Boot Month-to-Month Tenant

[AJ Aviles]

Hi BP Community. For those who have ever been in the situation on booting a month-to-month tenant to remodel unit and rent for more cash, this question/situation is for you :)

I currently have a side studio to my single-family home that is being rented out for $700. The tenant has been there for 5+ years and has never been an issue and always pays on time via Zelle. She was the previous owners friend. And if I bump rent +$150, I do not think she will go anywhere and accept to stay because of convenience to her mom and work. 

Due to my 2-1 buy down, on April 2024, my mortgage will be going from $2,546 to $2,803 and then to $3,071.25 in April of 2025. That amount includes Principal, Interest, Property Taxes, Home Insurance, and PMI. I currently cashflow, $50 on the full property (3bed-1bath + separate entrance studio) with the $2,546 mortgage payment but will not be able to once April 2024 comes up.

So if I were to put ~$12K worth of renovations to the studio (new kitchen counter tops, cabinets, furniture, paint) and based on my research, I should be able to rent the place to a mid-term renter for $1,000-$1,300 per month (+$300-$600 more than what it is now).

So based on my situation, these are the current option I am thinking of:

a) Lowest Level of Effort: Bump my tenant's rent by $150 with no renovations or value adds to the unit. This will leave me at negative ($107)  cashflow per month.

b) High Level of Effort + Vacancy Risk: Perform the remodel (I already have a trusted contractor) and find a mid-term renter which is very obtainable given the B+ location of this property in Florida.

Which route would you take and why?

Thanks,

AJ

[Kim Meredith Hampton]

AJ, I would try the rent increase first and foremost. Bird in the hand……

I caution you on the mid terms for a couple of reasons and things to consider;

1. Is this a legal conforming studio rental?

2. STR and MT terms have slowed down significantly, so I caution you in figuring 100% occupancy in your calculations

3. Downtime for rehab should always be figured into your equation with regard to cost and vacancy during this time

4. Do you live in an HOA whom allows MT rentals?

[Simon Ashbaugh]

Quote from @AJ Aviles:

Hi BP Community. For those who have ever been in the situation on booting a month-to-month tenant to remodel unit and rent for more cash, this question/situation is for you :)

I currently have a side studio to my single-family home that is being rented out for $700. The tenant has been there for 5+ years and has never been an issue and always pays on time via Zelle. She was the previous owners friend. And if I bump rent +$150, I do not think she will go anywhere and accept to stay because of convenience to her mom and work. 

Due to my 2-1 buy down, on April 2024, my mortgage will be going from $2,546 to $2,803 and then to $3,071.25 in April of 2025. That amount includes Principal, Interest, Property Taxes, Home Insurance, and PMI. I currently cashflow, $50 on the full property (3bed-1bath + separate entrance studio) with the $2,546 mortgage payment but will not be able to once April 2024 comes up.

So if I were to put ~$12K worth of renovations to the studio (new kitchen counter tops, cabinets, furniture, paint) and based on my research, I should be able to rent the place to a mid-term renter for $1,000-$1,300 per month (+$300-$600 more than what it is now).

So based on my situation, these are the current option I am thinking of:

a) Lowest Level of Effort: Bump my tenant's rent by $150 with no renovations or value adds to the unit. This will leave me at negative ($107)  cashflow per month.

b) High Level of Effort + Vacancy Risk: Perform the remodel (I already have a trusted contractor) and find a mid-term renter which is very obtainable given the B+ location of this property in Florida.

Which route would you take and why?

Thanks,

AJ

Personally id say take the risk and renno. Worst comes to worst you'll be able to bring top dollar if you decide to sell!

[Richard F.]

Aloha,

You are not only running negative with option A, but you are also losing an additional $300 - $600 per month if your figures are accurate. You also actually increase the actual value of the property with proper reno.

Get a solid plan together, using a GC to evaluate needed scope of work and provide actual cost estimates, then strategize based on optimal market timing for the finished reno availability.

