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What should my tenants' new monthly rent be?
Posted on 3/21/17 at 1:24 pm
Posted on 3/21/17 at 1:24 pm
My mortgage is $1200/month and my tenants are currently paying $1250/month. My tenants have reached the end of their lease purchase agreement. It is in my best interest to have them remain in the house and complete the lease purchase over the next year. He has a credit judgement from 2013 he says he is working on removing.
I owe $158k and nearby homes are selling between $165k and $175k. I think I could get ~$170k if I use realtors. That would eliminate $8500 from my equity immediately leaving me with about $4000 after 9 years of home ownership. That's not including any capital gains tax or other hidden taxes/fees I'll run into. Yikes.
My tenants have agreed to purchase the house for $172,900, and they are responsible for all closing costs besides splitting the attorney fee. If they buy it now (which they can't), I would have $14,000 before taxes.
So I'm offering them a new lease with new terms. I'm thinking about going to $1450, which gives me $250/month. They are also responsible for all minor repairs, and I'm feeling good about major repairs since in the past three years, I've installed two new A/C units, a new water heater, toilet, and dishwasher. The roof is 9 years old as well on a 25 year warranty.
Is that a big enough cushion between rent and mortgage? Should I go higher for my own financial safety? (I have about $5000 in savings to my name right now.) Or should I cut them loose and take my chances with FSBO?
$1450 would be at the very top of the area's rent prices. I feel that going higher would not be a fair rental price.
I owe $158k and nearby homes are selling between $165k and $175k. I think I could get ~$170k if I use realtors. That would eliminate $8500 from my equity immediately leaving me with about $4000 after 9 years of home ownership. That's not including any capital gains tax or other hidden taxes/fees I'll run into. Yikes.
My tenants have agreed to purchase the house for $172,900, and they are responsible for all closing costs besides splitting the attorney fee. If they buy it now (which they can't), I would have $14,000 before taxes.
So I'm offering them a new lease with new terms. I'm thinking about going to $1450, which gives me $250/month. They are also responsible for all minor repairs, and I'm feeling good about major repairs since in the past three years, I've installed two new A/C units, a new water heater, toilet, and dishwasher. The roof is 9 years old as well on a 25 year warranty.
Is that a big enough cushion between rent and mortgage? Should I go higher for my own financial safety? (I have about $5000 in savings to my name right now.) Or should I cut them loose and take my chances with FSBO?
$1450 would be at the very top of the area's rent prices. I feel that going higher would not be a fair rental price.
This post was edited on 3/21/17 at 1:26 pm
6
Posted on 3/21/17 at 1:31 pm to StringedInstruments
Absolutely none of what you said matters.
The only thing that matters is rental comparisons, comps. Furthermore, you don't want them to move because that hurts you, so you are most likely needing to rent lower than the high end so you don't kick them out.
Your mortgage has nothing to do with what you are able to charge. If comparable places are renting for $1400, that's what you can charge. If its $1200, thats what you can charge.
Remember, if they move out that's most likely going to be a months rent that you lose in the least in switching tenants.
The only thing that matters is rental comparisons, comps. Furthermore, you don't want them to move because that hurts you, so you are most likely needing to rent lower than the high end so you don't kick them out.
Your mortgage has nothing to do with what you are able to charge. If comparable places are renting for $1400, that's what you can charge. If its $1200, thats what you can charge.
Remember, if they move out that's most likely going to be a months rent that you lose in the least in switching tenants.
Posted on 3/21/17 at 1:32 pm to StringedInstruments
Your mortgage is $1200/month and you're renting it out for $1250/month??? Are you insane? Gtfo now while you have the opportunity.
This post was edited on 3/21/17 at 1:33 pm
Posted on 3/21/17 at 1:45 pm to baldona
quote:
Remember, if they move out that's most likely going to be a months rent that you lose in the least in switching tenants.
Well...I do have $4000 in their rent premiums I can use in the interim. The house needs some minor updates (paint updates in a few places plus some curb appeal) to sell. But I feel confident in getting new tenants quickly if I needed to. Last time it was on the market, I had 31 calls.
Posted on 3/21/17 at 1:47 pm to StringedInstruments
Then your rent is too low most likely. I don't know what kind of deal you are running, but a rent to lease deal you generally can't just break and keep their money because you want to up the rent. There is usually a contract and method for how all that works.
Again, what you paid and what you owed mean absolutely nothing. The only thing that matters is the current market and what others are willing to pay.
Again, what you paid and what you owed mean absolutely nothing. The only thing that matters is the current market and what others are willing to pay.
Posted on 3/21/17 at 1:56 pm to baldona
Sorry the deal is that they complete the lease purchase agreement by March 2017 and that's not going to happen. So I can either give them more time and ask them to pay more money while I wait or kick them out and hopefully sell.
