Inheriting Tenants in Multifamily - what would you do?

Question

Hello all -

I will be closing on a quadplex in December and am curious what you would personally do in my situation. I've already done my research so I know what all of my options are but want to weigh in on what other landlords would do in my shoes. All tenants are on month to month leases so I really have a lot of freedom here.

Situation:

Three of the four units in the property that I'm purchasing are under market value for rent.

- 1 bedroom currently at $390 ---> market rent $440 (tenant longevity 6 years - immaculately kept apt)

- 2 bedroom currently at $495 ---> market rent $550 (tenant longevity 5 years - immaculately kept apt)

- 3 bedroom currently at $650 ---> market rent $750-800 (unique tenant situation; no lease, 3 dogs, 4 kids, no deposit, pays rent in cash)

- 1 bedroom currently at $465 ---> at market rent (tenant longevity 1 year - immaculately kept apt)

Additionally, the current owner is paying for water and gas for the entire building (each unit has its own electric meter). After looking at their utility statements from last year - they're averaging about $400/mo in utilities (obviously that fluctuates significantly depending on winter/summer).

I realize that I'm going to have to 're-train' these tenants no matter which route I go but what would you do?

-Raise rent and start charging RUBS for utilities?

-Leave rent as is and start charging RUBS for utilities?

-Leave rent and utilities as is and raise at a later date?

-Other?

I don't think I would have any problem filling the units if people decide to leave as these are some of the nicest apartments I've seen in town. But I don't want to be left with an empty building right after I take possession, though, because even if I leave everything as is (utilities, rent, etc) I can still cash flow about $650/mo. BUT if I raise rents to what I've suggested above and start billing for utilites I can make an extra $600ish a month. That's a heck of a lot more cash flow!

So, if you've made it this far, thanks for reading and I look forward to hearing what others would do here :)

-Amelia

Will Gaston · Answer

@Amelia McGee I have bought dozens of units with inherited tenants and it is incredibly rare that it has gone well. In fact, I hate it. I'd rather buy a completely vacant property and seek those out. The previous owner has trained them to behave a certain way and that has rarely matched the way I do things.

My instinct is for you to let the tenants know politely and firmly (in writing) how you will be handling and managing the property and that the rents will be raised to market level. They can make the decision for themselves if they want to stay or not under the new terms.

Appreciate a long term tenant but don't be fearful that you can't get a new one at market rates.

Conner Matney · Answer

@Amelia McGee

A lot of great thoughts here.

I recently inherited tenants as well. The seller didn’t provide a move-in/out inspection checklist so I had the tenants fill one out when I notified them of my purchase. That way I could establish a baseline of the current maintenance situation and avoid more problems at move-out

Simon W. · Answer

Hi @Amelia McGee - Looking at the numbers, only the 3rd tenant with no lease and 3 dogs. I would raise the rent since that is the one you losing out the most in market rate.

As for the utilities, I would charge them for their usage. If they don't want to, evict and get new tenants. Adjust the lease agreements to the market rate and tenants pay for the utilities

Patricia Steiner · Answer

You're running a business - and maximizing return on investment is what all successful businesses do.  I recommend raising the rent to market value and assessing for utilities (why would you pay for something you don't control or use?).  I would give 30 days notice of the increases and share that the increase reflects the current market rent.  I don't do month-to-month leases so I recommend having the tenants sign new leases for a longer term.  You might want to consider giving a discount on the rent if they sign a lease for 6 months or longer.  Even offering a 10 or 15% discount would increase your return and stabilize your tenant base.

Congrats on your acquisition!  Hope this helps...

Jeff Dellitt · Answer

If you are concerned about a mass exodus, you can phase in both prorated utilities and market rents.  I would start by giving a termination notice on the 3 BR immediately.  Clean it up (three dogs!) and rent it out at market rate AND prorated utilities.  For the tenants that have been there for 4-5 years, it might be too much to raise rent AND make them pay for utilities at the same time.  So, I would probably do one or the other, probably pro-rate the utilties.  Since Apt 4 is already paying market rent, switch that one to prorated utilities also, so the whole building is switched at relatively the same time.  Then, if you have any vacancies from your 4-5 yr tenants, you can either raise the rent at that time, or raise it down the road.  Congrats and good luck!

Johann Jells · Answer

At least you're not stuck with them like I am in NJ. But I'd like to point out that the cost of the utilities to you isn't what's on the bill, it's the difference between the bill and what you build into the rent. I eventually realized this when considering what it would take to break out the heating in a 4U I bought with a steam boiler or the insane cost to replace it with individual systems. Assuming there's one heating system, it seems to me so not worth the effort and hassle of trying to break up a gas bill between the tenants every month rather than just get it right to begin with in the rent. Nobody around here bills tenants separately for water. It's part of the overhead.

Louis L. · Answer

I would also consider the fact that the tenants probably speak to one another, so I would be careful in doing anything to some and not others. As a business decision, raising all to market rent sounds nice, but you may find yourself with an empty building if you push it too far. I'd increase them all to a degree, but the actual amount would reflect how long they've lived there, whether they're a tenant that has a lease etc.

Also, I once had this issue where tenants subletted to new occupants before I bought a property and they wanted their security deposits back, which was a strain/problem to deal with.

All in all, I think it's a balance of being fair to the tenants as a group as well as making them understand that you have to pay your bills as well, and they have to abide by it so you can run your business.

Amelia McGee · Answer

Great points! I like the idea of phasing into it. I think because I'm able to still turn a profit without raising rent, it's best to slowly raise rents but implement utility RUBS immediately. That way I'm not stuck with an empty building in the middle of winter in Iowa.

Inheriting Tenants in Multifamily - what would you do?

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