Partial renos or cutting corners on quality of finish and materials will cost you on the back end. Do it right, do it once, get top dollar and attract the top 10% of the Tenant pool for your price range.

[AJ Aviles]

@Kim Meredith Hampton - thanks for the insight.

1. Yes, it is a legal conforming studio rental.

2. Correct, that is something I have been considering. I am leaning more towards MTR route (FF) as that is how I found my tenants (medical professionals) in the main house and I don't mind cold calling leads as I kind of enjoy that part. Also, there were similar size studio's on Zillow that were renting for $1,000 and obtain a renter within a few days.

3. Correct, I factored in 1 month for rehab and another month for leeway in finding a new tenant.

4. There is no HOA and yes, MTR is 100% allowed.

[AJ Aviles]

@Simon Ashbaugh - I am leaning more towards this route because I can take the risk while I am young and will have minimal living expenses since I live at home with family. Thanks for the encouragement! 

[AJ Aviles]

@Richard F. - this is great advice. Thanks. I am confident that I can get at least $1000 post renovation and this is a long term property hold so that extra $300 will go a long way over 10+ years ($12K for Rehab; additional $36K out after 10 years = 300% ROI in 10 years).

I do have two kitchen remodeling connections that I trust so I will set up a walkthrough to get those renovation estimates on a higher quality finish. Thanks!

[Kim Meredith Hampton]

Quote from @AJ Aviles:

@Kim Meredith Hampton - thanks for the insight.

1. Yes, it is a legal conforming studio rental.

2. Correct, that is something I have been considering. I am leaning more towards MTR route (FF) as that is how I found my tenants (medical professionals) in the main house and I don't mind cold calling leads as I kind of enjoy that part. Also, there were similar size studio's on Zillow that were renting for $1,000 and obtain a renter within a few days.

3. Correct, I factored in 1 month for rehab and another month for leeway in finding a new tenant.

4. There is no HOA and yes, MTR is 100% allowed.

 Given your answers, raise the rent to $1000 or give her a 30 day notice to vacate and do your reno

[Nathan Gesner]

Quote from @AJ Aviles:

Why so cheap? I just looked up studios in Miami and the ratty ones are renting for $1,000.

I would definitely renovate and try renting to short-term renters at a higher price. I'm in a market with far less demand and I rent everything on a one-year lease or month-to-month with a 25% increase.

[AJ Aviles]

@Nathan Gesner - I accidentally had the location set as Miami but the studio is actually in Orlando, FL (area code 32806). The studio is 300 sq. ft. so very small but the rehab will include a rear Lanai extension adding +100 sq. ft for laundry and storage. I dropped a photo below for reference:

Thanks for the feedback!

[Simon Ashbaugh]

Quote from @AJ Aviles:

@Simon Ashbaugh - I am leaning more towards this route because I can take the risk while I am young and will have minimal living expenses since I live at home with family. Thanks for the encouragement! 

 Absolutely!

[AJ Aviles]

Thank you @Nathan Gesner, @Kim Meredith Hampton, @Richard F., and @Simon Ashbaugh again for the advice! I just completed the renovation project (my previous tenant ended up walking) but my new tenant just moved in yesterday for $1,150 per month! 

Total Renovation and Furnishing Cost = just under $13K so I will be able to pay that back in one year. 

I put some before an after pics below:

[Nathan Gesner]

Looks nice. Thanks for giving us an update!

[Simon Ashbaugh]

Quote from @AJ Aviles:

Thank you @Nathan Gesner, @Kim Meredith Hampton, @Richard F., and @Simon Ashbaugh again for the advice! I just completed the renovation project (my previous tenant ended up walking) but my new tenant just moved in yesterday for $1,150 per month! 

Total Renovation and Furnishing Cost = just under $13K so I will be able to pay that back in one year. 

I put some before an after pics below:

 That looks very nice AJ! Keep up the great work man.