Managing Long Term Rental Property

[Breland Almadova]

Aloha Bigger Pockets Fam,

My mom and dad have a rental property. It was their first home they bought about 30 years ago now. Lived in it for about 10 years and have been renting it out for about the past 20 years. It still has a mortgage on it due to refinancing in the past years to create more investment opportunities else where. They do long term leasing with this property and have a pretty good tenant right now. However, they’re rental income is coming in at a loss and isn’t covering total expenses.  I’ve told them multiple times to leave your emotions and feelings out of it when it comes to upping the rent.  They are a bit hesitant as they forget real estate investing is a business. I have used the rent calculator tool and it shows median rent should be around $3,100. Currently they only charge $2,800.  Any suggestions on how they can communicate with the tenant and let them know that they need to increase the rent?

Thank you all!!!

[Randall Alan]

@Breland Almadova

We try and limit our rent increases to about 4% a year to limit turnover, but this year we are expecting to go to 6-7%. 

I’m not sure what rent calculator you are using… but wanted to offer some suggestions:

First, if $300 is making the difference between cash flow positive on a $2,800+ rental it sounds like you are pretty over-leveraged on the property. 

Keep in mind that if you lose your tenant by ‘over-raising’ the rent too much, and it takes you 30 days to put a new tenant in place, you will lose about 10 months of a $300 increase.  So short term you will be even more upside down and would have to cover the mortgage on your own for a month.  So while market might suggest the increase is warranted, there are possible negative trade-offs if you press your rent higher too fast.  There would also likely be some refresh costs to be ready to rent again (new paint / small fixes, etc).  

I would evaluate whether it might make more sense to sell the property at this point.  $300 a month cash-flow on that big of a mortgage / property hardly seems worth it (and you won’t even have that it doesn’t sound like if you DO raise your rent).   What happens when you need a new roof?  What does your cash-flow look like then? Negative for 10 years I bet.  You might be better cashing out what equity you may have and putting it to work otherwise.

All the best!

Randy