Sale or increase rent?

Question

So 8 years ago I purchased my first rental property it is now paid off but renter is only paying $350 per month he is a family friends dad who only draws ssi however this family friend is a millionaire. So rent and sales have skyrocketed recently in my area and similar properties are renting for $1000-$1500. We have property and would like to build but inflation is killing our dreams so my question is should we increase rent and find new tenants or sale the property so we can build? I understand this is a sticky situation with our current tenant. Any advice is helpful thank you all!!!

Nate Sanow · Answer

I think you should raise rent without guilt, even if the persons family is not a millionaire. (BUT especially if they ARE a millionaire!!!!)  It almost sounds like it’s been forced upon you to rent for such a discount.  It’s not the first time a property owner has been manipulated. I will be honest, my prediction is you end up selling, I’ve worked with a lot of motivated sellers who often find that selling is the way they justify coming to an end of the relationship with a person paying rent for a long time….if you do sell, it’s not the worst thing and it often can be blamed on “hey, sorry, I need the money from the sale.”  It is YOUR choice but I do It…. anyone paying that little in rent will come out with the waterworks in tears to get you to not do it. At some point it has to become cut & dry, whatever you do.  One thing about America is there is always some new government program if people really do need help paying for a place to stay and I am sure between you, the renter, and the millionaire putting heads together this tenant can find a new roof over their head without you having to feel obligated to be so far under market value.

Nathan Gesner · Answer

You are looking at this all wrong. Inflation is not killing your dreams; you are.

This is a business, but you're treating it like a welfare program. Your friend is a millionaire, but you're taking care of their relative?

By keeping rent just $300 below market per month, you're losing $3,600 a year or $28,800 for the past eight years. I suspect you've lost much more than that.

Put on your business socks and get to business! Give him written notice that you can no longer supplement his income and require him to be out in 60 days. That's plenty of time to find something suitable or hit up his wealthy relative for assistance. That also gives you time to study the market and determine how much you can rent it for and plan for any renovations. Clean the place up and rent it for market rate.

You may want to consider giving this to a property manager that can treat it like a business so you don't get suckered in again. It's better to pay 10% management fee than to lose 50% to a bad decision.

JD Martin · Answer

Easy answer: tell family friend you can no longer subsidize their parent's living arrangements, that rent is going to market immediately and they can either subsidize dad or he can live with them. A hundred bucks loss is one thing, but you have likely lost 6 figures in cash flow in these 8 years.

Richard F. · Answer

Well, your original post sounded like your need was funding for building at presumabley a different location, so yes. If you can continue to hold this long term and still accomplish your build, possibly with equity from this property, then if it is not due for a gut and remodel it may well make sense to get new tenants at market rate for long term. Depending on your market, you should be able to also factor in appreciation of both properties when considering your options.

Mike Dymski · Answer

Talk to the family friend and then to your resident and let them know that you either have to sell the property or increase the rent to market, which means rent will increase to market regardless of the owner.  Provide the resident with the option to renew at the higher rate or to move out...and provide three months to find a place should they choose to move.

Theresa Harris · Answer

The child's money isn't the dad's money (and vice versa).  If you really want to build, then sell the property.  Perhaps the family friend will buy it for their dad and the dad can stay put.  Talk to the tenant and let them know that you are considering selling the property.

Jack Mawer · Answer

Both of these options (selling or raising rents) will benefit you - it is truly up to you on what would make the most sense - raising rents will definitely drive up your cash-on-cash return on a monthly basis but selling would also allow you to acquire a large sum of money that can be used for new construction so that you can maintain your current reserves. Again, both solid options and either one is much better than received below market rent.

Billy Daniel · Answer

If you let them know you are considering selling it, they may buy it from you.  Your current tenant is in for a rude awakening no matter which of those two decisions you go with.  It's highly unlikely he will find another place to rent for that cheap.  New owners will certainly raise the rent.  My advice is to sell, but give the current occupant an unofficial right of first refusal.

Sale or increase rent?

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