Purchasing an property with tenants with bad history - Advice?

[James De Silva]

Hi BP. I'm looking at duplex property in Oakland county, Michigan which has tenants in it. The tenant has been there for 3 years and they have been consistently late at paying the rent. I would say at least 75% of payments are late by a week or two, but they do get paid eventually.

That said, the last two payments have not been received according to the ledger. The second unit has a brand new tenant without any rental history on him. This could go either way, but given its the same property manager, it's quite possible this is the same poor quality tenant.

However, the number on this duplex property are still quite attractive. I think it's running at 20% cash on cash if I finance 75% and 9.5% cap rate. So I'm wondering what you'd do in this situation and what you'd think about. Would you evict the older tenant? This is meant to cost about $2500, which I could negotitate down from the seller. Or would you skip this property altogether?

Numbers: 

Ask price: $95k

Property tax: $2040/yr

Insurance: $50/month

Utilities - paid by tenant

...

All expenses

Rents: $635 and $500 - This is below the rents I've seen anywhere else in the area.

[Geetika Casmon]

Have you considered asking the seller to have tenant removed as part of the sale? I had a situation and we asked the seller to have the unit vacant because we didn't want to deal with someone we had no relationship with and go through legal proceedings. In our case we were going to live in the units so it was required anyway or we weren't going to make the deal. But the seller can try and pay the tenant to move out which will save you a lot of hassle.