Posted on 3/21/17 at 2:10 pm to StringedInstruments
quote:
sk them to pay more money while I wait
Posted on 3/21/17 at 2:14 pm to StringedInstruments
Ok makes sense. Well you know they are going to be absolutely peeved if you boot them? I don't know who they are, but there's a dang good chance they don't leave the place in great shape. That's the kind of thing that makes people mad.
Even at $1450 that's not great. Unless it is a super easy property and your current tenants are great, I'd get it off your hands and move on honestly.
Even at $1450 that's not great. Unless it is a super easy property and your current tenants are great, I'd get it off your hands and move on honestly.
Posted on 3/21/17 at 2:24 pm to baldona
why not see if you can get them to agree to 1500 but $250 a month accumulates to be used as a down payment if the exercise the option? That gives them 3k to use to closing costs and downpayment should they exercise the option (They won't) and if they don't it lets you get a little more than market rent for the home.
Posted on 3/21/17 at 3:13 pm to StringedInstruments
quote:that dog ain't gone hunt
My mortgage is $1200/month and my tenants are currently paying $1250/month
Posted on 3/21/17 at 3:28 pm to StringedInstruments
Since you aren't sure, you will not be paying any capital gains tax on a sale. The first $250,000 in gains (not merely proceeds) are tax-free if you are single, $500k if married filing jointly.
There will be other costs involved of course, but capital gains isn't one of them.
There will be other costs involved of course, but capital gains isn't one of them.
Posted on 3/21/17 at 3:35 pm to foshizzle
quote:
quote:
My mortgage is $1200/month and my tenants are currently paying $1250/month
What's the big deal? So there isn't profit being generated, but someone else is for all intents and purposes is paying your mortgage. What's bad about that?
Posted on 3/21/17 at 4:11 pm to StringedInstruments
How long you talking before they're able to buy it? If its anytime in the near future, tread carefully about increasing the rent by too much on this new lease agreement. If they'll be in a position to be able to buy it from you in 6-8 months, do you want to risk running them off by going up $200 on the rent? If they decide they don't want to pay $1,450 a month and decide to move out, then you're starting from scratch with either having to find a new tenant or a new buyer. Depending on how fast you're able to find a new buyer/renter, you could be faced with the property sitting vacant for some time with no rental income coming in and that full $1200 mortgage payment coming directly out of your pocket
Posted on 3/21/17 at 4:13 pm to Paul Allen
quote:
What's the big deal? So there isn't profit being generated, but someone else is for all intents and purposes is paying your mortgage. What's bad about that?
It's an investment property therefore there to generate income?
Posted on 3/21/17 at 4:15 pm to foshizzle
quote:
Since you aren't sure, you will not be paying any capital gains tax on a sale. The first $250,000 in gains (not merely proceeds) are tax-free if you are single, $500k if married filing jointly.
That's only for primary residences, this is not at the moment so unless he lived there 2 of the last 5 years (may be 3 of the last 5) that's a no go.
Posted on 3/21/17 at 4:33 pm to Mingo Was His NameO
quote:
It's an investment property therefore there to generate income?
Seems more likely that it was OP's residence previously and instead of selling it when they moved, turned it into rental instead.
Wouldn't make much sense if it was intended to be an investment property if he bought something with a $1200 mortgage in an area where $1450 is the top of the area's rental market.
Posted on 3/21/17 at 4:47 pm to StringedInstruments
I'd offer them the same rent, especially if they have agreed to purchase at that price and it will be within the next year. You run a higher risk of them moving out and possibly damaging your property. Not to mention mortgage costs while finding/placing a new tenant, who may or may not want to lease/purchase at the same amount.
Your main objective should be to get out of a rental property generating cash flow that low. (I had a similar problem with mine, but was able to make the refi numbers work and generate much better cashflow).
That 14k is gonna be gone real quick after closing and taxes.
Your main objective should be to get out of a rental property generating cash flow that low. (I had a similar problem with mine, but was able to make the refi numbers work and generate much better cashflow).
That 14k is gonna be gone real quick after closing and taxes.
Posted on 3/22/17 at 7:05 am to Paul Allen
quote:
What's the big deal? So there isn't profit being generated, but someone else is for all intents and purposes is paying your mortgage. What's bad about that?
Well, for one, it's a really close margin meaning that any repairs are coming out of pocket. They pay off about $3500 of the principal each year, so if maintenance, repairs, upkeep, etc exceeds $4100 a year, I'm losing money.
But you're touching on the advice given to me. This isn't an investment property. I'm an accidental landlord, so cash flow isn't a necessity. They're paying off my mortgage and are great tenants, so keeping them is in my best interests even if I don't like it.
Posted on 3/22/17 at 7:53 am to StringedInstruments
quote:
I'm an accidental landlord, so cash flow isn't a necessity.
All the more reason to follow my advice.
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