New to Real Estate · MA · Member since 2020 · 36 posts · 23 votes
Hello,
I am interested in a four-family property, but all the tenants are currently paying under market rent. It would still cash flow enough to stay afloat with the financing that I am using, but they are paying roughly 80% of what they should be paying. Has anyone ever bought a property with existing tenants who paid under market rent? If they are tenants at will, how would you deal with this situation? Is it worth the trouble to raise their rent, or potentially pay cash for keys for a replacement tenant who will pay market rent? I'd appreciate any input, thank you.
@Kyle Marsh Raise to or right under market rent. Be sure to give plenty of notice so they have time to shop around. Most of the time they realize it would be more expensive to move. They may leave but thats part of the business. If you give enough notice you will also have time to find new tenants before they move out.
@Kyle Marsh Raise to or right under market rent. Be sure to give plenty of notice so they have time to shop around. Most of the time they realize it would be more expensive to move. They may leave but thats part of the business. If you give enough notice you will also have time to find new tenants before they move out.
@Kyle Marsh Raise to or right under market rent. Be sure to give plenty of notice so they have time to shop around. Most of the time they realize it would be more expensive to move. They may leave but thats part of the business. If you give enough notice you will also have time to find new tenants before they move out.
This. And people need to stop with the cash for keys crap every time they feel bad about doing something tenants won't like.
Totally agree with Eric, cash for keys in this situation is unwarranted. I like to upgrade the landscaping. Shrubs, flower and mulch are cheap enough and a single day job for a landscaper. Shows tenants you care and makes them proud to live there. NY is 3 months notice for an increase which is what I give. Raise it to just below market rent and you have a good chance of everyone staying. Good luck!
Personally, I'd take it over first, work all the kinks out of the building. Do your upgrades and repairs and then, when everything is settled, you raise the rents. We took over a building last year in Stamford. Had to upgrade the HVAC, siding, electric and roof/doors/windows. We raised the rates between 10% - 35% on all tenants. Not to be mean or a nasty landlord, but to bring the building up to our standards and market rate.
It's going to take a year to stabilize the building. I wouldn't do anything brash until the building is stable. You want to have the money coming in to help with the building's expenses while Murphy's Law happens.
The question only asks about one side of the equation. Are you comparing your units to like units? Units that are in similar conditions? Generally units that are that far under market rents are under for a reason. Yes, it could be the last landlord didn't raise rents as they could have but it might also be because of the condition of the units over the years the tenants have been there.
Giving them time is always the right (and generally legal) thing to do but keep in mind when they go out and look at other units they are not just comparing price, they are comparing condition.
Maybe your units are in excellent condition and need nothing and raising rents is a no brainer. Maybe not.
I would consider the condition and the costs to you to get those units in similar condition to the freshly rehabbed units before you serve notice or talk to them. I would also consider the cost of vacancy, turn costs to get them ready for a new tenant if 1 or 4 of yours decide to leave. I would at least run the numbers and have a game plan for the worst possible scenario before you are faced with it.
Create a plan then work the plan thinking about the possibilities...including the one possibility that you raise the rents and all 4 happily pay it and it doesn't cost you anything. That is of course one of the possibilities.