Buy/Rent boost - Prop. below rent w/ tenants - raise after buy?

Question

Hello Everyone!

I wanted to throw out a question that has been spinning in my head for a bit.

I'm looking to make a move on a couple of duplexes or a 4plex in the area.

The majority of them have tenants and all are below rent (some severely) due to "long term tenants." As they claim.

Is it taboo to raise rents following the purchase of the property? Do you need to honor the original lease?

If you can, how do you go about it?

The typical rents right now are $300 to $600 below current. So these wouldn't be minor adjustments.

Side note: some of the properties could us work which I feel could justify the rent changes.

Looking forward to hearing from everyone!

Kenneth Garrett · Answer

@Niccolo Fazio

It depends on your state law, but most will require you to honor the current lease, once it ends then you can raise it. If there on a mtm lease you can give them a 30 notice about a rent increase.  I would limit on much you increase it at one time.  Vacancy kills cash flow.  If you lose a tenant or two then it probably wasn’t worth it.  Increasing rent incrementally over time makes sense.  Of course making improvements justifies the increase.  Lastly the tenants have to be able to afford the increase as well.

Adam Martin · Answer

If a unit is that drastically underpriced depending on the rent I don’t think it would take long to recoup the vacancy aspect.  The issue I could see though is if these need work and how much would it cost you to get to market rent and to recoup those costs.

Nathan Gesner · Answer

You have to honor the existing lease. If they are on a month-to-month, you have to give appropriate notice of termination, rent increase, or any other changes to the agreement. Usually 30 days notice is sufficient.

$300 below market is almost $4,000 per year. Mulitply that by four units and you're "gifting" each renter $4,000 and losing $16,000. If you want to be charitable, I recommend renting your units at market rate and then donating the money to people that really need assistance and that will appreciate your generosity. Or you can just make the check out to me!

There's a very good chance the current renters can't handle an increase to market rate. Your best option is to terminate them, clean the units up, and rent them at market rate. The markets are on fire across most of the country so you shouldn't have that hard a time renting them. If you're concerned, turn over one unit at a time. Big increases on existing renters, even if it's done incrementally over time, will result in animosity and problems down the road.

If you have an existing tenant that insists they can afford the increase and they want to stay, ensure they are a quality renter first! Verify they pay rent on time EVERY time, maintain the rental, no lease violations, etc. Many renters will claim they can afford the increase but they can't. Many will say they can afford it even when they can't.

Niccolo Fazio · Answer

Account Closed : All great information!

Adam -  Fortunately the doors don't need too much work (some of the buildings at least) to warrant the increase. But, if they are to stay with the property I would do some work to justify it to them.

Dewayne - I completely understand and agree that a paying tenant is almost always best and with today's environment it may be difficult to get new tenants. However, the "missing" rent per year is thousands of dollars. It is likely that the previous owner kept the client with 0 increases to stray from Vacancy over the years. Overall a good negotiation point when purchasing, just a hurdle to overcome in the long run.

Thank you all! Any additional assistance is appreciated. Looking to buy my first rental property here in Dallas Tx now that I am a licensed Agent.

Account Closed · Answer

All good advice. And when you think about how much rent you’re going to raise it, if you do the numbers and how many months at a higher rate just to get back to where are you would be if you left it where it is Most likely you’ll find it’s over a year. Not necessarily a good thing especially if you factor in the cost to get it back on the market and rented and the time it takes. I typically would do a small rent raise, after actual races in insurance taxes and any utilities I furnish +1% for my general operating fund.  I Prefer that they be on a lease. Wile they can walk from lease it tends to make most people not leave. I prefer that they be on a lease. While they can walk from a lease it tends to make most people not leave. Just think that acMTM not only helps you raise your rent Anytime you want but it also makes it easy for residents to leave on short notice oooh that dreaded vacancy is up on you Just a thought

Steve Morris · Answer

Is it taboo to raise rents following the purchase of the property?   No, but it won't make you popular.  You'll have to honor existing leases (very few exceptions) and follow statue (like if you're only allowed a 10% increase per 12 month period).

Do you need to honor the original lease?  Yes, 99.9% of the time.  You can do a change of terms mid-lease if it follows statute and you/tenant accept it.  An example would be they're halfway thru a lease and you want them.  You tell them we do a 2 year lease and I'll only increase by 5%.

Cameron Whitehead · Answer

@Niccolo Fazio just have that conversation with the tenants and let them know this is not market rent tell them what you think is a fair market price. I am going to be doing that on a triplex I have under contract. I’ll let you know how it goes..

Niccolo Fazio · Answer

@Kenneth Garrett

Thank you for this response. I had a feeling there were laws around it, but wanted to be certain.

That is a good thing to know with MTM leases, though.

Yes, vacancy is a killer... it is just crazy how below market some of these rents are.

I was planning on doing a re-qualifier survey to see if an increase could be handled by the tenants. Obviously not to kick them out, but see what the range would be.

Truly a lot to think about - thank you!

Buy/Rent boost - Prop. below rent w/ tenants - raise after buy?

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