Interest rate increased on rental - I have a few options

[Alexandria Garreau]

So long story short, my interest rate has increased on my rental property and my mortgage payment went from $1220 a month to $1969. Tenants pay $2350/mo and after the rate increase, this no longer covers mortgage/taxes/insurance. Technically I’m losing $120 a month - which isn’t a lot, but I was cash flowing $900 from it before the increase. Here is where I’m at for next steps:

1. Be open and honest with tenants and tell them that the rent will need to be increased to $2500. 
2. Evict tenants (I would give them a couple months to find a new place) and take the chances with airbnb. It is becoming a bigger thing where I live now. 
3. Either increase or not increase rent then sell it in the spring when the market is a bit more hot here. 
4. keep tenants but tell them I want to sever the house to make it a duplex (would cost nearly $15,000 to do likely) and then airbnb or rent basement. 
5. Any other suggestion that’s out there. 

I’m kind of at a point where I feel impartial to every option. I think #1 is most realistic but I do want to duplex it in the near future. & since I’m on a variable rate, if it goes up any more I don’t really know if I could increase their rent more. 

I appreciate any and all input, thank you! 

[JD Martin]

Quote from @Alexandria Garreau:

So long story short, my interest rate has increased on my rental property and my mortgage payment went from $1220 a month to $1969. Tenants pay $2350/mo and after the rate increase, this no longer covers mortgage/taxes/insurance. Technically I’m losing $120 a month - which isn’t a lot, but I was cash flowing $900 from it before the increase. Here is where I’m at for next steps:

1. Be open and honest with tenants and tell them that the rent will need to be increased to $2500. 
2. Evict tenants (I would give them a couple months to find a new place) and take the chances with airbnb. It is becoming a bigger thing where I live now. 
3. Either increase or not increase rent then sell it in the spring when the market is a bit more hot here. 
4. keep tenants but tell them I want to sever the house to make it a duplex (would cost nearly $15,000 to do likely) and then airbnb or rent basement. 
5. Any other suggestion that’s out there. 

I’m kind of at a point where I feel impartial to every option. I think #1 is most realistic but I do want to duplex it in the near future. & since I’m on a variable rate, if it goes up any more I don’t really know if I could increase their rent more. 

I appreciate any and all input, thank you! 

 This may be immaterial, but you couldn't have been cash flowing $900 before if your other numbers are right. Your mortgage went up $749, so if are losing $120 per month now that it went up you were cash flowing $629 per month. This may not matter other than demonstration that you weren't doing as good as you thought and you're not as bad off now as it seemed relative to what you thought. 

That aside, the rent increase is really not a viable answer unless you're already renting the house significantly under market. If you are at market rates already, the tenants will simply refuse to pay or will move at the end of their lease. Likewise, if you have a lease, you probably cannot unilaterally raise their rent just because your costs went up. And even if they agree with the $150 increase you're just breaking even. Not a good reason to hold a property unless it is appreciating significantly.

If you have a financially better use of the property that's more or less proven using conservative estimates, then that's probably what y ou should do. If you can STR the house and make $50k gross per year, that's almost double what your current tenants pay.

It's unlikely any long-term tenant is going to like you using the residence below them for a STR, watching a parade of people come in and out.