Author Topic: Duplex Rental with Existing Tenants (Owner-Occupied)  (Read 777 times)

lexde

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Duplex Rental with Existing Tenants (Owner-Occupied)
« on: February 10, 2019, 07:48:37 AM »
Hi all, I am looking at purchasing a specific duplex right next to my work that will (1) subsidize my cost of living and (2) eventually become an income-producing property. First time property buyer but I did go through the process with an ex-SO and realize how much work maintaining and (minor) updates entail.

At this time, the numbers are as follows:

Purchase List Price: $239K
Comps: $225-250K
Planned offer: $220-225K
Rent for each 2/1: $725.00/mo
Market rent for area: $1,250.00/mo
Rent adjusted for property condition: $1,095-1,150.00

Property has long-term (5-year), quality tenants. One unit has a mother, large dog, and 2 children in school. One has a single guy who is very clean (unit is immaculate) and well educated but who gets out of school in 20 months so may leave at that time. One of them will have to move if I purchase the property as I am getting an owner-occupied mortgage. Mortgage/PMI/taxes will run about $1,650.00 with 3.5% down FHA.

The issue is that the rent is absurdly low for the square footage, location, and property itself. It's been semi-updated and is in standard rental condition, all tile, etc. I plan to make improvements to my side over the course of a year or so, and then when there is a vacancy on the other side I will move to the other side and do the same.

My question is: How do you tackle the issue of raising rent significantly to good, long-term tenants who have paid way under market? How do you decide which one to remove? Both are month-to-month and I have about 2 months to move in in order to comply with FHA after closing (if I close).

I want to be tactful and nice, but I can't change the math. This is going to be a second business for me, essentially.

The current owner owns free and clear but is in his 70s and wants out of the landlording game. So for him, he's making profit even on the $725.00/mo whereas I wouldn't even be able to make mortgage payments at that rate.

I'd like to rent out one side for at least $1,095.00 and live in the other in order to cut the costs. Eventually once my side is rehabbed, I can rent closer to market rate ($1,300 or so based on 2/1 with covered parking & separate driveway).

feelingroovy

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #1 on: February 10, 2019, 08:17:29 AM »
First, congratulations on the house hacking. We did the same thing--live in one side of the duplex and it has worked out very well for us financially. We stayed way longer than we intended.

We also once bought another duplex in a sort of similar situation. One unit was occupied by one half of a couple who had owned it. His girlfriend had moved out and sold it out from under him. The other unit was occupied by a friend who was paying $200 under market. Both units were in good shape on a major level but a bit tired. And one of them smoked.

We were simply honest but compassionate. We couldn't make the mortgage payments and make repairs at the rate they were paying. We gave them lots of notice. The smoker friend moved out but the previous owner stayed.

We did a lot of renovation to get the smoke smell out right away and spruce it up. Then found a renter. I think it was vacant 2.5 months. We learned quickly that you can't show it until it's pretty much done.

So you may find that one or both wants to move out. Be prepared to carry the cost of one unit for a couple months while you fix it up.

Your bigger issue is if they both want to stay.

BTW, are you familiar with the 1percent rule? Your numbers work for it but only at the low end of the purchase and the high end of the rent.

frugalone

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #2 on: February 10, 2019, 09:18:27 AM »
Do you want to live next to two kids and a dog? Sounds like a lot of noise. 

I have been a landlord for over 25 year and own duplexes and this situation creates a lot of noise.
Have them move as I am sure you will want to renovate a bit to make it your own.  When the neat guy's lease is up raise the rent $200, when he moves out in 20 months you can raise the rent to what you want.
« Last Edit: February 10, 2019, 09:25:41 AM by frugalone »

lexde

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #3 on: February 10, 2019, 09:33:32 AM »
First, congratulations on the house hacking. We did the same thing--live in one side of the duplex and it has worked out very well for us financially. We stayed way longer than we intended.

We also once bought another duplex in a sort of similar situation. One unit was occupied by one half of a couple who had owned it. His girlfriend had moved out and sold it out from under him. The other unit was occupied by a friend who was paying $200 under market. Both units were in good shape on a major level but a bit tired. And one of them smoked.

We were simply honest but compassionate. We couldn't make the mortgage payments and make repairs at the rate they were paying. We gave them lots of notice. The smoker friend moved out but the previous owner stayed.

