Transition from Old Landlord to New, How to raise rents?

Question

I just signed an 8 unit under contract, it has 6 two bedrooms and 1 three bedroom apartment with one finished commercial property. On a scale of 1 to 10, the condition of this property is a 9 having already been rehabbed by the prior owner. The apartments are nice, but rather small with no separate living and dinning room. The rents are extremely low at $500 and $600, that area should have rents at $850 to $950 (this is adjusted for the smaller area). I am getting $975 and $1000 a month for a two bedroom duplex I own just 1.5 miles away in the same zip code.

The current tenants are there month to month with no written lease. So the question to the BP family is, how do I handle the transition? I don’t want to kick the tenants out, however I doubt if they will want to pay the increase of $300 to $350 dollars. I am African American, all the tenants are Mexican. I do speak some basic Spanish and would be able to communicate with the tenants. I don’t think that language will be a major barrier, but I am wondering how I will be received. I am sure that some if not most will move out, mainly because of the rent increase. My plan is to clean up each unit after a tenant moves out and try to add some additional value like LED accent lighting. I am confident that I can get the rents I desire from either market rate tenants or Section 8.

Any suggestions on how to handle this transition and the rent increase?

Thanks,

Shawn Stiteler · Answer

I assume there are no vacancies? I would think that this would be the ideal time of year to do turn over if you ever had to do a major one. If there was a vacancy you could always advertise it at your $850-950 and see what interest there was for it. I really do not have the experience with that. It probably has to be an all or nothing type deal, unless you are allowed to just not renew leases one at at time to test your theory.

Justin V. · Answer

@Michael Taylor1.5 miles is pretty far in my area and can dictate a lot. What does Zillow and rentometer say for the 10 block radius? Any rivers, highways, or railroad tracks in between your sets of properties?Start talking to your real estate attorney. If you don’t have one, it’s time. I have done this for a 6 unit that needed varying work. I wrote introduction letters that said who I am, my understanding of their verbal lease, market rents, and my plan for increasing the rent (going up ~ $550 in 4 months to still under market rent) and plans for the property. Increase rents and renovate vacant units. Gave them the option to sign it and I take pictures or I tape it to the door and take pictures (proper notice for my area). I also gave 1 unit 30 day notice since it needed a gut. I ended up with more vacancy than I was expecting quickly, and 1 eviction, but my units weren’t ready for new tenants. There was also no covid.Due to covid I’d do a smaller rent increase if you are under an eviction hold. Would be bad to tick off a tenant right now and have them stop paying rent and sit tight for the next few months before starting the eviction process which likely wont move quick.

David Adams · Answer

@Michael TaylorI have that problem all the time . What I do is look at it this way. If I notify the current tenant of a rent increase and they decide to move, will I be able to replace that tenant with a new tenant at my new rate in a very short time period. It doesn’t pay to raise the rent on a quality tenant and have the property sit vacant for months

Andre Taylor · Answer

Best thing is to educate them on what the market rent is supposed to be in that area. I am taking over a 4 unit at the end of the month and I already sat with the tenants and showed them what units very similar to theirs are renting for and inform them about some updates that I was going to do with the building after that they where understanding and okay with the increase...now if your tenants are not.. hey let them go to the next landlord and you bring new ones in that will expect to pay the market rent

Nate Arrington · Answer

@Michael Taylor Sorry I don’t have any experience with this, but I’ve had a similar question of how to handle raising rents when buying a property with tenants. Let us know how it goes!

Michael Taylor · Answer

@Shawn Stiteler, I will let you know what works.

Michael Taylor · Answer

@Darius Ogloza, I was told that he has been there 13 years and that his family is moving. Looks like they did a complete building upgrade during that time period, but now he has to move. My guess is that since he and his friends did most of the work, he only wanted what he put into the building, so the agreed upon price is very good for me. I don't know if the tenants are new immigrants or what, but yes they are very low.

Darius Ogloza · Answer

Michael: hard to believe that the old owner went to the cost and trouble of rehabbing the property if all he/she was getting were 50-60% of the market rental rate - that seems peculiar. Could there be some other explanation for the low rental value there? Have you asked the old owner or the old owner's agent? I would continue to kick the tires on that issue, It could very well be that you are right but it would be terrible to misjudge this issue.