Thoughts on this opportunity? Long-term below market rent tenant

Member since 2019 · 22 posts · 4 votes

Hello,

Currently in position to lock in an all-cash offer on a condo- today! Plan is to pay cash using savings and etrade LOC and then refinance/cash out when mortgage rates are lower. Until then, will pay down the LOC aggressively.

Good price on home (~25% below original list price 45 days ago). The thing is - the current tenant has been there for 6 years which is great but the rent they pay is ~4-500 $/month below market. I can raise it to be ~3-400 $/month below market.

With aggressive LOC paydown, I could be cashflow positive in ~9 months for reference.

What do you think? Worth locking in a property with long-term value if willing to cover costs for the short-term? I will admit, although this isn't my first home purchase, this would be my first time paying cash, first time using my LOC so there are some nerves involved.

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Nathan GesnerBusiness Member

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

Quote from @Ryan Jones:

Many of us start off buying properties that are rented below market. We accept the risk because we believe the numbers will improve when we spruce up the property and rent it at market rates.

My suggestion is that you grab the bull by the horns instead of *****-footing around to avoid hurting feelings. The current renter is well below market. Even if he can afford the increase, there's a good chance he'll resent it and cause problems for you. You're already considering keeping him at $100 - $200 below market, which demonstrates you are operating on emotions and not with a business mindset. The best option is to terminate his lease, clean the place up, and rent it at market price.

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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3y
Quote from @Ryan Jones:

Many of us start off buying properties that are rented below market. We accept the risk because we believe the numbers will improve when we spruce up the property and rent it at market rates.
My suggestion is that you grab the bull by the horns instead of *****-footing around to avoid hurting feelings. The current renter is well below market. Even if he can afford the increase, there's a good chance he'll resent it and cause problems for you. You're already considering keeping him at $100 - $200 below market, which demonstrates you are operating on emotions and not with a business mindset. The best option is to terminate his lease, clean the place up, and rent it at market price.
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
3y
I agree with @Nathan Gesner
Frankly, You see a lot of people with less experience think that "being reasonable" and taking it slow with raising rents to market and confronting situations is best and that you can work together and "be a good landlord" - but in the real world, often it doesn't work out how you envision it and you can create resentment, false expectations and further problems. Usually best to "grab the bull by the horns" and set firm and defensible expectations up front (you can always give concessions after this, but you'd be working from a better position)
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John Myers
Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes
3y
Not enough information to know if the deal is good. I don't like negative cash flow with the hope it will get better in the future. Is your LOC at a fixed rate or a variable rate. Also do you have the cash or access to the cash to make repairs if the tenant moves out? Does the condo rules allow you to rent out the property? I don't like the idea of a condo for a rental as the condo fees go up almost every year. Some condo fees are out of control.
The tenant knows they have a good deal and probably will not move out. You will also want to raise the rent every year (as long as the market allows) so the tenant gets used to the rent going up.
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