Section 8 rent increase - only after new one year contract

[Johan Hultman]

Hey BP,

Background:

I bought a property a few months ago in Indianapolis. The property has a section 8 tentant with a contract ending this summer. The tenant is a lady who has lived in the property for 25+ years, happy where she is and will probably stay there until she moves on to the next world. 

The problem is: The rent is at $525, which is way below all comps. My PM suggests $725-750 and this is the number I used when doing the numbers buying the property (understand that my numbers look terrible with the current rent) . The rent has not been rasied for the last 10 years by the precious landlord for some reason.

Now that the contract is coming to an end (it has actually already ended), section 8 tells my PM that they want me to sign for a new year before starting negotiations for a rent raise. To me this sounds crazy, I am risking signing a new one year contract ending up at $550 rent for the next year.

To me I have a few options and I hope that I could get some good feedback here.

1. Sign a new one year contract and hope for the best. The tenant is a very cool old lady and I would proably not have to deal with vacancy for many years to come. I would ask for a raise now, and then rehab for $5-6k (Paint & Floors) the coming year and ask for another raise because of the improvements next summer (Hoping to end up at $725-750 next fall). My PM also informs me that I can only ask for a rent raise ONCE per year.

2. Walk away from Section 8 and start fresh with a $725-750 rent. Hoping for a good tenant (In this case I would probably have to spend $5-6k at a turnover) and deal with vacancy in the meantime.

Any feedback is greatly appreciated.

Regards,

Johan