Vaughan, Ontario · Member since 2016 · 3 posts · 1 vote
I'm not sure where to turn but I really need you're assistance everyone.
I have potential tenants who want to lease my whole house and they're willing sign a year lease and to pre-pay for 12 months as long as I agree to have our unfinished basement finished.
What are the pros and cons to this agreement?
I spoke with my real estate lawyer and he said to look out for complaints from tenants about noise and the inconvenience of having contractors coming and going.
The tenants have a toddler and an 8-month old.
The only pros I think would be to lock them in for at least a year and the finished basement would increase my house value.
Cons would be that the money they give would be allocated to the finishing of the basement and I would need to set aside money to pay down my monthly operating expenses.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
10y
Paying a year up front is generally considered a red flag.
Big deal all my leases are for a year. How much more are they going to pay you for rent with a finished basement? Presuming your unit is priced fairly now I wouldn't even consider this deal unless the rent was higher.
Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
10y
It really depends on what you want ultimately. If you spend $20k to finish your basement, how much more rent are you charging compared to not finishing it? What's your payback period? How much more will your house be appraised for, and what do you intend to do with that extra equity?
Could you use that $20k for down payment for another rental property instead? Or is your pool of potential tenants very small for your rental? And if so, finishing the basement will get you better quality tenants?
If you go forward, I suggest a much longer lease assuming they're qualified. Personally I would never spend so much more unless I know I'm getting a solid renter who's gong to stay. Remember turnover always cost more money!
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
Johnny Dong a smart person would not pay that rent a year in advance. Too many wat if's. What if the house burned down? What if the landlord sold the house? What if somebody got a transfer at work?? A smart land lord should not take that much rent in advance for the same reason. What if the tenants are needy and call every other day for some made up repair? What if the tenant is tearing up the house? What if you want to sell? Again what if the house burns down?? Read the forums. There is somebody on here everyday wanting to know how to get a tenant out. It seems foolish to make it harder than it already is. Oh yeah here's another question. Why doesn't somebody with that big of a chunk o change own their own house? RR.
Vaughan, Ontario · Member since 2016 · 3 posts · 1 vote
10y
Thank you all for the replies. Our market here is quite hot so our tenants are not able to afford to buy in our neighbourhood.
The tenants believe that the real estate market is over heated and will have a correction soon so he is staying out of the bidding war situations of buying now.
I think what I'll do is have them lease for a year and if they can prove they are good tenants then I'll consider having my lawyer draft up an agreement to finish the basement.
I would find tenants that are not going to make demands before they are your tenants. If they want a rental with a finished basement they need to find one. Taking their money and agreeing to do the work is extremely risky and could likely come back to bite you.
Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
10y
I've done work on a house with tenants in place, and it was a nightmare. Unless there was some kind of emergency situation I would NEVER do it again. I certainly wouldn't do it with 2 small children in the house.
If you want to finish the basement, do it while the house is empty. Nothing they have offered is enough incentive for you to do remodeling that you had not already planned on doing.
Are they paying more than your asking price for rent? If not, tell them goodbye.
If they are paying more than your asking rent, then you need to look at the details. How much more are they paying? Does that cover the cost of the renovation? Does the renovation increase the home's value? By how much?
What time frame do you have to complete the basement? Who is drawing up that contract? What if you don't complete it in time? What happens if the work is not to their satisfaction?
Look at this situation like a poker wager. If you get another tenant instead at whatever rent you were asking, you won't be sorry. If you do this, you might be sorry. A good gambler only bets when the upside potential outweighs the risk. Make sure there's a good upside.
All that said, ask yourself why they would offer to pay a year up front. To me that seems very dumb from their perspective. Withholding rent is one of the only recourses a tenant has against an unresponsive landlord outside the court system. Why would they offer, all on their own, to forego that?
They don't sound dumb to me. They sound cunning. If you accept a year's payment, then you basically can't get rid of them for a year. I don't know what they are planning. Maybe they are going to be great tenants, or maybe they will have loud parties, not mow the grass, make their neighbors hate them, park 6 cars in the street and leave your house a wreck. My suggestion is to run and don't look back.
If you do this (and I would definitely not) do not make the lease agreement contingent on the remodel in any way shape or form. They should be completely separate agreements. If they insist on this point, or any point that seems odd, then you've probably discovered their game. But you don't need to discover their game, and I wouldn't bother.
Real Estate Agent · Minneapolis, MN · Member since 2016 · 52 posts · 37 votes
10y
Paying for the entire term upfront is definitely not a red flag. In fact, it diminishes all risk for collections, quite the opposite. Paying 2-3 months rent upfront to have you overlook ****** credit, or income is. In regards to finishing the basement, I would say no unless rent was raised to the price per sq foot average in the area.
Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
10y
1. Question is, do "you" want the basement finished do "you" want to pay for it? If not, move on to next applicant.
2. I read posts about advance rent and all the hypothetical nightmares and I don't agree. Of course, anything is possible, but these type comments remind me of all the naysayers to REI and the broken toilets, late night calls etc. People have any number of reasons to pay advance rent. I've known people to allow higher taxes to be deducted from W2 income so they can get a refund the following year as a way to force saving. Insane! But people do it. Same with advance rent. If screening comes up clean, go for it. BTW, I've taken in the past and did recently take advance rent and have no problems with it.
3. If you take advance rent, you must record the income in the year you receive it. It is constructive receipt. Individuals and many small businesses have cash basis accounting, not accrual. If you get 12 months of rent on 8/1/16, that money is 2016 income, but you won't have but 5 months of expense. Do the math and visit a CPA.
Good luck!
San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
10y
Figure out what rent would be for a house with a finished basement, and tell them you'd be happy to have them pay that amount of rent upfront, without a discount.
There is nothing in it for a landlord to discount getting rent up front. If you screen well, and you have a year lease, you will get your rent. Why would you give them a discount? You lose money on tenants who pay upfront with a discount.
And creating a unit that would cost any other tenant more money, then giving it to an applicant just because they pay a year's worth of rent upfront - which is the amount for a unit without an unfinished basement, is not good business.
And trust me, today they want a finished basement for the price of a unit without one - tomorrow, they will want who knows what.
I learned this from the owner I worked for. He said there is no benefit to a landlord to undercut himself just because someone pays their rent early. Why would he do that? He wants the max rent he can get for 12 months. So, taking a tenant who "only" pays every month, but pays a higher amount, is the way to go.
Now, if you want to finish the basement, then charge a higher rent to someone willing to pay full price for a year to have it - go for it.
Vaughan, Ontario · Member since 2016 · 3 posts · 1 vote
10y
Got an update to the tenants request. Since we declined to renovate the basement the tenants now want to put down a roll of carpet for some padding and maybe hang some nice fabric on the walls to cover the insulation and wood studs so that they can create a little play area for play dates at their own expense.
What do you guys think? Yay or nay?
Too demanding on their part or are we too anal about little details?
This is our first rental property so we are complete NEWBS.
Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
10y
Is the basement original intent for storage, water heater, furnace, etc.? Is the electrical wiring exposed running through the studs and/or covered by the insulation? Is this an older house, i.e. 30+ years? If it's genuinely intended storage or utility basement, non-heated, then it's not living area. You certainly don't want a child playing and have little hands accessible to wiring. You have a duty to provide a safe place. How much would it cost just to hang drywall and tape the seams?
Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
10y
Aside from trying to these applicants in the door and depending on the amount of free time you have, go to Home Depot and attend a free class on drywall, often on Saturday's. Check the front door for upcoming classes or call store. You and buddy could probably get the walls covered and taped sufficiently meet any safety concerns of exposed wires. Drywall isn't terribly expensive and feed your friend well for his time. You can always go back later or hire someone to finish it for painting. You'll be surprised at what you can do and drywall is very forgiving - a little mud and sanding hides all your goofs. Good luck.
San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
10y
Amen to @Tommy F. 's post. My first thought was that you'd be giving permission for kids to play in a room with lots of fiberglass floating around - yikes!
I really think you need to turn these guys down. Just tell them it appears it's just not a good fit for their needs, and now that they've told you they intend to let children play in an unfinished basement, that you can be liable for anything that happens, so you are denying them.
Whenever it's this much work, just deny. Because their entire tenancy will be more and more work and drama and petty requests - ahhhh! Been there.
Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
10y
Not a good idea. Sounds like you have a needy tenant that will keep coming up with more requests/demands every month.
If the basement is that unfinished and they still want their kids to play down there...it doesn't sound too smart to me. A good way to figure this out is.....can you see and reach out and touch the heating system, the water tank, the electric panel, the utility shutoff valves ? If you can , so can the children!!
Is your upstairs living areas not big enough? Are they trying to create more living space for other people to hide/sleep there ?
Also, I know you already told them NO, but for future knowledge, never agree to any remodeling while a tenant is in a unit.....the potential of harm and lawsuits is not worth it. The only time is if its an emergency resulting from something in need of repair (not to enhance a property). Besides, if you had to do this remodeling before they move in, you could lose another month of rent and thereby cancelling any gains you could of upcharge for in the following months.
Don't forget that it is not just a one time charge $$, every time the unit is turned, you will have to fix it up again including the potential of a new carpet every 5 years.