Rent too low? How to handle?

Question

Hi all,I purchased a distressed duplex that cash flows well at $850 per unit in rent. One side was vacant and needed a good bit of clean up. I did some rehab work that still gives me a nice 26% cash on cash return. I decided, or so I thought, to stretch a bit and list the unoccupied side at $950 per month after researching the local market a good bit.Within an hour of posting I had three responses. Two of them wanted to see it right away, and have translated into fairly solid applicants. I haven't fully processed the background checks, but things check out so far.After the first hour I modified my listed and increased things to $990 per month. I received three more interested parties who are seeing the property over the next 48 hours.This is my second investment property and clearly I have some learning to do. My question is -- have you run into this situation before and how did you handle it? I can't speak yet to the quality of the folks who are responding at the $990 price point. I want to be fair, but over the long haul a $40 difference in rent starts to stack up. I've made no promises and certainly things like how long they plan to stay are important.P.S. For bonus credit, assuming I can rent one side at $990 or $950, what would you do with the established $850 a month month to month tenant? I'd need to rehab that side a good bit as well.

Patrick L. · Answer

How much will the rehab cost and how much will you lose in vacancy? Let's say you have to spend $6k on the rehab and you lose 2 months of occupancy @ $850/month, that's $7.7k. Now let's say you can get $990 after the rehab, an increase of $140/month, your break even time would be 55 rented months. Now that will vary based on how extensive your rehab is but you need to decide if it's worth that investment because it'll take you 5 years to see that money back. If the tenant is great and pays on time then I'd let it ride rather than tying up those resources on a small rent increase. As far as the applicants I'd feel obligated to honor my original price for the previous applicants. I'd pick the most qualified applicant from the pool and rent to them regardless of the price point. You can always increase it in a year.

Bryan N. · Answer

I would process the applications and honor the price you quoted them if approved. Otherwise, they will think you are just another dirty greedy landlord and will treat you the same way once they move in. People appreciate honesty and fairness. If the class of people you deal with don't appreciate that then you are probably accepting the wrong people. A month of vacancy is worth its weight in gold for a drama free tenant.

Andy Mirza · Answer

@Jeremy Rusnak You can tell the applicants at $950 that you are still screening other tenants as well. If you like one of the $990 applicants and they pass your screening, go with the one that you will think will be the best. I don't think there's a special need to let the applicants know about the $990 candidates.IMO, I'd leave the $850/month tenants alone unless you discover that they are problematic. If you're really concerned about the rental income wait 6 months or a year, and raise the rent $50/month. The next year raise it some more until you get closer to or at market rent. If it's too much, they'll move on their own and you'll have the chance to rehab the unit and raise the rent for the next tenant.

Jeremy Rusnak · Answer

Thanks Nat! I did my comps from local listings on the usual sources. I did rehab the bathroom with new tile, floor, fixtures... As well as the kitchen (new counters, appliances, and flooring). I suppose that I underestimated the premium that tenants would place on the freshness factor. Your input on high rents = better tenants is very interesting and I will certainly keep that under advisement. I think I will have a better idea of the playing field after the next 48 hours has passed.I tend to agree on number two. I think I am better served by starting to search for my new property to acquire than going through all the hassles for another $140 a month in income.

Nat C. · Answer

Good on your Jeremy. Where did you pull your comps from?I think the general consensus is to make the starting rent at the top end of the market comparisons (assuming you did a decent rehab job) and drop it if there is a poor response rate.It's completely prejudice but I've always found the people who can afford the higher rents are better tenants.For unit 2, you have the choice of evicting the tenants, rehabbing and renting at a higher price. Personally I would leave it as is and wait until they eventually leave before rehabbing it.