We did a lot of renovation to get the smoke smell out right away and spruce it up. Then found a renter. I think it was vacant 2.5 months. We learned quickly that you can't show it until it's pretty much done.

So you may find that one or both wants to move out. Be prepared to carry the cost of one unit for a couple months while you fix it up.

Your bigger issue is if they both want to stay.

BTW, are you familiar with the 1percent rule? Your numbers work for it but only at the low end of the purchase and the high end of the rent.
I am familiar with the 1% rule! I am working on comps to justify even a possibly lower purchase price as similar comps sold for less, but several years ago, so it depends on whether the seller accepts those comps which would help my numbers even more.

Financially, the full payment will be about 1/3 of my take home, so it is doable but would not be fun for me.

As is, with a professional cleaning job and some interior paint, both sides are rental ready, so I'd be able to show immediately.

My concern is just how to determine who goes/who stays. I'd rather the single, neat tenant stay than the 3 people + large dog. Should I offer the rental increase to him first, and then to her only if he declines?

lexde

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #4 on: February 10, 2019, 09:34:45 AM »
Do you want to live next to two kids and a dog? Sounds like a lot of noise. 

I have been a landlord for over 25 year and own duplexes and this situation creates a lot of noise.
Have them move as I am sure you will want to renovate a bit to make it your own.  When the neat guy's lease is up raise the rent $200, when he moves out in 20 months you can raise the rent to what you want.
Yep. I have a large dog too and don't want to deal with a tenant with dogs. If single-and-clean-guy is willing to stay in his unit then I will be more than happy to let him stay. They are both month-to-month now so I would be able to initiate the increase as soon as I am able.

lexde

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #5 on: February 10, 2019, 09:36:45 AM »
Apparently the owner has a management company he uses to collect rent, but does his own maintenance? Not sure how that works out.

From the purchase-side, is there a date that I should request closing so as not to lose a months' rent from the tenant(s) while I give the tenants 30 days notice of ownership change/rent increase? Or should I factor in that he gets that month's rent in the closing price? Not sure how to navigate that end, but it's $1,450 combined, so not peanuts.

feelingroovy

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #6 on: February 10, 2019, 10:11:16 AM »

From the purchase-side, is there a date that I should request closing so as not to lose a months' rent from the tenant(s) while I give the tenants 30 days notice of ownership change/rent increase? Or should I factor in that he gets that month's rent in the closing price? Not sure how to navigate that end, but it's $1,450 combined, so not peanuts.

Just ask the current owner to give them the letter of notice of the rent increase 30 days before the closing.   In my state closings take more than 30 days. If you are in one of those nice states with  2 week closings, then you may have to request a closing date further out. Before the closing, all the notifications have to come from the current owner. You could even set up the offer so that one unit has to be vacated.

The thing you have to be careful with here is not discriminating against families with kids, since that is illegal. Is there any difference between the two units?

tralfamadorian

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #7 on: February 10, 2019, 12:12:31 PM »
The thing you have to be careful with here is not discriminating against families with kids, since that is illegal. Is there any difference between the two units?

Since the OP plans on living in the other unit, fair housing rules do not apply. However, this is presuming there are no local or state laws overlaying the federal ones.

Personally, I would ask the family to leave and blame it on the dog. If the neat single guy decides to eat the rent increase and stay, there is probably a good timeline built in to allow you to fix up the first unit then move into the second when he graduates. To soften the blow of the rent increase, I would offer him three tiers: ex: 1) 18 or 20 mo lease- $850/mo, 2) 12 mo lease- $1000/mo, 3) mtm lease- $1150/mo. Actual numbers depending on what the rental market is like in the area.

lhamo

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #8 on: February 10, 2019, 12:48:58 PM »
I would give the mom notice that you want to move into her unit and give the other tenant notice that you will be raising the rent.  Maybe give him a slight discount off market rate for being a good tenant (and one you would like to keep).  Keep doing incremental annual rent increases on him to get that unit up to market rate.

srad

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #9 on: February 10, 2019, 01:15:27 PM »

Whomever you decide to move out, i'd try and give them as much notice as possible.  I don't feel a 30 day notice is not enough time to find a place, especially if they have kids and jobs.  Quite frankly id decide whom gets removed based on who has the worse condition unit.  Better to tackle a larger fixer project when you aren't under the pressure of getting it done to rent it out.

