Should I keep inherited tenant?

Question

HI BP,

I am currently looking at buying a single family rental property that is currently rented. I personally know the person that owns the property and am close friends with him. He has informed me that the tenant has never missed a payment and has not caused any problems. When I looked at the house they kept it very clean. However, the property currently rents for $850 and market rent calls for at least $1,000. I know that the tenant currently makes $33,144 gross a year which would be $2,762 a month. This would not meet the 3X monthly rent rule at $1,000 a month. Do you think I should not renew the lease when it is up in April and find a new tenant or since it is very close to the 3X monthly rent rule let it slide?

Thank you in advance for everyones help with this decision.

Matthew Hutchinson · Answer

Hi Brady,

If you are looking at it from just from a dollars and cents perspective then you should keep the tenant.  I am going to guess that you have checked the comps for the neighborhood the house is in and you have found other houses for rent at the market rate?

If the rent payment covers your mortgage and you have a good tenant, why would you get rid of them to take on the expense of unit turnover, because you will have to do one, and the 5% vacancy loss just to increase your rent $150 per month?

I would also find out from your friend if they have increased the rent since that tenant has been in the house.  Instead of getting rid of of the tenant - increase the rent slowly.  At lease renewal increase the rent $50 per month and then the same the following years until it is at market rate and more than likely the tenant will leave on their own and you will have still gotten the rent for that entire time until they moved out and built up your reserves for that property.

Peter Mckernan · Answer

Let's talk about this directly as a business decision. As a new owner, you should confirm if you can raise the pricing on the rent, and do that accordingly to the laws. This does not matter if the tenant is off a bit on rent and income. I would raise the rent.

The first thing prior to this would be to verify this is a good tenant, check the lease, and confirm with the owner with a payment ledger that they have been paying on time since they have been there. Even if you know the owner like a brother, you need to do your checks and balances. Tenant estopple is a great place to start while you are in escrow, if you have closed escrow and did not do this stuff, you cannot backtrack. I would verify as much as possible which is looks like you know income on the tenant and maybe some other stuff too.

Matthew Becker · Answer

I would keep them at least until the summer because it is not great to lease in the winter.  Get someone on a June to June or Aug to Aug.  Leasing things in the winter is much more difficult.  People move in the summer.  I have rented to many tenants who do have 3x income.  If they have a good payment history then I would renew.  Raise rent in summer.  Also help them find a job that pays better than a 16 year old can make.

Drew Sygit · Answer

@Brady Ascheman rents are flatlining or declining in many areas of the country. Making long-term tenants even more valuable.

Show the tenant what market rent is and ask them what a fair increase would be.

Adam Bartomeo · Answer

We use a 2.5 multiplier. In today's market it will tough to find a tenant at 3 times. Either way this is just a metric to help guide you, with this tenant you already know that they are a good tenant. We give our proven tenants some slack when they are upgrading since we already have a proven record with them. You are best off to raise the rent and give the tenant the option to stay.

Also, I hear a lot on here that "rents should be", "the potential rents are"... make sure that you do your due diligence when calculating potential rents because most new owner OVER estimate them.

Caria Mitchell · Answer

Consider this scenario;

You reach out to the tenant and decide to move on, you give them 60 days to move. Scenario 1 they don’t or refuse to move- eviction costs and/or lost rent

Scenario 2 they move out and Cap ex and turnover costs, lost rent, advertising for new tenants in a somewhat of a qualified tenant shortage, headaches can be avoided by simply having a conversation with the tenant to see where their head is at, and that they understand what your expectations are. To sacrifice a good tenant, which is hard to come by these days in favor of higher rent, may not be the trade-off that you need or possibly want. I would have a conversation with the tenant, and then after that if you determine that’s in your best interest and theirs to seek out a new tenant give them plenty of time and make sure you leave amicably because in case you get more rentals and they are looking in the future, I have a higher income that relationship is sure to last, which means that you have guaranteed business in the future.

Kristian Sexton · Answer

@Brady Ascheman

To make the decision strictly from a Property Management standpoint you have to calculate your vacancy cost and cost to acquire a new tenant to know if a rental increase is even a smart play. April is a safe month to "play the market" if you will, because the market starts picking up as a whole then but, a good reliable tenant to me always seems better than making a few hundred more a month. Have you thought about meeting it in the middle and just raising it $50.00, so $900.00 a month? This would allow her to feel more comfortable with the increase, and to still meet the 3x rent requirement.

Another thing to consider is are you basing the 3x rent on her initial application? When tenant's get raises or switch jobs we don't always know. So you could also approach it from that angle.

V.G Jason · Answer

If $150 is making or breaking the deal, then there's other issues.

They could be great tenants, just never know how they will be going forward. I would recommend keeping them, and gradually increasing rent on par with market increase + 1 to 2%.

You could get a better qualified tenant, but they could be worse with money management, property respect, etc. There's too many risks even with that.

Nathan Gesner · Answer

The 3x rule is just a rule of thumb. Some people make 4x the rent but squander their income on eating out, drinking, car payments, etc. Others are responsible with their budget and can stretch a dollar.If they are excellent renters, I would offer them the option to renew and let them make the choice.