When buying a property keep tenants or get higher market rent?

Question

Hello!

Theres a duplex im considering buying(both sides) thats in pretty good condition but looks like it needs some cosmetic work and general cleanup(maybe 10k reno) . My dilemma is how I would deal with the tenants that come with the property. Both sides are rented out to tenants that are currently paying about 30 to 35% below market rent. They are both on month to month leases.  From the pictures i saw, they seem to have alot of stuff in there(borderline hoarders )and the units look filthy. One of them smokes.   On the one hand, its nice that the unit is already cashflowing(though not as much as id like at those rent amounts), but on the other hand, id rather get new tenants that are cleaner and can pay market rent. Then the cashflow would be much better.  I dont think the tenants that are currently there could pay for a 30 to 35% rent increase so the choice would be to let them stay and raise the rent bit by bit or non-renew and have them move out so i can renovate, clean up and get market rent with new tenants.  What would you do?

I had another idea that even though they are on a month to month, I was thinking I could give them maybe 4 or 5 months notice that im non-renewing the lease. That would give them enough time to find another place and would give me a few months of rental income that i could use toward the reno and cleanup.  I was even thinking of maybe staggering it...maybe have one tenant move out first, reno that side, then once its rented, have the other tenant move out and reno the other side.  What do you think?

Jonathan R McLaughlin · Answer

@Martha Daisley. You don’t own it yet, have it delivered vacant as a condition of the sale. You will never have a better chance to start fresh with less drama.

Nathan Gesner · Answer

I have to disagree with Kenny on this one. It is very unlikely that these people can afford market rent. Even if they could, would you prefer a tenant paying market rent that takes care of the property or tenant pain market rent that continues to trash it?

if you offer to let them stay at the higher rate, there's a very good chance they will accept that offer... And then fail to pay the rent.

Get rid of them. Clean the units up. Putting quality tenants at market rate.

Also, they do not need four to five months to find another rental. If you give them that amount of time, most likely result is that you will experience four to five months of problems. Give them a 30 day notice, or whatever minimum your state requires. Be prepared to evict if they refuse to vacate.

Kenny Dahill · Answer

@Martha Daisley, always ask!  Seriously, it's free and you have nothing to lose.

I'll never understand landlords who intentionally put themselves at vacancy risk instead of simply asking the tenants to pay more.  If they refuse, that is when you give notice and proceed.  If you never ask, you'll never know.  Especially since they're smokers, it will take time to clear that smell.

It's also not your responsibility to determine if they can financially afford the 30-35% or not.  They're adults and need to determine that themselves.

David H. · Answer

@Jonathan R McLaughlin

I completely agree with Jonathan.

I just purchased a duplex and took this route due to my prior experience inherited nightmare tenants.

One thing I’d suggest is to be very careful with estimated rehab costs. If one is a smoker and both are borderline hoarders that screams $$$ to me. You never know what is under a carpet, bed, behind a cabinet etc. when dealing with a hoarder.

Will Fraser · Answer

I agree with @Jonathan R McLaughlin 100%!  I would also stipulate that you want it vacant and clean OR you’ll only be willing to purchase it at a significantly lower price that would compensate you for the risk and hassle of the turnover.

It is NOT your problem that the current owner placed bad tenants and neglected to be excellent in their property management . . . YET.  On the day you close this all could be your problem to deal with, and trashy tenants paying way below market value doesn’t serve you OR them well, so I’d recommend either buying it vacant and clean, or buying it at a substantially lower price under the stipulations that the seller serves 30-day (or locally relevant number) notice to them so that on closing date or soon after it should be vacant.

Anthony Wick · Answer

If I’ve said it once, I’ve said it a thousand times. Of course you want market rate rents as soon as possible! Keep your business and your charity separate. If you are so afraid of a vacancy that you’re willing to take hundreds less than what your rentals are worth, you are not ready to be an investor or a landlord.

My last purchase was a duplex. Each side getting $1,100. Well below market value. Each on MTM leases. My purchase agreement stated 1 tenant must be out before close, as he was behind in rent and smoking in the garage, which was against the lease. He was also a slob. The PA also stated the other unit was not to sign a new lease, as I planned on raising rent immediately and getting them under my lease.

Both units ended up being delivered empty at close, which was perfect.

I did some cosmetics, such as new carpet and paint and cleaning. Spent about $5,000. And both sides now rent for $1,500 a side. That’s $800 a month more for the duplex than the last owner. $9,600 a year.

You know what I didn’t do? I didn’t increase rents slowly. I didn’t let them keep paying well below market rents. And I didn’t listen to anybody that suggested I help subsidize my tenants rent.

Nicole Heasley Beitenman · Answer

Get them out and get tenants who will pay market AND take care of your investment. If those leases are month-to-month, their leases (and your state's law) likely requires you to give 30 days' notice of non-renewal. Verify that before proceeding.

John Teachout · Answer

I'm walking this tightrope right now with new properties. 3 inherited tenants, all paying under market, one could leave without hurting my feelings.

We plan to raise the rent incrementally and with plenty of notice. One of the tenants has been paying the same rent for 17 years. I suspect she realizes an increase is coming with the new ownership.

To the OP, I'd raise the rent to slightly under market. If the Orlando market is competitive, they may pay the higher rent. If not, well, then you have the unit vacant for the rehab.

Wendy Brockman · Answer

Although they may agree to higher rent and default. Can you resign a new lease if they agree and go through credit checks and employment checks again to ensure they have at least 3 x the rent as monthly income etc.

Jaysen Medhurst · Answer

It's probably worth rolling the dice on non-renewal, @Martha Daisley. I wouldn't give a longer lead time. Won't really make much difference. Staggering is a good idea. Be aware that if they really are "borderline hoarders" you may be in for a tough road.

When buying a property keep tenants or get higher market rent?

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