Sometimes you inherit tenants when you’re an active rental investor.
Other landlords view all tenants they didn’t personally screen with distrust and instinctively want to get rid of them at the first opportunity.
Which impulse is right? And how do you raise the rent on these inherited tenants if you do decide to keep them?
Here’s the landlord’s guide to handling inherited tenants, and exactly how to proceed for maximum ROI.
5 Steps to Raise the Rent on Newly-Acquired Tenants
1. Screen them for yourself.
Evaluate all inherited tenants as if they were new applicants.
First, talk to the seller about what kind of tenants they’ve been. Do they always pay the rent on time? How clean are they? Have they ever violated the lease agreement?
Ask the seller for copies of their screening reports from when they originally screened the tenants and a copy of the original rental application.
Inspect the rental unit, giving the tenants as little notice as possible. You want to see for yourself how well they treat the property.
If the tenants are on a term lease, use the months in between purchasing the property and when you need to make a renewal decision to evaluate them. Are they whiny or low-maintenance? Reliable or full of excuses? Do they respect the property and your lease rules? Be sure to conduct periodic inspections.
Are they good tenants? If not, non-renew them as soon as possible.
If they’re worth keeping, it’s time to raise the rent—without losing them!
2. Decide how much to raise the rent.
I never raise the rent by more than 5% at a time if I want to keep the tenants.
What’s the market rent for your rental unit in its current condition? If it’s
significantly higher than what your inherited tenants are paying, you may need to gradually increase the rent over the course of several years to catch up with market rents.
Imagine your tenants are paying 20% below market rent. They’re good, clean, reliable tenants, and you want to keep them. You may need to make a judgment call—how long are you willing to space out the rent hikes to catch up with market rents?
If you can’t wait four years, to raise the rent 5% each year, then sit down with the tenants for a heart-to-heart. “You guys are great tenants, and I’d love for you to continue living here. With that said, you’re paying significantly lower rent than market rates, and I just bought this property and have a high mortgage payment. I’m going to need to raise the rent by X% to cover my expenses and make this work. I would love for you to stay, but I understand if that much of a hike is not feasible for you.”
One last thing: Make sure they can actually afford the new rent on their current income!
3. Build a relationship.
Have some time before their current lease term ends? Start building a relationship of trust.
Be responsive like you are with all your other properties (right?). If they call you with a concern, stay in communication with them until it’s resolved.
Ask about their children, their jobs, their hobbies. Spend a minute or two on small talk when you call them before getting down to business.
When you conduct inspections, use the time to get to know them better.
Ask them about their “dream improvements” to the property—what kind of changes they’d love to see, in a perfect world. (And let them know you can’t promise anything—you’re just trying to better understand what they want.)
When it comes time to sign a new lease agreement with an increase in rent, give them the courtesy of a phone call when you send the renewal notice. Renters are far more likely to renew if they know, like, and trust you.
4. Serve the written notice.
In all states, landlords are required to serve a written letter to tenants when raising the rent.
The advance notice timeframe varies by state, but it’s usually 30-90 days. Look up your state’s requirements many months before you actually want to raise the rent! Put a reminder on your calendar for when you need to serve the notice.
Have them select one of two options: renew at the higher rent amount or vacate by the last day of the current lease agreement.
If they choose to renew at the higher amount, don’t stop with just the signed intention to renew!
5. Sign a new lease agreement.
The prior landlord signed their own lease with the tenants. While that transfers with the sale of the property, you want to have your own lease agreement signed.
First, it’s cleaner legally. Second, you can make sure it includes all your own landlord-protective clauses.
If your inherited tenants want to continue living in your property, it will be under your rules, not the last landlord’s rules. Make sure they read the new lease agreement carefully, and make sure they understand any new requirements or rules!
Inherited tenants can be a blessing or a curse.
Many are excellent tenants who will continue paying on time and treating your property well for years to come. Others are deadbeats who made the last landlord’s life miserable and drove them to sell.
The quality of your returns as a landlord are determined by the quality of your tenants. Your goal as a landlord should always to be to fill your properties with low-maintenance, high-ROI renters—renters who will stick around long-term, pay on time, and treat your property well.
If that sounds like your inherited tenants, do what you can to keep them, even as you raise the rent. Otherwise, move on; the last thing you want is to be stuck with low-ROI renters just because another landlord made the mistake of leasing to them!