Buying house with tenant inside that pay half the market rent

[Noyessie Hubert]

HI All,

State: New Jersey

Quick question. I have 4 identical units of property where all the units need a little work to be on top. 3 units are occupied and 2 of them are paying way below market rent. They are currently paying $1050 and the current market rent is $2000. As you can guess, they have been there for a very long time now ( almost 5 years as I heard ).  And one of them is paying $1600 on a month-to-month lease.

What will you do In this case? Should you evict them? should you try to negotiate a new lease with them? 

Just for more details:
- At the current listing price, my monthly payment on the property will be $6000. I'm using an FHA Loan. I may switch to a 5% conventional loan to avoid the risk of failing the self-sufficiency test. Still looking for one.

- the current rent will be around: $3700

So we will have a difference of $2300 + additional fees like garbage, cap expenditure, rehab loan for the 4 units ( around $350 per month ) and others. Let's say almost $3000.

Thanks for your help.

[Alecia Loveless]

@Noyessie Hubert Last year I purchased an 8 unit where the tenants were paying 50% of market rent.

I just went for it with gusto and sent them all certified letters notifying them of the rent increase. Most were paying $575 and market rent was about $1100. I raised the rent to $800 because I was planning to transition the units to paying for their own heat so a lower rent amount was fair.

I sent out the notices to the tenants that were on month to month leases because you have to honor existing leases. 1 moved out and 4 stayed.

Over the course of the year I raised the other 3 units as their leases expired. I’ve had a turn over of 4 units which has allowed for upgrades and renovations.

If you do decide to raise the rents considerably I would suggest staggering it so that you hopefully only end up with one vacancy/renovation at a time.

You will never get market rates if you only raise it 3% or 5% or $100 here and there.

When I first raised rents I kept everyone month to month because I hadn’t selected those tenants and wanted to see how they would be before signing a year lease. The new tenants that I chose all have year leases.