Just Closed - What to do with lease on existing tenant?

Question

Hi BP,

I just closed on my first property last week! A duplex in Union, I'll be house hacking this property and living in one of the units.

There is a tenant that I'm inheriting from the previous landlord. During the purchase process, I was provided with the current lease and rent roll. The tenant has been there since Jan 1, 2020 and I have pay statements showing that he has been paying on time. I will be keeping the tenant.

He is currently living in the top unit, a 1 bedroom 1 bath apartment paying around $1400 a month. His current lease from the previous landlord is a month to month lease with at least 45 days notice to vacate.

Prior to this current lease, he was previously on a 1 year lease. The landlord gave him the option to renew another 1 year lease at the same rent or renew on a month to month lease at a higher rent. He opted for the month to month option.

As the new landlord, what should I be doing after moving into the property? Should I be providing him with a new lease with new lease terms? Where would I get the new lease? I would like to increase rent to $1500 as this is closer to market value. What would be the best method for collecting rent at the start of the month (should I use software or Zelle)? He's was previously paying with money orders to the previous landlord.

Thanks in advance!

Greg Scott · Answer

First of all, you should be providing the resident notice that ownership has changed.  Instruct them where and how to pay their rent. Be sure that is aligned with the provisions of their lease. If you want to change how payment is collected, you'll need to give them some advance notice.

From there, how you proceed is more up to you.  If you believe market rents are $1500, you may want to present them with a lease at $1500 and notice that the MTM rent will increase to $1600.  Of course, there is a risk they will move out, and then you will have to rehab and re-rent the unit, so you might not want to go that high.  As a business owner, you need to decide which path is best for your business.

John M Chludzinski · Answer

Congratulations!  As to your lease question - be 100% sure you use a NJ compliant lease for this.  If you are a newbie, you might want to have the attorney you used for the closing (if you did use and attorney) give you a PLAIN LANGUAGE lease to use.  Then you can reuse that for future tenants.  A REALTOR lease must include provisions about attorney review that you as a landlord do not need if you are not using a Realtor, so stick with the plain language version.  There are also forms for the required window guard notification, and a new one coming up for 2022 for radiator covers if your unit has steam heat. There is also a requirement for lead paint disclosure now, that will be changing for 2022. The most useful info you can find is on the NJ Department of Consumer Affairs search for the Landlord-Tenant Handbook. Good Luck with the tenant and the property!

Amy Turnbull · Answer

I just download whatever is free on the internet for a lease but it's a headache getting it into Docusign so I would follow the advice of the guy above who uses TurboTenant.

Kudos to you for not raking your tenant over the coals with a sudden increase in rent. I feel a $25 increase every year is fair.

Harry Arnold · Answer

Congrats on your first property! The first one is the hardest and you’ve done something that 99% only talk about! Good for you. I’m in Monmouth county and the rental market is super tight. I don’t think you’d have a problem renting it for a lot more if the current tenant doesn’t want to pay the extra $. Also, the rehab you’d have to do to get top dollar would be minimal. I recently rented 2 places - received 50+ applications within 2 days and receive more rent than I asked for. There’s very few rentals out there.

I use my attorney for leases. It costs about $400, but there’s a reason I spend the money. I get free advice if I need it during the tenancy, and he has skin in the game if I need to evict for some reason. I look at the $400 on each unit as a good investment. In your case, you may be able to go back to the attorney you used to close and ask them. They may even do it for free.

I’d wish you luck - but, you don’t need it! The investor itch will start in a few months and you’ll be on to #2!

Harry

Joe Martella · Answer

I purchased a SFH, in July of this year, that was rented for $850 a month. The purchase price took the low rent into account. The market rent is $1,200. the tenant (single mom) was living there for 6 years and tenant had kept the property in great condition. I made sure to go to inspection prepared with prospective leases. I gave her a 3-month lease for her current rate of $850 that ended in September and then gave her a 12 month lease that started in October for $900 a month. I told her that she should expect a $25 to $50 a month increase per year until it gets her to market rent.

As for the leases I use. I got my leases through TurboTenant.com.  I think it was $30 and I had the word document that I could reuse.

Paul Camuto · Answer

What is the market rent for the area? Find out what others are leasing for? What is the cost of having to find another tenant in trying to get an extra $100 a month. Definitely get away from Money Orders. All digital. Apartments.com has a great free system.

Daljit S. · Answer

@Amy Turnbull @greg

@Greg Scott

Thank you both for chiming in here! All the points that you've made are great. I do have a follow up question - where do you typically get your leases from? Do you have an attorney draft one up for you? or are you using the local leases from being a BP pro member (I'm currently not a pro member)?

Amy Turnbull · Answer

My lease agreement with one of my tenants in Dalton, Massachusetts reverted to month to month about a year ago. I politely reached out to her recently to let her know I will be increasing the rent by $50 a month in June and gave her the option to sign a new lease or remain month to month. Leases make it easier to track rents if/when you want to sell, otherwise you will have to provide proof of payments (rent rolls) to the buyer's lender, usually through your bank account. I use Venmo, which my lender didn't like at all, but Zelle goes through the bank so you should be okay.

Just Closed - What to do with lease on existing tenant?

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