What would you do with problem tenant

Question

I've rented on 1996 SFH to the same tenant for seven years. She has always paid the rent on time, and I never get complaints from the neighbors, but she has not taken great care of the house. I know she has had adults stay with her for extened periods that were not on the lease. The children she had when she first moved in are adults now that still live there. Last year, she had a visitor that forgot she had a slow cooker cooking in a bedroom that resulted in a small fire. My insurance covered the 20K damage, resulting in an increase of my monthly insurance. The insurer went after tenant, who had let her renter's insurance lapse in violation of the lease terms. She was apologetic, saying it was a mistake and it was a mistake that she has now fixed. The insurance settled with her for about 2K (she was lucky) and reimbursed me for the deductible. I raised the rent to cover my increased insurance costs, but I have not raised much over the seven years.My handyman was doing work at the house recently and reports that the house now smells badly of marijuana (in violation of my no smoking lease). He's saying that if I don't renew the lease and wanted to rent out to someone else, it will need serious remediation. In addition to new carpet and paint throughout (which are due anyway), he's recommending a thorough TSP cleaning of all walls, triple coats of special primer, and replacing the kitchen tile. When last I visited at the time of the fire, the place was dirty, but I actually didn't notice a bad smell.The house is in Murrieta, CA, which seems to be in high demand right now. I'm constantly getting letters offering to buy it, which I don't get for my primary (in San Diego).Current lease expires June 30. I'm considering three options:

Raise rent significantly, by $500, which would put it just a bit over market rate
Sell as-is, by getting quotes from Sundae and the other services I keep getting notes from saying they will buy "as is"
Kick tenant out, clean it up myself (well, have my guy do it) and re-rent

We recently advertised a different rental and had no shortage of quality tenants apply.What do you think?

• Raise rent significantly, by $500, which would put it just a bit over market rate
• Sell as-is, by getting quotes from Sundae and the other services I keep getting notes from saying they will buy "as is"
• Kick tenant out, clean it up myself (well, have my guy do it) and re-rent

We recently advertised a different rental and had no shortage of quality tenants apply.What do you think?

Dan H. · Answer

I am not sure that #1 and #3 are not the same thing.

When I have a tenant that I want to get rid of, I raise their rent above market rent.  They may think I am clueless as to market rents, but I do not care.  Why do I just not give the tenant notice?  When I raise the rent above market the tenant typically gives me notice.  This prevents any claim of revenge, bias, etc.  It reduces the odds of any future issues.

If you keep the property, either properly manage the property or hire a property manager.  Properly managing includes enforcing the lease, keeping rent near market rent, inspections, performing proper maintenance, etc.  For a property that far from me, I would hire a good PM.

Good luck

Nathan Gesner · Answer

Why on earth would you keep a tenant that nearly burned down the property and regularly violates the lease? You know that's not a wise decision, right?

Get her out. Clean it up. Turn it over to a Property Manager. You're in the most regulated, litigious state in the union and it's only getting worse. A good Property Manager can keep you out of trouble, help you sleep at night, and protect your investment. If you had a professional all these years, you wouldn't have had this tenant for seven years and the rent increases would have more than paid for management.

If that's too much, sell the place and invest in something else.

Emy Bernardo · Answer

Option 3.  I wouldn't sell, the rental market is strong, you will not have any issue renting once you get the tenant out and get the place fixed up.

Stephen Bernard · Answer

@David Codelli I feel for you! It happens, eventually, to every investor.

Option 1: Rents are poised to skyrocket throughout Southern California. I have several past and current clients in the Temecula/Murrieta area- so I'm familiar with the market, enough to believe in its continue potential for growth. Prices there, due to accessibility to the military bases around the county, already matched those in San Diego proper; whereas Murrieta and Temecula originally served as relief valves to the high prices of San Diego.

PROS: you raise rents $500, you might increase your cash flow, and you might have your tenants elect to not renew anyway.

CONS: If you lose your current tenants, you have to find a replacement.

Conclusion: Option 1 is a win-win for long term buy and hold, it's easy to find new tenants (in the worst case of your situation) or you get to create a new contract with stronger and better terms for you. I think this option de facto similar to option 3.

Option 2: You probably have some stellar equity in the property, and it's still a great time to take advantage of that. With real estate prevalently run by principles of supply and demand,  the current value of your home isn't going anywhere. If anything, it will continue to appreciate although at a margin of what you've seen over the last several years. As rates rise, less buyers are in the market; but those that are, are typically better qualified and stronger. As such, if you were to consider taking it to market I'd caveat that you might be prepared to make concessions. 'As-Is' and off market is a way to save some heartache.

In my opinion, we are on the precipice of a shift that will open opportunities to investors by discouraging normal competition. I think you should turn "one door" (your current sfh) into "two" or more doors; taking the equity out of this property and inserting it into a new investment in San Diego.

Pros: rid yourself of your current tenant woes and repair expenses, step up in your investment portfolio by buying a small multi-family, increase your cash flow

Cons: Liquidating an asset is always a tough call and feeling

Conclusion: This is a great play if you are looking to ramp up your investment strategy. Some investors like the 10 units they own and want to own them until they're all paid off. Others will use each of those 10 units as a stepping stone to 20 units etc. etc. It comes down to your personal goals and desires!

I hope this provided value to you! I appreciated thinking about the situation.

Malida Suong · Answer

If you think the property will still rent well, I would keep it and do option 3. Lease almost up anyways. I would make regular inspections somehow though on your next tenants.

Raising rent on them (assuming they decide to stay and can afford it) will not change their behavior and therefor will not fix the problem.

Bruce Woodruff · Answer

Do not stick with this tenant! Even if only half the stuff you're saying is true, it is too much. Whatever route you take should be one without her.

Stephen Bernard · Answer

@David Codelli I would also caveat that if you were to consider option 2, you should do it with a local firm rather a big-name with a ridiculous marketing budget. You'll be covered in fees before you know it and just another cog for them to churn; a boutique business experience will help you get the maximum value with the minimum headache. I've worked with a good one in San Diego if you need a recommendation!

Greg R. · Answer

One thing I've learned is not to trust other people's eyes/ accounts. I recommend you try to get in there yourself to see what it looks like. I'm sure the batteries in the smoke detector need to be replaced along with the filters in the HVAC system. Try to get eyes on it and you can make the determination. Not too far of a drive, I live in SD myself =)Perhaps your handyman was over exaggerating and it's not that bad. You could be losing out on a relatively good long term tenant that (besides that one significant issue) hasn't caused many problems. Or, you can validate what your handyman said and kick her out. One thing I don't understand is why you'd need to replace the kitchen tile, are there signs of abuse? Tile is usually bullet proof. Not sure about triple coats of primer, sounds like this guy might want to take you on a ride for unneeded expenses. A good cleaning with TSP and a fresh coat of paint should suffice.

If you decide to stick w/ her, you need to raise rent.

Theresa Harris · Answer

If she's not taking care of the place and you haven't raised the rent in 7 years, I'd also do option 3 unless you think you can reinvest your money in another rental and come out ahead.  Unless they are growing pot in the house (ie a grow op), you shouldn't need to do much.  Washing the walls before painting isn't that unusual if the walls aren't clean.

Polina Ryshakov · Answer

Sundae doesn't charge any fees to the seller, and we have local market experts out ready to help you sell however you need!

What would you do with problem tenant

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