise rents; 3) make improvements

Context/Background

This is one property in a portfolio owned by a couple in their mid-70s who are looking to dump the entire portfolio. Current rent for the 4 units is $1,500; market rent is between $2,200-2,800 depending on quality. In order to bring them up to market rent, each unit at a minimum needs a deep (the deepest) cleaning and repainted, plus other likely repairs/minor updates. Planned close date is July 30

Week 1 Plan - Get tenants on an immediate lease

This is my biggest point of concern...making the tenants legally responsible once I close. My thought is I'll immediately have them sign a lease for the month of August at current rent price, with a notice that they have until September 1 to either find a new place to live or sign a new lease where current rents will be increased by ~$100 per unit

Week 2-4 Plan

Once the leases are signed, I'll get the new leases in order. The rent size of the rent increase must serve two purposes: 1) push out tenants who can't afford the increase so I can repair/repaint the unit to get market rent, and 2) provide sufficient cash flow if the tenant does decide to stay. 

I'm thinking at least $100 per unit with the additional note that units will remain as is, which puts me over 9% COCROI without adding any additional expense on my end. At the end of August, I know who is staying and who is going

Week 5+ Plan

At the beginning of September, best case is that the tenants who don't sign the lease are out (a guy can dream, right?). If not, they'll be put on notice and if needed I'll offer to pay them their last month rent payment to GTFO. If they don't, I put a loud noisemaker outside their window and bother the $h!t out of them until they leave. Jk, then I go through the painful eviction process.

Back to the dream...tenants are out. I have the contractors lined up to paint, clean, repair, etc. By week 6 or 7, the units are turned over and I can rent them out for mid-market value. Assuming this is all 4 units, $10k cost to paint/clean/repair, and $2,450 total rent, my COCROI is up to almost 16%

Wrap Up

My biggest concern about this whole process is that first week and month. While they've been paying without a lease for the past few months, there's obviously the concern that they reject the initial lease and stay in the unit, sign it but don't move out, or (the biggest concern) reject the initial lease and start taking a sledgehammer to the unit out of spite. There are other concerns, such as whether to do an interim rent increase or if it'll be detrimental to keep tenants in a place that needs updates. 

Patrick's Version of the Famous Four (or 8 if you're counting question marks...)

1. What is the best option for the immediate term? If they don't sign a lease and further damage the unit, do I have any recourse since there is no legal agreement? Since they don't have a lease currently, is there any downside to putting them on a month lease with a notice to vacate or resign with increased rent? Am I missing something?

2. Am I wasting my time making only a slight increase in rent if the tenants stay? Should I just raise to full market value as if repaired to force them out, or make it a shorter term lease (3-6 months) at the ~$100/unit increase with the notice that rent will be raised to full market value after the term?

3. I plan to hire a property manager for this as I travel for work. In your experience, should I expect to pay the placement fee (whether half or full months rent) in August to sign the temporary leases and again in September when the tenants either resign or are replaced?

4. What am I overlooking, misunderstanding, or just plain dumb on?

Thank you all in advance! I look forward to hearing the advice of the BP family

[Jill F.]

There is no requirement for a written lease in NC. As long as you and your tenants have an oral agreement, you have an enforceable lease. If you want to change the terms of a M2M oral agreement, you should give at least an entire month's notice just as you would with a written lease when you are going to change the terms. Personally, I hate doing anything other than M2M leases with tenants that I didn't select and place especially before I have some time to get to know them. Since the existing tenants have been generally cooperative, I would give them at least 90 days at the current rent so they have time to find a new place.

For the record on a $425/month unit, $100 is a HUGE (>20%) increase, not a slight increase. and going from $425 to $600 or $700 is an awfully big jump; are you sure the neighborhood and property will support it?. Personally, I prefer to let attrition naturally do it's job and reno the units one at a time rather than forcing out paying tenants. We have found that much of the time, existing tenants will see enough value in our renovations that they will move into a renovated and higher rent unit if offered the chance.