New duplex, great long term tenant WAY under market value

[Stephanie M.]

Hi all, I'd appreciate your opinion on what to do in this situation - 

Just purchased a duplex today ( 7/6/18 ) with long term tenant paying same rate of $1100 since 2011 for a 4 bedroom 1600+ sq ft, 4 BR 2 car unit in a great location, the top school district in the state, and large yard. I averaged out similar properties cost per square foot and the avg is $1.24/Sq Ft. ...... A duplex next door is 3BR 1 car renting for $1600... 3 BR Houses are being rented out for $2600 in the area. 

The tenant is currently at .92 cents per sq ft. Even at $1.00 per sq ft of 1600 in rent is below market avg. 

I thought $1,500 / month is a good middle ground for a great tenant year lease starting off, then I'd increase next year. instead of dropping the bomb of $1900+/month at market average off the bat. I'd really like to keep him as a tenant. He had a deal with the previous owner where he cuts the lawn every now and then and does some snow removal on the property. Does not do the best lawn care but its nice to have someone cut it. I wouldn't require him to cut the lawn with this increase I think he would push back. 

How would you approach this situation? I need him to at least be at $1400 to hit half of the house monthly payments not including my utilities.... 

Thank you so much for helping me here. I really appreciate your input. 

[Zachary LaJoye]

Stephanie M. Congrats on the purchase. I’m going to assume you’ve done your homework and that your numbers are all accurate. If so, I would increase rent to match the market rate at the first chance I got (lease renewal.) To have rent that far below market and leave that much cash on the table would be a huge misstep. Don’t get caught up trying to “meet in the middle” or help out the tenant. You need to look at it like the business it is and maximize your profits.

You mentioned at the end wanting to, “at least get the tenant to cover half your house payments.” Going off this, I’m guessing this property is not cash flowing. Is this the case? If so, even more of a reason to increase the rent and maximize income. Good luck.