Found an excellent block of units to buy current tenants not paying enough rent

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.

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.

Can something like this work for you?

Benny

Hi 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?

Benny

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.

Hi Jobie

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.