Advice: I Inherited a house in San Diego with a Long Term Tenant

[Matthew Ware]

 I am a 44 year old teacher who suddenly inherited property in San Diego when my father passed away unexpectedly. I have no experience managing tenants or property. The home is a single family home in the Clairemont neighborhood within short walking distance of Mesa College. Zillow values the house north of 500K. The house is paid for and the taxes are very low thanks to prop 13. My father was renting to an older couple, and as far as I can tell, never raised the rent. They have been paying $1400 a month for the four bedroom house for years and years. They've lived in the house for over a decade I think. I live way out of state (Vermont) and have hired a local property manager to oversee this property and another property that my father left. After a bit of research, I told the property manager that I wanted to raise the rent to fair market value which seems to be at least 2500 dollars a month according to Craigslist and Zillow. She was reluctant at first, which pissed me off, but after I insisted she told me what a good idea it was. When the PM informed the tenants, she claims they were indignant and very rude to her. They claimed to have had "an agreement" with my late father. The property manager after consulting with my probate attorney then advised me to give them at least six months to find a new place, which I did, and this waiting period is up on July 1st.

Recently,  I received a call from the property manager informing me that the tenants had approached her and said that they are unable to find another place to live and asked her what renovations I would do in exchange for a rent increase. She asked me what I wanted to do and I have not responded to her yet. 

What should I do? I feel somewhat guilty about raising the rent and/or forcing the tenants to find a new home , but also anger about my father having been taken advantage of. 

Should I respond to this request, or should I continue with the plan to renovate and turn over tenants? How valuable is a long term tenant in the San Diego market?

I know that I will need to renovate the house after they leave, but I have no way to truly estimate these costs. The thought of coordinating this from across the country is daunting.  I'm sure there is quite a bit of deferred maintenance since it has been rented for so long. Do any of you seasoned landlords see any value in keeping these long term tenants in the house? The tenants are an older couple with an adult son who is disabled and in a wheelchair.  I have strong suspicions based on my one brief visit to the property that the tenants were also subletting a section of the house although I have no proof of that. I am not reliant on the rental income and there is money from the estate to renovate with. I am conflicted about being an evil landlord, but feel in my gut that it would be best strategically and financially if they were gone. Is there anything else I should consider? If you've read this far, thank you. Your thoughts are appreciated.

[Matthew Ware]

Thanks to all of you who took the time to respond to my questions. I am truly amazed at the generosity and kindness that so many of you have exhibited with your thoughtful replies. I'll soon try to get a picture of myself uploaded so that you can put a face to the name. 

After sleeping on this, not so well by the way, I think that I am beginning to get my head around one of the most difficult challenges that I am facing, and perhaps others face, when presented with these types of dramatic life events. The specific issues with my tenant are really symptomatic of a much larger and heavy issue. Prior to my father's passing, I had no real comprehension of his net worth. We were estranged and aside from the grief of loss, what I'm struggling with is the shifting of mindset from wage earner to investor.

Those of you who are offering the advice to sell, I think I get it.  I can borrow against the money in the houses, but the money locked up in the CA houses can be making significantly better money elsewhere, ideally without greatly increasing my exposure to risk. I can always borrow against those new, better performing assets when it comes time to expand my portfolio. From an investor's point of view, the goal is to always have your money making money and to assess risk and reward.  So my San Diego properties are like the T-Bills of real estate, and I can likely manage a significantly better return by eventually learning and developing skill in a real estate investment strategy that I can apply closer to home. My learning curve and comfort level with analyzing risk can define my next moves. There is an opportunity cost to holding on to the houses,(a rate of return that a seasoned investor would not accept), but they are cash flowing right now, so no immediate rush to sell. 

 If I hold on to the properties long term, out of sentimentality or risk aversion, I am betting on appreciation. It's hard to not overvalue this variable since the only reason I have this asset is because my Grandmother was fortunate  that her late, 3rd husband had the foresight, or dumb luck, to buy these houses back in the 60's. But I seem to recall reading somewhere that using past performance to predict future performance is not a sound investment strategy, although it's very emotionally compelling.

For the vast majority of my working life I have followed a path that trades my time for a very modest, predictable wage and decent benefits. Money was something to be budgeted and used to live on with occasional indulgences or escapes from the routine. There was always an unstated belief that I was lucky to have a job, and although the money wasn't great and there never seemed to be quite enough, I was at least making ends meet. I had no aspirations that I would ever be in a position to invest beyond a modest retirement fund,  and felt that I would most likely "work" for most of the rest of my life. 

This is a very difficult mindset to shift. It is hard to see things from this different "investor" perspective. Thanks again to all those on this forum for helping me understand some of the smaller things that led to this larger realization. I look forward to continuing to learn with all of you. Don't worry I won't do anything rash, but I may begin to venture down this road less traveled with some of you.