To keep a current tenant or not???

Question

I am in process of purchasing my first investment home. There are tenants in the property right now, they have been there for 4-5 years and they are asking if i would consider for them to stay. Their current rent is about $500- $600 below what the average rent is going for but i am planning on raising it. I was planning on at least replacing then flooring as good faith and to justify the rent increase but seeing their living conditions (not the cleanest) my wife is worried that if they stay they will destroy any upgrades we do on the home. My wife would like for us to just remodel the house and find new renters. One of the main reasons why i am considering them to stay is according to the current homeowner, who is a family friend or ours, the tenants have never missed a payment and if they were late they always paid the late fees. If i keep them I could possibly avoid having to do a lot of repairs/upgrades to the home right away and immediately cash flow.

my question/options are

1. Should I keep them and do no upgrades on the home

2. Keep them and do flooring

3. Remodel the home and find new renters

I hope this makes sense any feed back would be much appreciated.

my question/options are

1. Should I keep them and do no upgrades on the home

2. Keep them and do flooring

3. Remodel the home and find new renters

I hope this makes sense any feed back would be much appreciated.

Cameron Tope · Answer

Account Closed great questions!

What's your goal of the property? If it's to BRRRR then you may need to get them out and do the upgrades so you can refi.

Would you cashflow with them staying at the current rent?

I think your wife is correct - leave the flooring alone. However, if a tenant is in a property for ~5 years the odds of them moving are slim to none, which means vacancy is 0 and the turnover costs are 0.

You'd be surprised how much you can increase rent over a few years. If you raise the rent when you buy, by $10-$50 the odds are they won't leave. Then next year raise it again $10-$50, and so on...

When they move out then you can do the upgrades and get market rent. I would let me stay and just slowly raise rent every year, unless you're trying to BRRRR.

Best of luck!

Anthony Wick · Answer

@Ian Salinas

So, they have been late on rent before, they do not keep good care of the place, you’re about to raise the rent significantly, and your wife wants to get rid of them?

What’s the question again???

Justin V. · Answer

@Ian Salinas

I’m a pretty small duplex investor in Minnesota, but I’d like to share my thoughts and questions which may inspire more thoughts.

Get to know your local laws and start talking with a real estate attorney on what your worst case (eviction) looks like and how much it will cost in fees and unpaid rent. My 1 eviction totaled 5k and 3 months of vacancy before the renovation and caused my wife and I to miss a few days of w2 work. It went through on the first pass.

If you are just getting your start and need to brrr it to build your empire, accept that you need to be the bad guy and make the tenants to move out or consider adding “delivery of the property vacant” to the contract with the seller.

How much does rent need to be for it to cashflow? Is your family friend giving you a deal if it doesn’t cashflow as is? Is this property the right deal?

I’ll keep tenants that are kind of messy as long as it isn’t damaging or smelly. It’s very hard to get bad smells out of things.

How much more above the average rent will you get after renovating? And what kind of renovation do you need to do?

Finally an anecdote to an already long post: I have a tenant at $170 below average rent of $1300, but her unit still cash flows. The floor above her is finished well and rents for 500 more per month. Her unit will be a full gut (paneling over bad lath and plaster) when the day finally comes that she has moved on. I am happy to keep her as a tenant because she keeps tidy, pays on time, doesn’t smoke, doesn’t ask for much, and is super nice/respectful. Refi came in about 50k-70 less than if it would have been done up, but I don’t necessarily need that loan for the next purchase/project. If this had been my first purchase instead of my 5th, thing might have gone differently or I might have passed.

-Justin

Charlotte Dunford · Answer

Account Closed I think you should keep them (if they pay on time and are good tenants). Turnovers are expensive!

Account Closed · Answer

@Daniel Schiller thanks for the advice

Account Closed · Answer

@Cameron Tope thanks for the response

My goal is/was to BURRR. I cannot cash flow with the current rent but the current owner told the tenants the price that I am planning on renting it out. They seemed to be fine with it. My only concern is if there is a maximum amount I can increase the rent to.

Adam Tafel · Answer

Balancing empathy and capitalization is a lifelong conquest, something I struggle with constantly! It's hard to give/receive advice without more specifics, and you didn't buy the home to be charitable. I like to be as direct as possible, give people options, and come from a place of helping rather than taking. Don't beat around the bush, let them know that the current situation won't work for long, and get them to like you! This is super important, as difficult tenants can get very expensive. Best of luck!

Jane S. · Answer

ALWAYS GET RID OF LEGACY TENANTS ESPECIALLY IF THEY ARE FRIENDS OR RELATIVES OF THE SELLER, HE WANTS TO BE THEIR HERO, he bragged that he would tell you what to do for them, etc. IT HAS NOTHING TO DO WITH YOUR BUSINESS STRATEGY, they dont care!!!!!!!!. I HAVE HAD SELLERS TELL ME I CANT RAISE RENT ON SO AND SO, WHAT NERVE! I ran away fast. I think she was his side-hustle. Also the water heater was buried in the crawl space so deep!

is there some other property you can buy that will cause you less stress, back out of this one

Also the advice not to do any rehabbing on your first property is very on point. the new renters probably wont notice. i had no idea how little they care about small stuff. put rugs on it.

just wait until you ask them to sign the new lease, you'll hear a few swears from them! they will tell you mr. so and so promised them no raise in rent ... and a few other fantasies. tenants hear the most amazing stuff

Dennis M. · Answer

in good faith I was going to add new flooring to justify the rent increase

Crazy talk !!

there is no such thing as good faith in this business especially with tenants who will screw your over if it suits them . Look Those tenants will hate your ever living guys when you spike their rent up 500 bucks wether there’s new shiny floors or not .

Tim Swierczek · Answer

@Justin Voegele Good questions to ask and good persepective.

To keep a current tenant or not???

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