One of a kind property rental, How do I price it?

[Kevin Barbot]

Hi everyone,

I own a property in a highly sought-after rural area of Lee County, Florida, which has been under my ownership for the past 12 years. Initially, my family and I lived in this house for a couple years before deciding to rent it out, anticipating a market recovery from the 2008-2012ish recession. The property is beautiful, featuring a single-family home of 2700 sq ft with 4 bedrooms, 2 baths, and a den, plus 2 barns on 5 acres, was purchased for $400,000. Our mortgage payments started at $2300, but due to increasing property taxes and insurance, they have alarmingly risen to just under $3300. The tenants, who have been with us for nearly 10 years and are interested in renewing their lease for another long term (3 years), began renting at $2900 a month and are currently paying $3000. They have horses and other farm animals and have been exemplary in maintaining the property and managing minor repairs independently.

A recent search revealed zero similar acreage properties available for rent, underscoring the uniqueness of this rental home. Despite the property's substantial equity, the rising costs have put me in a challenging financial situation, as my monthly expenses now exceed the rental income. Notably, rental rates for single-family community homes in the vicinity average around $2500 a month, albeit for smaller properties without land.

One of my concerns is the continuation of rising taxes and insurances, locking in a rental rate for 3 years could once again put in the negative. 

Selling the property isn't part of my plan, as I intend to perform a 1031 exchange for a mountain home in the West closer to my retirement, which is still 8 years away.

I would greatly appreciate your insights and advice on how to navigate this situation. Thank you in advance for your guidance!

[Melanie P.]

First, you're going to have to have a talk with the tenants and let them know their rent is going up to $4,000. You need that cushion in order to make the finances work. Tell them as soon as possible so they have time to plan. 

If you want to do another multiyear lease with them that's fine, but put steps into the lease. So each year on the anniversary of the lease rent goes up 3%. Put the amounts in the lease and mail a reminder notice each year. Explain to the tenants that this will protect them from future large rent increases. 

Your main problem here is your own failure to raise the rents on every lease renewal consistent with, at least, inflation. Raising the rent a third after not raising it for so long is going to be a hard topic to broach, but this is why you make the big bucks.