I am interested in a block of four units, all on separate titles in a good area. However, the owners have just changed real estate agents. The new agents informed me the previous real estate did not increase the rent over a period of 3-5years. One new tenant is paying $200 per week (about right), with the other three tenants paying $130,$160 and $180 per week for identical units. Two have had recent rent increases with the third staying how it is apparently due to the circumstances of the tenant (the $130). Just trying to work out the best solution. Evict all three and start again? Evict the $130 paying tenant only and my partner and I move into that unit whilst gradually increasing the $160 and $180 to be closer to the real rental value? I fear this process my take some time and be a very costly process as we cover the mortgage? Have I missed anything? Is there any other work around?
Jobie
This topic was modified 8 years, 10 months ago by Jojo.
Hi Jobie,
If you are looking to move into one of the units then yes – it would seem that evicting the $130 tenant for you guys to move in would be the best solution given your description. You can then have the agent gradually bring the other units to market price. If the agent is unwilling to do this then I would be looking at other agents in the area who would be more proactive.
Thank you. This is my first investment property and I just joined the forum today!! I appreciate your reply and will be doing some number crunching over the next few days.
Hi Jojo,
Have you talked with the Agent re taking “vacant possession”? This usually leads to a scenario where the Agent then discusses the “change of landord” with each tenant, and introduces to them the likelihood of a rent rise.
Depending on each one’s circumstances, they might choose to stay and pay a bit more, or they might choose to leave. Of course, this means you may need to find FOUR new tenants – but discuss that likelihood with the agent too. You would need to know how much competition is out there from other units to rent, etc. Playing the “vacant possession” card allows you to flick-pass the problem to the seller. Of course, any existing leases might need special consideration (see your lawyer re this though).
Or, flip side, if the top 3 are good people, and you want to keep them around, maybe take them on as is, but introduce discussion re “What else would you like to have in your unit?” They might be wanting to have air conditioning, or a new oven, or a fresh coat of paint. Whatever it is, look at HOW you might be able to make that work, in return for an uplift in rent. e.g. one might tell you “WE nearly left to go to another place because it has a new kitchen. We would be happy to pay an extra $20 a week to have a new kitchen.” Now, you could borrow the money needed to renovate the kitchen – like this :-
1. Expected cost to renovate = $10000
2. This can be a likely Tax deduction (but check the circumstances with your adviser – not all items may be deductions).
3. This may add an extra $20k in Equity for you (market value lift because of the reno).
4. If borrowed on a home loan at 5%, this costs you an extra $10 a week in Interest (close enough).
5. The tenant is happy to pay an extra $20/week (sounds like a 100% profit to me, even without Tax deductions)
6. Any old items replaced are written off in this FY, adding to your deductions, and the new items fitted allow MORE of a deduction in years to come.
By the way, I have heard of some who can do a kitchen reno for way less than that, so my $10k is “a shot in the dark” just as an example.
Hi Benny,
Thank you. Very interesting. It sounds like something that may work for us. I will talk to the Real Estate Agent about this. I predict one maybe two may stay and one will definitely leave. Which will work perfectly given that we want to live in one and it should not be too difficult to find a tenant for the other. In what ways will this change the dynamics when we go to negotiate a price with the owner?
Jojo
Vacant possession means the seller should arrange for all of the tenants to leave so that the place is empty at settlement. I would think just mentioning those words to the Agent might have them realising that this could be a requirement if you are the eventual Buyer. They will likely want to talk you into accepting that some tenants remain. At that point, you both start talking of that, and what concessions you might make and what you won’t accept. e.g. You might say that you won’t accept any tenant that is paying less than $190 a week. This puts the ball in their court – and they might discuss this all with each tenant to gauge just who will/won’t accept the new rent. In agreeing to this, you are not enforcing vacant possession, but you are doing the next best thing – getting your desires in front of the Selling Agent.
If you were to enforce “Vacant Possession”, this does create a problem for the Seller – it may even be enough to have him reject your offer and look for a more amicable Buyer. So don’t play that card without thought.
