When the bones are good but the tenants are not...

Question

We looked at a place today that was interesting. It's in an area we are looking to get into, the price is right, and it's a side by side duplex, each 3 bed/2 bath. It's an older character home, semi-detached style, and a lot of great features - high ceilings, crown moulding, and a lot of upgrades (roof, both furnaces, all wiring, and insulation under the energy rebate a few year ago).

Anyway, we walked through one unit and it was disgusting. Bongs on the table, clothes, food, garbage everywhere. I couldn't take a full look because I was just so uncomfortable in the space. I know I need to get over this part to find those diamond in the rough properties, and I see it in this one.

I have two questions:

1) For the experienced real estate investors, how do you detach from the emotion of walking into a space like that. I can see beyond the mess, I loved the bones and features of the house and I can see the potential. But the emotional part of me felt so uncomfortable in the space, and wondering how people can live like that. We've never had tenants at this level (lucky I assume?) but I know if I want to take our REI to the next level, I need to get over this. Any tips?

2) If we buy a property with a tenant like this, how do we get rid of them? In this case, we'd like to get rid of this tenant, upgrade one side, rent it for more, and then do the other side when the other tenant eventually moves out (our plan is to BRRR this one). Is there a way in Ontario to do this?

Would love any more suggestions from those who have BTDT.

Kristina Heimstaedt · Answer

I'm going to echo @Jacob Perez's comment that if you feel uncomfortable in the house, so do other people. You just need to do the math and love the numbers more than you care about the queasiness in your stomach.

It sounds like Ontario might be a little different. We have been in similar situations in the past and we mitigated the issue by offering to return the entire security deposit, no questions asked if they moved by a certain day. You'd be surprised how quickly people are willing to move for that. Also, if you plan on remodeling that unit, you don't necessarily care about the condition that the previous tenant leaves the property. You're going to more than likely gut the kitchen, bathrooms and floors and paint. That just about covers every inch of a property. Expediting access to your property is more valuable than dealing with an eviction or otherwise.

Side note, if a thread doesn't already exist, there should be one for the scariest things you've ever seen when shopping for real estate. I think that would help people get past the queasiness and focussed on the numbers especially if someone bought the property.

Best of luck, I'm sure you'll do great!!!

Thomas S. · Answer

In Ontario you can not terminate a lease other than for personal or family use. You can terminate to do renovation work if a permit is required and the tenant has the right to exercise their right to return at the same rent they are paying when they move out. The tenant must put in writing at the time they move out that they wish to return when the reno work is completed. The best way to dissuade tenants from wanting to return is to not commit up front to any time line on the renovation.

You may not evict unless a tenant is in violation of the RTA. Good luck succeeding at that for other than non payment of rent.

When purchasing a seller may ask tenants to leave but can not force them to leave. Only the new owner, after taking possession, my evict for personal use. Assuming you are financed as a owner occupied you are required to stay a minimum of one year but it is very common for investors to lie. As long as the bank gets it's money they do not care but it is mortgage fraud and a small risk on the investors part.

As for emotions.....No place in business for emotions. You need to adjust your thinking, especially in tenant friendly Ontario, if you want to survive in this business. Emotions are a handicap you must leave at home.

Matt Geerts · Answer

"For everything, there is a right price" :)

Jami Kloet · Answer

@Matt Geerts You are totally right. Apparently both tenants have been there for four years. The rents are $900 and $940, it's just a different type of tenant than we have dealt with in the past.

We spoke with the owner over the weekend, and we are going to look at it again this week, and and then we will have to decide if we're up for it, and for what price.

Matt Geerts · Answer

An easy first step is to make it someone else's problem. Submit an offer with "vacant possession" in 60 days after the next first of the month. If the seller can negotiate it with the tenants, you're golden. Make sure you word it such that you have N11 forms signed.

Otherwise you have to try to buy cheap enough that you KNOW you can negotiate the tenants out at a cost that makes it still worth it.

What's the rent and price? Maybe you can just wait it out. Pounce on their every failure to pay rent on time or upkeep the place as necessary.

Not all pot-smoking slobs are terrible tenants. If the rents are high enough and they're never late, who cares?

Jami Kloet · Answer

@Thomas S. Thank you. You have provided insight on a couple of my posts recently and it's very appreciated. As for separating the emotion, I do get it. This would be our fourth rental, but my first experience witnessing this state of disarray. I do know I need to get over it, but I am sure I'm not the first to have try to separate the two, so advice is helpful.

@Jacob Perez and @Kristina Heimstaedt sounds like my thinking is on the right track, I just need to shake off the discomfort.

For these units, it would be new kitchen/bathrooms, and paint. We'd like to do the side I'm talking about first, while the other side remains occupied. The numbers are really good on this one, and I do like the building. I just need a strategy to deal with the tenant.

Jacob Perez · Answer

@Jami Kloet

To Answer #1 - Here's the thing. Those types of properties are great opportunities for a lot of reasons. One, obviously reno will force appreciation but also, when people walk through a property they want to feel good. Investing is about your gut as well as the numbers. If you're feeling that way so are others, the person who had guts will win the deal.

After 6 deals, I've done 2 deals where I loved the numbers but felt terrible about the house. Those have been my hardest properties to get moving, but once up and running have been my biggest ROI deals.

#2 - In terms of evictions it's not always impossible. My last deal was a 4-plex with 4 nightmare tenants in each unit. The prior landlord tried to evict them and was unsuccessful - Within 1 month we've vacated 3 of 4 units.

It's a long story how we did it but having to get rid of tough tenants is a challenge but also another opportunity to find value. Feel free to PM I can provide more details about how we did it. Just a lot to type.

Jami Kloet · Answer

@Roy N. Thank you for the response. We won't be moving into this one, nor will a family member. I think the new rules in Ontario also require that you occupy the unit for at least a year, but I would need to take another look at them.

I think the renovation would be significant enough (new kitchen and some other work that needs to be done) but I do think first right of refusal does need to be offered if we were to take this path.

The property is being sold by another investor who is unloading his multi units, and he does run a property management business. I am going to talk to him about it.

Roy N. · Answer

@Jami Kloet

Here in NB, if you, or an immediate family member, were planning to take-up residence in half of the building, you could ask for that unit to be delivered empty ... I thought that same condition existed in the Ontario Residential Tenancies Act (@Thomas S. would probably know).

You are also able to evict the tenant if you will be undertaking a renovation significant enough that the unit must be empty ... however, in Ontario, you may have to give that tenant first right of refusal to move back in (It's been a while since I've read that section of the act).

When the bones are good but the tenants are not...

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