I recently found a property that COULD BE a +ve cashflow property.
Problem is there is a current super-loyal tenant of 12 years who is paying a rent of about $50 pw less than the market rate for houses around the area in similiar condition.
So I am faced with a moral dilemma …
(1) Bad guy : Raise the rent to market value, +ve gear the house and kick out the tenant at the end of his lease if he doesn’t agree to the rise.
(2) Good guy : Raise it as much as I can and keep him even if the rise is not enough to +ve gear it.
(3) Medium guy : Raise it at a minimum to neutral cashflow and kick out the tenant at the end of his lease if he doesn’t agree to the rise.
(4) Walk away from the deal altogether.
Basically I am leaning towards (4) as the house is practically the guy’s home and I don’t have the heart to kick him out when push comes to shove. And neither do I want another -ve geared property.
What would you do in this situation ?
Hi Bennido,
Property investing is a business.
I’m sure that this tenant is aware that he is on a pretty good wicket…
Why not speak to the tenant, and find out how he feels about the rent increase?
He can only say yes or no…If you want this house in particular, then try to buy it as vacant possession on a long settlement, if he is not prepared to pay market rent.
I’m sure if another investor eventually buys it, they will pretty quickly increase the rent.
The question is will that be “YOU” or the next guy?
I would “probably” opt for option 1, but if the tenant is in a current lease, then I belive you can only raise the rent a certain percentage higher. Even that is with a 60?(I think) days notice in writing…
If you want the house, I definately wouldn’t go for option 4,Good luck, I’m glad it’s you and not me!![blush2]
Del
Can you add anything to the property to compensate for a rent rise, bearing in mind whatever you add will be claimable?
The question for me is – What capital growth do you expect from the property?
If you expect some capital growth then you can forgo some of the cash flow – well thats how I look at things. A good long term tenant is better than a few hundred a year in rent.
If your after the cash flow, then I would keep the tenant, use a property manager and start to increase the rent over the next 1-2 years to just below market value.
If you cant handle dealing with tenants (and I am in this category for the reasons you specify) then use the property manager to do your dirty work.
In my case I want growth properties, so it would not be an issue for me – a good long term tenant is worth its weight in gold, even if you loose $600 a year. Whats $600 a year on a property worth $150k or more.
Like Yack, I’ve got a property with a tenant who pays below market rent. But it’s a property with consistent growth (Sydney). The tenant has been there for years and lets me know (via the PM) whenever there is a problem. It’s a -cf property, so the fact that with the current tenant it’s even more -cf is incidental.
Oh Bennido,
So many “if’s” and “could’s” but what you really need to ask yourself is “why”??
Why do you want the IP?? Because it “could” be cashflow positive based on what you have read in another’s book?? Remember Steve is a primarily a businessman, and although a nice guy, emotion is not what got him to where he is today!!
Have you fully researched the area, it’s CG potential, your finances, your reasons for wanting to purchase it?? You seem to be in a quandary about several property ventures, and I think you need to slow down, and tackle one project at a time, otherwise you will burn out!!
You said you were “suckered” by the crowds before, now you are turning to them again (albeit a different one) for what?? Moral support, guidance, financial advice, what?? At the end of the day Bennido, you have to do what is right for YOU!!
I think you need to do some serious homework, due diligence and maybe a little soul searching thrown in for good measure.
Good luck,
Jo
P.S. For what it’s worth…I’d raise the rent within reason (in accordance to what is acceptable by tenancy guidelines) and compensate some of the hurt with an additional something to the IP (i.e. heating, air-con, new carpet, fresh paint etc). You don’t have to be a “bad” or “good” guy; just be FAIR !!!
Hi Bennido
Property Management is not social work. Just because the previous owner was soft, ignorant of rent levels, or could afford to be generous, doesn’t mean you have to copy them.
Consider a wrap, they might feel entrenched, not want to lose all that history etc etc.
Or match the market rent.
Provided you have a good property, there are enough good tenants out there for you, if this one decides to leave.
Suggest you decide how long you want to subsidise this tenant’s rent. Then, offer the tenant the existing rent for that period, say 90 days, gives him time to adjust or find another property. In NSW, a rent increase requires 60 days notice, if you give him 90 days subsidy, you should send the notice of rent increase 30 days from now. Time for a reality check.
cheers
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Bennido,
I wouldn’t buy it, personally. I did get “lucky” I suppose, for a place that I bought. It had tenants at a fairly cheap rent, and then they moved out after the lease ran out, so I could put it at market rent (which was still dirt cheap, considering). But if your tenant has been there forever, and is paying all he can afford, it would do my head in to change his life like that. I look at tenanted places with long-term tenants as the price that “is and will be paid”, I guess. Unless he moves on from natural attrition, I’d leave him as is.
NB The author asked individuals what they’d do, and this is my perspective. I am sure people will respect my right to not raise the tenant’s rents without becoming personally vicious about it (pre-empting this as it’s what often happens re such topics).
kay henry
I saw posts like this before and really, to answer on the information given is a hit and miss affair, too much information is amiss.
Yet what prompted me to answer are the answers offered.
I am surprised at the, in my view excess prudence in the matter of raising rent to market value that many people seem to have. Most people seem almost frighten to ask for what is rightly theirs, and that is a fair return on their investment.
If you owned a delicatessen shop would your do a survey with all your customers about “how they feel” about you rising the prices when your provider does so with you?
