Should I sell or keep?

Question

Hi all, I'm in a conundrum and need smart suggestions.

I currently rent out a 1 family house that is way below market value. The current rent barely pays for the monthly mortgage and I am scraping through to pay for property taxes.

I have two options in mind:

1. Sell the house.2. Get a loan to fix the basement to bring rent to market value.I'm sure I would need to provide more information for answers so let me know!

Thanks in advance! - Lina

Wilson Lau · Answer

@Lina Vezzani-Katano

When you say the current rent barely pays for the monthly mortgage, did you purchase the property recently at a higher rate? If your financial situation allows, maybe you can slowly increase the rent and bring to FMV, and after a few years refinance to a lower rate? I would say a rent increase of 3-5% per year is very common and reasonable in the area. Honestly, most houses in 95112 and surrounding areas are renting for $2.7k+/month, so I don't think they can find anything to move to.

Alecia Loveless · Answer

@Lina Vezzani-Katano I have great, quality tenants that take care of things and never need anything from me in a 4-plex I own.

I’ve been focusing on keeping rents steady because I believed I was “doing the right thing” for these tenants for the past 3 years since I bought the property.

I also have been looking for comps to see what others are charging for rents in the same town but there have been none posted in over two years. Finally last week one apartment was listed and it showed that my rents are 40% under market value.

I’m currently locked into leases until next November.

We’re all trying to run a business and make some money whether we want a little money or a lot of money. So let’s all do ourselves a favor and REMEMBER. this is a business and not a charity. We do have to raise our rents to fair market value.

Thomas Shepard · Answer

@Lina Vezzani-Katano I would walk the property and document photos of the whole thing just to get eyes on everything. Once you know what it looks like, you can analyze how it compares to units on the market or rented currently. This is all a property management situation. Consistently increasing the rents slowly over time is considerate to the tenants and helps you stay solvent.

check out rent BP rent estimator or rentometer to give you ballpark data for market rents. I would recommend coming under that for a quality tenant.

Basit Siddiqi · Answer

If you sell the house with a below market paying tenant, you will get a below market offer.You should increase the rent ASAP.There are two strategies - Raise it to FMV asap or do it in 2-3 year increments.I choose option 2.

Thomas Shepard · Answer

Hello Lina,

Is there a potential 3rd option? I think you may have a stronger position than you think.

What are you currently bringing in as rent today? I have a property in CA and based on what I know, you should bring in a solid $3500-4000/mo even without a renovation of the basement. Let's say you even discount that to secure a quality tenant. Be careful about selecting a tenant, but it seems to me that maybe your current tenant may be locked in at a low rate. I love the response @Basit Siddiqi gave regarding increasing rents. Can you speak to if that is an option for you? Can you decide to not renew their lease?

If the answer is really no flexibility to bring up rents without a major renovation, you really are left with selling. But, I feel that other options are better for building long term wealth

Let's say you end up keeping the property. In 5+years, the home will be worth >$1 million - $2 million and you can sell for much more to a homebuyer or investor. The challenge is to keep holding onto the property over the next few years. It might sound backwards, but keeping in cyclical markets like CA and selling it at the right time is more important than other more "steady" markets. Do you have other ways to offset the low to negative cashflow of this property with other investments or active income? I personally am willing to hold onto properties at slight loss or low cashflow if that means I can hold the asset for long term while providing a quality product for my tenant knowing that time will bring a higher return.

Lina Vezzani-Katano · Answer

Thank you @Basit Siddiqi @Thomas Shepard, I agree with both of you and I will try to increase the rent. Sadly, the tenants are such good people and I hate to not renew the lease with that to bring it up to FMV (I guess they could reapply with new lease if they wanted?) Currently we are renting $2,200. I know it's crazy low but they take care of all repairs and pays all bills on time. (Zip 95112)I really appreciate your insights and this means a lot to me.

Follow up question - would you get another set of eyes to evaluate the house with its current condition or just go ahead and raise to FMV?

Thanks again everyone!

Bradley Buxton · Answer

@Lina Vezzani-Katano

Is remodeling the basement the only way to bring the rents to market rates?  Are there utilities or other amenities you can charge for without a large remodel?  CA can be much more restrictive to raising rents so you'll want to check on the regulations.  In Nevada it's much easier to raise rents and evict people and get new tenants that are willing and able to pay more.

Should I sell or keep?

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