Here is the situation:
We have a tenant who wants to move so we planned and bought another property to move him to and backfill current property.
We are getting a new tenant who wants to move into the current unit the day after we move our current tenant to the new property (so we will have no vacancy for another year). Problem is the max. rent the new tenant can pay is $1150 Current rent is $1295, and the fair market rent is $1250.
So we will be taking $100 a month below market rent but days on market for comparables is anywhere from 30 to 68 days. I think it is better to take the lower rent and not risk vacancy because taking lower rent the downside is $1200 where as for vacancy the downside is $2500.
What do the experts on this board recommend?
1 extra month of vacancy would take you 1 yr to recapture with the extra $100 a month. If you have someone that will move in asap at $100 less and passes your rigorous screening go for it.
Tenants are FICKLE. Your current tenant wants to move. You have a new tenant that is moving in but you can’t really know how long either will stay.
I would NEVER buy a property for a tenant. You’re doing it backwards. You should be buying your rentals based on the numbers. The rental property business is ALL about the numbers. Likewise, I would not lower the rent for a tenant. That $150 difference in the current rent and the new rent will likely wipe out all of your cash flow (using real world expense numbers) and may even result in negative cash flow. Would I lower the rent and operate at a negative cash flow? NO!
Vacancies are a normal part of the rental business and it takes a little time to fill them. The vacancy loss is already included (or should be) in your operating expenses. Therefore, although you should certainly do what you can to minimize vacancies, they are not really affecting your cash flow because you’ve already accounted for them in your operating expenses.
I am also concerned about lowering the rent because a new tenant can’t afford the normal rent. This is a warning sign that the tenant is financially stretched and you may well expect problems down the road.
Good Luck,
Mike
why are asking $1295 is even you admit that fair market is $1250. Rentals are VERY price sensitive. You need to lower it to $1250 or even consider $1200. Get in line with the market unless your rental market has very low vacancy rate. Vacancy is like “yield loss” in manufacturing. Small chances have a big impact.
However, this is independant of your tenant who “claims” he can afford $1150. As propmgr pointed out, try to avoid tenants who are stretching. Secondly, I don’t negotiate rental prices. I post what I think I can get and that’s the price, period. Unless you think you are going to have a real hard to find someone else, then I would not drop to $1150. Spring is here and getting ti filled should be easier than winter time.
Here’s a few things I learned through 25+ years of landlording:
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Renting 10% below marketing has it’s advantages, but USE IT WISELY.
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Renting above market, i.e. $1,295 for a $1,250 apartment leads to constant turnover, vacancy and repairs, painting when tenants vacant, plus the added wear and tear of constant moving in and out…
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When renting 10% below, I cut vacancy rates, and get many more people looking so I can pick the BEST tenants, NOT someone who can bearly afford it. At this price, I can frequently get someone moving out in the morning, the next tenant moving in in the afternoon, but more often a 10 to 15 day gap, and even have some volunteer to paint the place besides. Yes for me, taking $125/month less is worth collecting 60 days additional rent ($2,500) plus $500 to a $1,000 a painter would’ve charged me, in addition to other maintenance costs
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I once rented to one guy who could barely afford it, couldn’t raise the rent for about five years, and he finally moved when his salary was cut. Could’ve rented to someone of a better cut from the start, savings years of aggravation.
Frank Chin
Thanks everyone for the input. I should clarify that I am dealing with Sec 8 tenants here so the rent is determined completely by what sec 8 will allow based on each tenant’s voucher. So the current (higher) $1,295 is due to that and the next tenant’s (lower) $1,150 is too. The current has been in place for 5 years and the new tenant is leaving her current rental after 4 year (to move to my property). This is why I figured that having a continuous long-term tenant outweighs the $100 less in rent.
Propmgr. you are correct and we have factored in 10% vacancies but I figure I’d rather take a “potentially” long-term tenant and save 10% vacancy a year. Re: not buying a property for a tenant; we were going to buy anyway just hastened the process to keep the current long-term 5 year tenant.
Right now I am leaning towards taking the lower rent for no vacancy (because sec 8 guarantees rent payment).
Oh, you should have mentioned the section 8 part earlier. Not sure if they do the same thing in your area, but I did take a section 8 tenant a couple of years ago and the most they would approve the place for was $745. It’s based on the number of people that are living in the apartment, the same unit one floor below was good for $900 as she had one extra person living with her. Anyway after a year, I was able to raise the rent to $850 and section 8 allowed it. You may be able to go this route and get your rents up higher next year.
Right now I am leaning towards taking the lower rent for no vacancy (because sec 8 guarantees rent payment).
Section 8 does NOT guarantee the rent payment. Section 8 will pay their portion of the rent payment if the tenant continues to meet all their requirements. Normally, part of the rent is paid by the tenant. It is common for Section 8 tenants to fail to pay their portion of the rent, just like any other tenant not paying their rent. I had one lazy section 8 tenant lose their section 8 payment becasue he refused to go to his annual section 8 renewal meeting. Crazy!
Section 8 tenants are no different than any other tenant. They screw up with great regularity and either lose their section 8 eligibility or must be evicted.
Mike
Propmgr. yes that is correct, in this case the tenant only has to pay $50 of the rent. rest is paid by Sec8 which is guaranteed for the lease term. This tenant has been on Sec 8 for donkeys years without any evictions hence I said guaranteed (one would think the tenant would not want to lose the Sec 8 rent voucher by not paying $50 but who knows).