What to do with my rental?

[Tim L.]

My tenant's lease is up at the end of April, and like many other places in the country I'm looking around at the real estate market here in south Florida and seeing everything skyrocket. I've had this tenant in place for 5 years now, and he's been pretty decent overall. He pays rent on time, and doesn't cause problems, aside from a big red flag that he's been caught subletting the property without my knowledge/approval. He currently pays $1500/mo for a 2/2.5 townhouse. Stupidly, I haven't been raising the rent on him the last few years, because I thought that it would cost me more to clean/list the property again and have a vacancy month with no income. So now I find myself way below the market rent of $2000-$2300. I aim to fix that now.

I'm debating whether to raise his rent to $2k, or just not give him the option to renew the lease so I can find a new tenant at market rent. If I let him go, I would need to swap out the washer/dryer and repaint, as well as fix any other issues that I'm not aware of. I'm confident I could get the property turned over and rented for at least $2k within the month. I would be the listing agent as well, so I could save half of the commission there.

If I decide to keep him, I'm not sure how he would take the news of having his rent raised $500 all of a sudden, but I'm sure it's going to come as quite the shock. If I had only raised it $100/year, it wouldn't be such a big change, but here we are. I could also raise it by only $200-$300, but that would be leaving money on the table, which I'm not happy with either.

I also am considering selling the property in order to 1031 exchange into another rental or two. I paid $125k for the place (owe $80k now), and these units are now selling for $300k+. With my location in the community (on the water/lake), I'm sure I could be at the top of that selling price if I did some renovations prior to listing. I would need to do all 3 bathrooms, and probably put new floors in upstairs since the laminate is older. The kitchen and downstairs floors are in good shape.

Obviously, with selling there are a lot more variables to consider. I would need to get a rehab cost, and more importantly have a plan in place for what to do with the profit so I don't have to pay taxes. Turning my 1 rental into 2 rentals would be ideal, but in this local market I don't know if I could do that.

So what do I do? I want to give my tenant as much notice as possible. It's 2 months out from the end of the lease, so ideally I want to make a decision this week to give him the heads up.

Thanks so much for your replies.