Prices and that includes rent are the result of offer and demand. When the two curves meet, that is the price. If you artificially stay under the market price on the belief that such action puts you in the good book, and that you will so gain the favour of the tenant that will pay you religiously and in time because of your grand gesture, I think that eventually you will have a rude awakening.
No one believes that cheaper is because of your good heart, anyone can see through such action and think that in fact you feel powerless to raise the rent and that such is the real reason. For whatever reason you do it, that is the perception and the result is that you are lowering the average price and devaluing the market for all.
If you go to the process of purchasing a property for a lot of hard earned, or expensively borrowed dollars, you must do it with a purpose and that is to have a return. You buy income producing assets. The government runs government housing. Le them do their job. If you buy properties for profit, don’t forget that income is your reason, not social work.
May God prosper you always.[biggrin]
MarcMarc said:
“No one believes that cheaper is because of your good heart, anyone can see through such action…”
Once again, Marc, you see right through us! Remarkable how you do that.
kay henry
Marc,
Originally I wasn’t going to give my opinion, because I felt this was a decision which Bennido needs to make for himself; however I realised that that was not necessarily the right approach to take, as he had asked for people to do just what I wasn’t doing; hence I obliged!!
My suggestion was to raise the rent, but not dramatically, for several reasons, but mainly because of the fact that the tenant was a “long term loyal tenant” of some 12 years!!! Which in my books, is worthy of holding onto, even if it means forsaking a few dollars!! Over the course of a year or two, the rent could be raised periodically hence eventually bringing rental return back into line with the rest of the market!! Too much, too quickly can be a loose-loose situation for all.
If on the otherhand Bennido, were to increase it somewhat inconjunction with putting something back into the IP, it becomes a win-win (in a manner of sorts)….He is keeping his long term loyal tenant, is increasing the rent, and he adds substantial value to the property’s overall capital!!
Jo
I agree with Jo,
Consider the loss of a few weeks rent (or more) to replace the tenant if he decides to leave. Your annual return would probably be worst off. Raise the rent gradually.
Hi Bennido,
I know I will be shot for making this statement — but I believe in a social conscious — making money is not the be all and end all of owing property. [rolleyesanim]I have a tenant who has been in a unit for 10 years. She has a disability and therefore her income is limited. At the moment she is around $27 to $30 per week below the going market rate.
I justify the low rent in the following manner — if I had tenants coming and going every 18 months (or less), then I would have to repaint and refurbish to bring the unit up to scratch each time the unit is put on the market. Then of course there are the letting and advertising fees which must be paid to the property manager; and the other issue of course is downtime — if the new tenant doesn’t move in as the other moves out there will be loss of income. Over the course of 10 years, all the above costs would mount up to more than the monthly loss of income (tenant below the market rate).
So you really need to weigh up all facts –not just look at interim issues but the long term view. Perhaps being a good guy is possible, even if it means leaving the tenant in place, keeping the rent at a lower level — yet in the long term there will be more dollars in your pocket.[smiling]
Just my thoughts. Having read earlier posts, I’m sure my comments will raise a few eyebrows. [blink] Anyway, I am able to sleep at night, knowing that I have treated my tenant with respect, fully aware and supportive of her circumstances.
Regards
some great points here everybody.
questions: was the tenant loyal because the rent was underpriced? Is the landlord selling rather than raising the rent/moving the tenant??? was the landlord managing the property themselves???
I prefer to use a property manager so that these issues are kept somewhat at arms’ length.
You could do the same. The fact of the matter is that most people don’t want to move, because it’s a pain. And involves change which means stress. but we have all had to move at some point in our lives, for various reasons, when we didn’t want to. So it is the same for this tenant. Let professionals decide on the market rent, inform the tenant of when this will take effect, and let the tenant make their decision whether to stay and pay or find a cheaper place elsewhere.
or, choose a different deal – and let someone else make those decisions…
cheers-
Minijoy to the world
Look at it from the tenants point of view, if you raise the rent – will the tenant be able to find somewhere as good and as cheap? If not the chances are he probably won’t move out and accept the rent increase.
The rent is probably low because the vendor has been a little soft, may even have become too friendly with the tenant. As Minimogul suggested, use a PM.
Sometimes a lower rent for loyal tenants works out better than a few weeks vacancy – it’s simple enough to work out.
One other suggestion would be to look at wrapping the property. He’s been there long enough perhaps he should own the property.
Cheers
JeffI agree with Monopoly and Mini, as for Kay, what can I say Kay? You appear to be an expert in taking things out of context. If that particular sentence has pricked you to the point that you have ignored the rest that puts it into context, what can I say? Enjoy!
The fact remains that if we where all Meat-Pie manufacturers, each one with a share in the market, you would be all serious about the prices offered and would tell to whoever is selling below cost to get their act together, since they would be damaging the market.
What we do, mutatis mutandis is no different, and whoever thinks he has an obligation towards his customer (tenant) to subsidise the rent for some real or perceived reason, must understand that in the long run he is doing himself and the rest of the investors a disfavour.
His property will invariably deteriorate just like his returns, the market is corrupted by a lower than average price and in the end his tenant will be out of touch with the real market he will be unable to re-enter without a rude shock. That to me is a lose-lose situation.
May God prosper you always.[biggrin]
MarcHi everyone,
Hope I’m not outta line here, but I’m sure I read on Steve’s home page here that most investors don’t buy using emotion, a big no-no or whatever. Is that not the case for most investors of property???
This is interesting to for me, as it’s my first time buyer “directly” without the aid of a buyer and it’s a whole new ball game when you have to do it on your own, and confront your own demons….like should I do this or that.
Pepper
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