Inhereting a tenant with purchase of a duplex

[Phillip Dakhnovets]

Today I closed on my first investment property, which is a duplex in a small town in the Midwest. The house is the ugliest one in the 2 block radius and is located near a small liberal arts college. I can not rent to students, because the college requires them to live on campus all 4 years. However, the area around the university is really well kept

The closing price was $83K, so my monthly payment (principle and escrow) is right under $500.

I plan to do a lot of work to the house ($15,000 worth of improvements) and bring it up to a “good rental product” status, as I believe a well kept property will attract better tenants.

The house came with a tenant on one side, who pays $650 every month. They are occupying a 4 bedroom, 1 bathroom side of the house. The tenant is C+, because during the Inspection their side of the house smelled like cigarets, the carpet was distorted, and their dog ate bathroom laminate. Their lease ends at the end of the month, but they expressed interest of staying longer. The old owner said the tenant is some times few days late on the rent and is not taking a good care of the property.

Talking to local real estate investor, he believes the 4 bed/1 bath unit can rent for $800-850 after few cosmetic repairs. The other unit(currently unoccupied) is a very spacious 2 bed/1 bath and can rent for $700-750.

All in all if everything goes right I plan to collect $1300-1500 a month in gross rent.

My dilemma is whether I should keep the current tenant, and ask them for a drastic rent increase while fixing up their side, in the meanwhile. Or not resign their lease and fix up their side, while no one lives there and put it on the market with hopes of attracting a better quality tenant.

Lastly, I am a “long distance” investor, as my job is located on the other side of the country, but my family lives about 45 minutes away and I expect to keep working from home at least till late spring. So I will need to set up property management process to keep the place in a good shape.

Please let me know what you think about the deal, and what should I do with the current tenant. Any advice is welcomed

Thank you all.

[Nathan Gesner]

The current renter is not a good renter. They smoke, they pay late, and they've damaged the property with their dog. Get rid of them. Tell them you want them out to renovate and that's that. No debating, no discussion, no alternate options.

While you are renovating it, educate yourself on how to properly screen renters. I also recommend you really study the market to ensure you're charging market rate. Many REALTORS have no clue what something will actually rent for; they just pretend they know what they're talking about to tickle your ears and make the sale.

I would also recommend you be very careful with using family or friends to manage the property. They have no vested interest in it and may do a terrible job, which is a great way to ruin your investment and your relationship. Instead, consider hiring a professional property manager. Yes, it may cost you 10% of your income, but they may also be able to charge higher rates, get better quality renters, and you can save a ton by not making mistakes that cost thousands.