When rents are too low

Question

Hi  everybody,

I am still learning and have a question about how to handle a situation:

I looked at a listing for a duplex and the published rents seem low for the area.  Assuming the property condition is good and that the rents are too low,  how would a buyer handle this with the tenants in place who have been getting a good deal?  Say that I want to buy and raise rents 20% to market level.   It seems like a rough thing to do.   How do these things work out with giving notice and how do you make them happen in a decent way?  I see some listings described as "tenants want to stay".   Curious for insight / experience.  Thanks!!

Roy N. · Answer

As  Justin S. indicated above, I too like properties were the rent is under market and the price will be lower ... of course, you need to offset this with the deferred maintenance that accompanies this scenario most of the time.

If the tenants are desirable, then we set down with them as the earliest possible time and layout a schedule for bring their rent back in-line with market.   We acquired a triplex last year where the rent had not been increased in 16-years.  There was a long-term tenant (8-yrs) in one of the units.  Originally, we thought we wanted to be rid of this tenant (they had three dogs which had caused damage to their unit), but after a couple of months we realised these folks a) always paid their rent early; and b) would never likely qualify for their own mortgage.   We sat down with them and laid out a schedule where their rent would increase by $25/mth every 6-months over the next two years.   They were relieved the increase was not as drastic as they anticipated and delighted they would not be compelled to move.

In cases were we do not wich to retain a tenant, we would increase the rent to market (or as much as is allowed) in one single jump.

In some jurisdictions you can request to take possession of a vacant building, which results in the existing tenants being served notice when the deal goes firm.   We have never exercised this option as, to date, our preference has been to acquire a building with a revenue stream in-place.

Bryan Hancock · Answer

You have already received great advice in this thread.  I would be a fan of moving the rents up to market level as soon as you can.  You do need to honor the existing leases so that will be important to understand when you purchase the place.  I would also suggest getting estoppel certificates as a condition to purchase so you establish with the tenants what the rent should be.

Mathew Wray · Answer

Karen, I agree with Joe B. The rents should've been raised for years and the fact that they haven't isn't your fault. In fact you should use it to your advantage in negotiations and see if you can get a better deal.

I've personally been on the receiving end of a 30% rent increase when a property I lived in was sold. It sucked. But the place was nice and we had been getting a great deal so we paid it. And on the other end of the spectrum I had to evict two tenants as a condition of purchase (they were on M2M) because I needed to gut their units to bring them up to market.

Just plan for worst case, that both tenants will move out. If they're on an annual lease and you want to be kind let them know as soon as you take possession so that they can plan for it. And that way if they do go it isn't a shock and you've got it built into your reserves.

Good luck!

Mathew

Justin S. · Answer

Use the lower leases to your advantage. In real estate investing, you are buying based on cash flow, so if the previous owner mismanaged the property, and rates are that low, you should be able to buy the property at a deep discount. Many of the properties I've bought have been mismanaged, I try and not have the tenants pay for the mistakes of the old owners. As stated above, if they are good tenants, then slowly move the rent up. If they're bad, get them out as quickly as possible, and you can raise rent very quickly.

Ned Carey · Answer

Keep in mind you need to honor the existing leases. Make sure you get copies.  If they are month to month - no problem. If they have a year or more to run you will be stuck with those low rents for a while.

If the existing tenant are otherwise good you may want to move up the rents gradually. That my net you more money than removing them and having the cost and time of getting new tenants.

Joe Bertolino · Answer

You notify them of the rent increase at the end of their lease and they typically move if they can't afford the rent.  It's business... and it is why you should have a reasonable rent increase built into your leases every year so you are never 20% under the market.

Kyle J. · Answer

The existing lease goes with the property (and the current tenant).  So you may not be able to immediately raise the rent, even if it is below market value.

However, once that lease is up (or if the tenant is month to month), you can then notify the tenant of the new rent amount (as long as there are no local rent control ordinances that would otherwise prevent you from doing so).  The tenant will then have the choice of either signing a new lease at the higher amount, or moving.

Matt Devincenzo · Answer

First it depends on if there is a lease in place and the terms of that lease, so ask the listing agent for that.

If there is a lease in place you'll need to abide by the lease and can raise rent when it expires. Also if they are that low it could be a LL shoving anyone in a unit to get it rented prior to sale, so ask for a copy of the application especially if they are new tenants so you can verify how likely you might be to have to evict.

If there is a month to month lease then you need to give notice based on your state requirements and then you can raise it. Often tenants know they have a sweet deal so may not move over the increase if you're reasonable. I would raise it by 10% or $50 max whichever is lower, at a time depending on your actual rent range. This way they can gradually adjust to the new rent and likely stay in the unit.

Finally a way to entice your tenants to stay is to give them a nice little "new owner" gift and the rent increase together. Something like a free carpet cleaning, new light fixture or blinds, something that stays with the rental but makes the tenant feel like you care at the same time.

Search up top, there have been a lot of threads on this before with tons of information and ideas....which reminds me search for estoppel agreement too that makes sure everyone is on the same page about the lease terms.

When rents are too low

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