Negative Cashflow Property

[Emily Reddington]

Hello fellow investors! 

Hoping for some seasoned input on our current situation.

We own a duplex that we initially house hacked in. We rented the downstairs to almost cover the mortgage and lived upstairs. We had no intention of moving, therefore we payed a little more for the duplex than a good BRRR would allow. This house was grandfathered in as a duplex in a nice historic area where it's zones for only single family now. We were fine paying a little more as we wanted the area for ourselves.

Then within a matter of 6 months of purchasing, we found out we had our little oops baby on the way and my hubby landed his dream job about 2 hours away. We had to finish renovating our unit, bought another duplex and renovated our level again- all before baby was born.

Ok that's the backstory! Currently we continue to rent out the bottom unit (Apt A) to the same tenant as we inherited with the property. She's amazing. She is on a HUD voucher, rarely calls, very nice and is timely about her paperwork. Of course HUD is ALWAYS the hold up if things get messed up.

The upstairs is rented to one of my best friends for a significantly lower than average rent. I don’t like mixing business with friends, but she was in a tough situation so we are doing month to month as she finds a new place. Extremely clean, handy to have on site since we live 2 hours away and we were completely fine with the lower rent as we were breaking even.

We include a utility stipend in the rent, because HUD requires it anyway and neither unit has ever went over.

All was well for a matter of a few months after she moved in, however in my naivety, missed that our Apt A, HUD tenant's Older daughter was soon to be turning 18. This happened in February, and they will be dropping her rent the first of March.

Now, we will be negative cash flow a little over $350 per month.

I am very much not keen on raising my friend’s rent. As that is what we agreed on and I should’ve foresaw the downstairs rent decreasing and this is not her fault.

Also, right now is not a good time for us to renovate the downstairs unit if we decide the lower rent doesn’t suffice. We are currently in another renovation and usually DIY most everything. We like it, we like to work together, and it saves a ton of money.

What are your all's thoughts? I am having a hard time analyzing this as I feel it is unfair to all parties. It's unfair to my tenant to evict her because of her HUD payments (she's been there 5+ years), it's unfair to

My friend to request increased rent to compensate, and it’s unfair to us to have such negative cash flow- and this included estimated appreciation of the house.

I know business isn’t always “fair” but I do have my heart in this. I am not capable of shutting out the others in the situation- I completely realize this is not good for business, but I am more concerned with my morals honestly.

Any advice??

I have already looked in to refinancing and lowering the insurance costs with no luck.

“Regular” rent was $975 for upstairs and $1009 downstairs (we pay utilities out of this) with a mortgage of $900. 

[Erik W.]

@Emily Reddington, hi and welcome to BP!

You have to decide if this property is an investment or a charity. Is your goal to make money or subsidize friends and HUD tenants with below market rents? Btw, it should be noted your HUD tenant is already receiving a subsidy courtesy of the US taxpayers, so any talk of "fairness" should probably keep that in mind.

The rest of the decisions should come pretty easy after you figure this first part out.  You're welcome to do either/or, but right now you're trying to have your cake (be nice and "fair" to everyone) and eat it too (make money).  This property does not allow you to do both, due to the manner in which it was purchased to serve as a personal residence partially.

Or third option: sell it.  You bought it with different goals and life circumstances and therefore were willing to pay too much vs. buying it purely as an investment, and it no longer meets those goals and life circumstances.  I would probably take this option, if I woke up in your shoes.

I hope this help.