Subleasing Cheap Rentals for Cash Flow

[Jon Olson]

About three years ago while searching through Craigslist, I found a 3 BR/1BA rambler for rent in Bellevue, WA for way below market value.  The owners of the home live in Hawaii and did not even have a lease or ask for a security deposit. We wrote up a simple lease to sign and made sure we would be able to sub-lease it in the future, as we knew we would likely be finding a home for ourselves within a year. Sure enough, we found ourselves a fixer in nearby Kirkland and have been subleasing the rental the last 18 months. Rent is $1,900/month and we are subleasing it for $2,600 ($700 cash flow/month). We did make a few upgrades like painting all walls and cabinets, cleaning up all the trash outside (there was quite a bit), de-mossing the roof, and some landscaping improvements like putting in a path and adding planters. The owners paid for materials and we did the work ourselves. We think we can get close to $3,000/month, but decided not to increase rent on the current tenants this past year. My question is:  Is this wrong? We feel a bit of guilt like we are potentially taking advantage of the situation. Or is this a savvy way to generate cash flow?