TL;DR -- this deal will see me bankrupt or well on my way to property two. I'll need to raise rent, or kick tenants out and have them immediately replaced. What's the best way you guys did that?
Here's the situation: I've found a good property that has great numbers at market rent that I'd like to offer on. There are two main issues in my way that make the deal precarious.
One issue is that the tenants are locked into leases at $200 below market rent for the next 3 - 9 months, with varying expiries on their leases. I will be removing the only tenant that is month to month in order to satisfy owner occupancy laws for FHA financing. At their current rent, the remaining tenants will pay my PITI, PMI, and HOA fees. Leftover expenses for sewer, property management, and vacancy/capex reserves put me $673 in the red per month.
The nearly $700 expense couples with my next challenge: after closing at asking price and paying all closing costs, I will be completely out of cash, and unable to afford any unforeseen expenses. Hopefully the seller negotiates here, but I don't like to have hope in my toolbox.
The situation one year from now is financial paradise on paper: market rent meets the 1% rule and gives me a comfy cash flow-- again, barring any disasters or extended vacancies. Until then, it's a volatile situation with no safety margin and several challenges I need to overcome to ensure financial survival:
- Successfully fade any unexpected expenses from inspections or repairs with zero cash on hand.
- Arrange for rent increase or tenant removal in the least disruptive way possible.
- If tenants are removed, they will need to be replaced immediately
My brainstormed solutions so far are:
- Regarding unexpected expenses: Craig Curelop my unit by getting a futon and Air BnBing the rooms to increase cash flow or borrow from family.
- Regarding rent increase/tenant removal: use property management or letters? Negotiate gradual increases? Leaning toward using management here since I have it priced in. The tenants have been there 13-20 years, and it would feel really awkward or bad to kick them out myself. I have to, and I'd do it, but I'd prefer not to.
- Negotiate a healthier price on the deal so that I have some money for expenses.
In my mind, the deal gets exponentially better IF I'm able to overcome all the obstacles. If I fail, I just drown. How did some of you negotiate rent raises or tenant replacements? And how did some of you stay afloat when your real-estate barge almost got swallowed? My gut tells me this is a deal I can definitely sail into, and somehow, the challenge makes the deal more appealing, since I know competitors will have to negotiate the same obstacles. What are your experiences on handling these challenges?
