Advice about tenant in AZ rental

[Andrew Kleiner]

I own one rental property in Mesa, AZ. (1120 s/ft, 3Br/2.5Bath, townhome). I have had the same tenant in my unit for 13 years. I have been charging her below market rent because she has been there for so long and in 2009 she had a reduction in income. If I let her, she will live there until she dies. I have been educating myself more about REI and want to get more units, get into BRRRR, etc. I recently did a cash out refi on the property to pull out my original investment, to get some cash to go get my next property and to rehab it and rent it out at market rates. I need to spend about $10k to get my unit in top shape so I can attract other high quality tenants. I have been renting for $850 but can rent the unit for $1600 or $1700 a month. I made decision to tell my tenant that I am raising rent to market rates and if she cannot afford it, then I will be terminating our relationship (she is month to month right now).

Tenant is losing it, crying, desperate to stay and after she thought for a couple of days, said she could pay $1200 a month if I let her stay another year. At $1200 a month I am still making $200 a month in cashflow (not including CapEx, Maint.). I have managed this unit myself and and my mortgage payment used to be so low that at $850 I still cashflowed and made money to set aside for CapEx so that I have never come out of pocket for when I replaced the AC and appliances.

I really want to lease my unit at market rate (looking at $300 a month in pure cashflow), but tenant said she will live in the unit in the same condition and pay $1200.  

I need your thoughts. Keep a tenant for one more year, or take chances with market rent and tenant who may only stay for 2 years.

[Ryan Swan]

It's REALLY tough out there for tenants right now. There's a very real chance your older tenant might not be able to find anything to rent (no kidding). I would sign her to a 12 month lease at $1200/month and then tell her rent is going up by x$ the next 12 months. Maybe that number is $1600/month, maybe it's $1300/month, but either way it's going up. That gives her time to prepare mentally and practically. 

You could even put a stipulation in the fixed term lease that the tenant can break it early without penalty if she is able to find alternative housing. That would be win/win for both of you.