But, if played, the place is then sold to you EMPTY, and it is up to you to fill it – perhaps with ALL new tenants at $220 a week (I don’t know if that price is viable, but talk with the Agent re this possibility too).
Re property price, the more you “fit in” with their conditions, the more pliable they might be with the price. Price and conditions are often at opposite ends – so, if you want a heap of conditions, be prepared to offer a higher price.
If few conditions, the price can often be a lot lower. Maybe think in terms of “What price would you pay to accept it EMPTY?” Then shave a chunk off (see below) when accepting one or two tenants….. ALL of this is negotiation, so be free in your thoughts with this. Start low – they start high – you meet in the middle somewhere – or not.
When considering price, be realistic – e.g. if existing tenants are paying a total of $50 short per week, this is just $2600 a year you are missing out on. If all tenants pay $200 a week, you get $2600 more – wheee !!! The Seller might be happy to take $5k (maybe even $10k) less just to NOT have to get all tenants out. Remember, even at $10k less, that is only $2.5k per unit – hardly a steal, but better off in your pocket.
Or, you might choose to throw a harder ball if Sales are tight in that area, !! If it has been on the Market a while, the Seller may just want it GONE !! Get the Agent talking, then just listen (and take notes!!) and then re-do your numbers. What do the numbers show as it stands? If tenants pay what they are now (less the $130/wk tenant) how is cashflow for the block? Any reno’s required or planned?
I’m not sure about what state you’re in, but where I live you can’t just evict a tenant without cause. Even if they are on a month to month agreement. However if they are not on a lease you can increase the rent to market rates and they either need to pay it, vacate or contest it. That is a minimum 8 week process here.
If you buy the property you also buy the leases. So asking for vacant possession might mean the owner needs to pay the tenants to leave. So, I would find out the state of the leases and if out of lease increase it to market rates. If in lease determine if a rate increase is included. Then figure out if that works for you.
I’m not sure about what state you’re in, but where I live you can’t just evict a tenant without cause.
If its NSW its 90 days, though they can leave at anytime after you give them notice. Eg they might find a place this weekend and tell you on Monday….I’m leaving the keys in the office and send the bond and the next 22 days of my rental refund to XYZ
I can’t say I think vacant possession on all four is a good idea. You’d be going to market to lease 4 at a time, and also the lender might look at the vacant possession and decline finance.
Increase the rent on one unit at a time and if needs be evict one tenant after settlement and re-tenant at market rate.
If they are on fixed-term leases, you can’t evict them till the lease ends anyway (unless you intend to move in yourself, but you’d be hard pressed to say you and your family needed to live in all four of the units).
If any of them are on periodical leases or near the end of their lease you may be able to get a condition of sale that the seller is to issue that particular tenant with a rental increase notice. At least that way by the time you take over ownership the rent will have gone up or is just about to (increase notices usually have a 60 day lead time on them).
Thank you all for your responses. Sorry about the delay. I am not going through with the units..it does not seem to be worth our while….especially after reading on to the next few chapters of Steves book. I also received a bill from the lawyer today who invited a colleague to come and speak to us about trusts for the last ten minutes of an appointment in regards to Wills. The cost of the lawyer coming in for ten minutes was $165.00 for the ten minutes. I asked the cost before the appointment and she could not tell me. Not sure where I stand with this but an hourly rate of $990.00 sounds ludicrous.
Why did you decide not to buy? remember sometimes….other peoples problems are where you make the most money, eg I love buying ugly apartments….ugly you can fix, crappy layout or location can never be fixed.
As a suggestion if you really aren’t going to go ahead…..why not post the address here on the list along with a handshake request that anyone form the list that picks it up pays you $190 for your efforts……it may not remove the sting of being charges $990 an hour….but it will help defray your costs and doesn’t cost you anything apart from 30 seconds to post the address here (but only if you’ve decided to really walk away).
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