New Leases for Inherited Tenants?

Question

Well, I close on my first investment property on Friday - crazy timing, I know. It is a small 4-unit property and I will be moving into the only vacant unit (owner occupy). I will be inheriting tenants for the other three units. The current tenants are all on expired leases, which in Portland, OR, automatically become mont-to-month leases after the expiration of the one year lease. What is the best way to move forward? Do I need to have them all sign new leases with me? I am assuming I cannot make significant changes to their current leases? I plan to use Cozy for communicating with/managing tenants. Any guidance is appreciated!

Jeff S. · Answer

@Todd Ashley i would highly recommend joining RHA (Rental Housing Alliance) or some other group that has forms and can give you advice. Portland is very specific in their rules and regulations and can change at any time. RHA's forms are drawn up by a group of attorneys and investors and are up to date. Be careful here.

Anthony Wick · Answer

@Todd Ashley

1. Get them under your lease, under whatever terms you decide. Which will also notify them of who you are and how to pay rent.

2. Do a thorough walk thru of every unit, with pictures and documentation, just like you would a new tenant.

3. Fix any deferred maintenance. And yes, there will be some.

4. If anybody gives you advice to lie to tenants and tell tenants you are just the Property Manager, ignore said advice. Always be honest with tenants, as you want honesty from your tenants.

Anthony McEvoy · Answer

@Todd Ashley - I would update the lease so that it is with you and it is your language, not the previous landlord's language.  I feel it is one of those things that if there are no issues... it does not matter.  However, if there is an issue, then the contract language will matter all the way to the dotted i's and crossed t's on both sides.  Honestly, it would ultimately be best if you consult an attorney that is well versed with the laws in the area your property is located.  A few hundred now compared to potential thousands later?  Also, you would hate to have a vicious tenant that nails you on changed laws that you were not aware of... I have a buddy that got raked over the coals in the City of Chicago over an old lease.

Another thing is ask a property manager for a sample lease in the area your property is located.  If they are a big enough company, they have a sample packet ready to send with little hassle since they probably get enough requests for property management services.  I do use a property manager and when I was interviewing them, their lease mattered in my decision.

Beverage - for sure!  I find it interesting meeting other BP folks when I travel or when people come to Illinois.  I am not sure if we are going west this year or if my relatives are coming east but I will let you know!

Anthony McEvoy · Answer

@Todd Ashley - typically you need to honor the leases in place.  As far as moving forward depends on your strategy with the purchase.  Do you want the current tenants to stay?  (Are they good tenants - good payers, noise compliant, etc.?  Do you need to perform major renovations and cannot do it without them vacating it? etc.)  If you do not want them to stay and they are month to month, then scan to see what notice you need to give them.  I have typically seen 30 days where I invest in Illinois.

If you want you do want to keep the tenants, then I would draft a new, long term lease.  You can make whatever changes you want to the lease.  Depending on the changes, it may drive them out.  For instance, if they have pets and do you not want to allow pets, then it may be a deal breaker.  Also, be conscious of the price increase if their rent is way under market.  You would hate to have a vacancy for a month or two if you raise the rent too much at once unless you know you can get someone to move in immediately at the desired rate.

In a nutshell... what are strategic plans?  Read their current lease since that agreement should be honored.  Be empathetic if you want to keep them.

P.S. - I love the Portland area... I have relatives that live there on the river.

Chris Levarek · Answer

@Todd Ashley I would advise creating new leases respecting local laws as detailed above. However more importantly, screen these tenants as if they are brand new. What are the criteria for success? Credit checks, income verification, pets, limit multiple renters on the lease, etc? We've had properties acquired have illegal tenants, expired leases and even a tenant who built dry wall units inside his apartment then sub-leased them out.

Point is, be aware of what kind of tenant you have and ensure they meet YOUR criteria for success when it comes to screening. Then sign a new lease respects your criteria. Work with a PM or Attorney or Agent on the details that you are unsure of.

James Wise · Answer

All the leases are month to month so you'll just need to give them proper notice that they need to sign a new lease with you. Most places that's 30 days, given that you're in Portland, OR it may be longer. Check your local landlord tenant law for clarification. May be a 60 or 90 day notice requirement.

P.S.

Above is how things go from a contractual standpoint. If a tenant is willing to sign a new lease with you voluntarily you can do that at anytime. Working with 1,000's of tenants throughout the years I can tell you that most tenants will be happy to sign a new lease with you if the rental amount isn't increased. It's a very easy sell. "Hey Mr. tenant I'd like you to sign this new lease with me. You'll be able to lock in your rental rate for the next 12 months." Works like a charm.

Adam Cornell · Answer

Congrats on your new property, Todd!  As I understand the rules in Portland, you cannot compel the tenants to sign a new lease.  And, since you definitely cannot compel them to accept significantly different lease terms, it is functionally a moot point.  But, in our experience most tenants will go along with a new lease with your name on it once you have established trust.  If the tenants pay reliably and get along with others, then they add value. We have had success with gradual rent increases (so the tenant can adapt) along with clear communication about what tenants can expect in the future (market rate rents).  FWIW, I would be careful to avoid initiating a vacancy in the current market.  Inherited tenants could be worth more than you think.

Jessica S. · Answer

Since your property has four units, it isn't eligible for the owner-occupied exemption.   I suggest you re-read the law.  Good luck!

Todd Ashley · Answer

@Jeff S.

I appreciate the recommendation Jeff! I did purchase a Portland specific rental forms packet from Multifamily NW that includes more information than a know what to do with. For instance, I had no idea that the city now has their own depreciation schedule.

Todd Ashley · Answer

@Jessica S.

Thanks Jessica! Yes, I am aware of the moving assistance rules that have been enacted. There are some situations in which landlords might be exempt from relocation assistance payments, including owner occupy situations (which this is).

New Leases for Inherited Tenants?

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