Also, if they are way below market on rent its a good chance they know it, so receiving a larger increase shouldn't shock them too much.  I had a deal where the existing tenants were paying 500 a month, market rent was 1000.   I had spoken to them both during the purchase process and they both told me they were expecting increases.  I ended up bumping their rent to 850 and neither tenant complained.   I've hit them with decent increase again the following year.  Both still here...

lexde

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #10 on: February 10, 2019, 07:08:00 PM »

Whomever you decide to move out, i'd try and give them as much notice as possible.  I don't feel a 30 day notice is not enough time to find a place, especially if they have kids and jobs.  Quite frankly id decide whom gets removed based on who has the worse condition unit.  Better to tackle a larger fixer project when you aren't under the pressure of getting it done to rent it out.

Also, if they are way below market on rent its a good chance they know it, so receiving a larger increase shouldn't shock them too much.  I had a deal where the existing tenants were paying 500 a month, market rent was 1000.   I had spoken to them both during the purchase process and they both told me they were expecting increases.  I ended up bumping their rent to 850 and neither tenant complained.   I've hit them with decent increase again the following year.  Both still here...
The mom's unit is in worse condition. Not by too much, but I found rental photos from the listing when they both moved in in 2013 and single-guy's unit looks exactly the same as it did in 2013. He's kept it in pristine shape. So there is really no reason other than being soft to consider keeping the mom as a tenant. She's doing her best, absolutely, and I will give her as much notice as I can to make the transition easier.

Dee18

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #11 on: February 10, 2019, 08:06:19 PM »
I would have the mom (dog owner) move. If you close in 60 days and then move in after 58 days can you get to the end of the school year for her kids?  That would be really nice. 

lexde

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #12 on: February 11, 2019, 06:31:20 PM »
I would have the mom (dog owner) move. If you close in 60 days and then move in after 58 days can you get to the end of the school year for her kids?  That would be really nice.
I can try to stall negotiations and see about that but my lender wants a closing date no more than 40 days out, which will cut it pretty close. I really hope that I can stall for her. Is there anything I can do to "live" there for FHA purposes while still residing at my current apartment? Or is that a no-go? Unfortunately with the current rent rates I wouldn't even be able to make the mortgage payment with what they're currently paying, so that's another issue...

wbranch

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Re: Duplex Rental with Existing Tenants (Owner-Occupied)
« Reply #13 on: February 11, 2019, 06:51:08 PM »
My wife and I bought a duplex last year with the plan to move into one side. Somewhat similar numbers, 2 bed, 1.5 bath, $250k purchase price, rent was at $750/mo MTM, market rate $1,100+ after cleanup/updates. Not best #s for a rental but we think it fits for the house-hack situation. Biggest issue was the current renters had been there 5+ years and were very low quality.

We had it in the purchase agreement that 30 day notice would be given after we lifted inspection contingency. After meeting the renters and getting their background info, I did not feel bad getting rid of them ASAP. No kids or other factors to make us feel bad. Some may still feel it was a bit harsh. We ended up giving them both an extra 2 weeks rent free and they were out. A bunch of cleanup was needed that I am sure would have been needed even if they had a 6+ month notice. We were taking a bit of a chance that there would be no issues. We have received mail to both sides of the duplex from multiple State departments of corrections. This mail was to family members who were not on the lease, including a daughter that was involved in a felony level B&E. So I was a bit nervous leaving tools there, and things were locked up tightly. Thankfully no issues. 

We needed to rehab both sides, so keeping one renter would have been ideal. But I feel the place was at a point that both tenants needed to be out. First side was completed in 2 months and we moved in so we were cutting in close on the mortgage requirement. But we we did update all of our addresses and took other steps, so I am comfortable saying we were "moved in" within a month. Heck, we were there 7 days a week when not at work and only going back to our apartment for sleeping.

2nd side took us 7+ months taking our time. Renter moves in this next week at $1,150 a month, we had listed at $1,200 and they had good income and credit backgrounds and wanted to negotiate so we were willing. Tenant already setup auto payment on Cozy so it seems to be working out well.