Interest rate increased on rental - I have a few options
Rental Property Investor · SW Ontario · Member since 2023 · 3 posts · 3 votes
Interest rate increased on rental - I have a few options
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
2yQuote 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.
Skyline Properties
26 Replies
- 2yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Have you thought about doing a refinance and buying down the rate. You can also refinance and get into a I/O Interest only to lower payment and increase cash flow until rates take a steeper drop.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes2y
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.
Skyline Properties - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Alexandria Garreau
Sell it
Also if you raise rent and it sits for 3 months can you afford it?
Also $150/months is $1800 a year, so it would take over a year to catchup rent for every month it sits vacant
Issue isn’t the rent it’s your debt and that’s what you should focus on
The other option is to sell it.
Without knowing the STR market in that area not too much to comment on except I. Many areas str's are getting crushed
7e investments53 Reviews - 2yChristian EhlersBusiness MemberReal Estate Agent · NH & MA · Member since 2021 · 457 posts · 291 votes
Revenues for Short Term Rentals in a lot of markets are way down this year, some well above a 20% decrease, the other thing to think about is do you even have the time/energy to do an STR? Definitely more work & communications than a long term tenant and you have to furnish the place of course.
I'd look to raise the rents IF the market can reasonably support it & try to get your debt down with a refinance as mentioned above. I'm not the biggest fan of selling it unless you have somewhere else to put that money or NEED to sell if you're not cashflowing. Rates could come down enough within the year to help you refinance, we just don't know for sure yet.
- 2yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
1. Unless the market is $2500 you can't increase it to that and even if it is a big jump will make them move.
2. You would be terminating a lease I assume not evicting. A STR has upfront costs and takes time to get established. Have you figured those out given the STR market in you area and will you do better than your other options?
3. Selling is an option. Consider selling vacant.
4. You are better off getting new tenants after you do this. This likely won't go over well.What is your interest rate? Try going for a fixed rate mortgage. You could get cash out to build your basement unit and get two sets of new tenants. That said I would get a contractor estimate for the renovation. Your estimate seems like cosmetic only and things like egress may bump it up.
- Cincinnati, OH · Member since 2016 · 116 posts · 83 votes2y
How many bedrooms and bathrooms do you have? You can consider renting by the room on Cragis List and now its a new feature on Zillow. Depending on the area, you can get 1k or more per room. Its not ideal but it can stem the bleeding in your bank account.
- Cincinnati, OH · Member since 2016 · 116 posts · 83 votes2y
Or you can list the house as "rent to own" I think the official name for it as lease purchase contact.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes2y
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!
You and a lot of other people that bought on tight margins with a low adjustable interest rate are in the same boat right now. I will be in the same position with our latest acquisition, a building I bought with a commercial loan, in about three and a half years.
Your intentions are a bit muddled in one place: you want to "sever the house" to make it a duplex and then "Airbnb or rent basement." I assume that all means it's a single-family house with a basement to begin with and that "sever the house" means to divide the single-family into a duplex.You refer to this as "my rental property" and this is your first post. Based on the information in your profile, it seems likely that this is your one rental property although you mention in your profile that you also let out rooms in your own home.
Out of your four options I think the worst is No. 4. You're admittedly new at this game. Performing a duplex conversion and possibly a basement conversion is a veteran's move, when you have the contacts and/or skills necessary to get it done as cheaply as possible AND as reliably as possible. Your renovation number seems very low for a newbie trying to get this done in Ontario: you'll have to split the single-family and then also put in another kitchen and bathroom, manage the heating somehow and then gas and water. It ain't cheap. I know I couldn't get a duplex conversion done in any single-family house that rented for $2350 USD for $15K here in western Pennsylvania, not even after years of actively of building the right contacts and learning the right skills to handle doing much of it by myself and competently supervising the rest.
No. 2 puts profits before people, and you're taking a chance on Airbnb. Karma could bite you hard.No. 3 is a chance, again, but it's not much of one. Sure. Maybe it's a good idea to sell in the spring.
No. 1 will work, at least. But your math is really incomplete here. You're not calculating any sort of expenses in running this rental such as vacancy, repairs, or capital expenditures. Sooner or later, pipes start to leak, fridges break down, the lever on the back of your vanity faucet breaks, these things cost money to fix.
Anyway, good luck.
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes2y
First, take a deep breath. This is a slow leak that needs to be attended to but not an emergency. If it helps think of the $1440 you would be down this year as just another repair item :) it’s about the price of an appliance or 2 anyway.
I’d give it a while and see if you might get a little interest rate relief. If you can get a nice premium for the sale you can time it for when the lease is up. Take the win and use the money to cash flow better somewhere else.
What kind of debt do you have now? You might be able to adjust the cash flow a bit.
If you bought well and have equity, you haven’t lost you have just switched your gain from cash to equity, with the interest rate-the cash drain being the rate of your return.
- Rental Property Investor · SW Ontario · Member since 2023 · 3 posts · 3 votes2y
I should mention that when the mortgage rate increased, so did insurance, and taxes in a lovely timely manner. Insurance and taxes were both $100-200 less when I was cash flowing $900.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes2y
Quote from @Jonathan R McLaughlin:
First, take a deep breath. This is a slow leak that needs to be attended to but not an emergency. If it helps think of the $1440 you would be down this year as just another repair item :) it’s about the price of an appliance or 2 anyway.
I’d give it a while and see if you might get a little interest rate relief. If you can get a nice premium for the sale you can time it for when the lease is up. Take the win and use the money to cash flow better somewhere else.
What kind of debt do you have now? You might be able to adjust the cash flow a bit.
If you bought well and have equity, you haven’t lost you have just switched your gain from cash to equity, with the interest rate-the cash drain being the rate of your return.
I don't think this is a slow bleed, Jonathan. I use a version of the 50% rule as a quick but reliable measure of expenses on a single-family: you can reasonably expect all monthly expenses not related to the principal+interest of the loan on a property OVER THE LONG HAUL to be 50% of monthly gross income.
I also think she's just calculating that PITI expenses are pushing her down to - $120 a month. Capex, repairs, and vacancy aren't in her calculations. The furnace dies in this place in early January and she's up a very cold Ontarian crick without a paddle. - Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes2y
@Jim K. I had it she had accounted for some maintenance and capex but looking back I think you are right. I do stand by the advice not to panic and take your time to figure out the best course of action. Just after the sticker shock of a reset is probably not the time to rush into a decision.
Not sure how she is amortized and if she can go to a 30 year? Is there a balloon? How much equity and how much chance of appreciation? Not sure if this is a cash flow first/only kind of property or an owner occupant quality one. There are some properties I would look at that almost break even and think its nothing more than an assets under management fee and some I would run screaming from.
And I agree with your plea to pay attention to the long term not-so-invisible expenses, might not be happening here.
- Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes2y
@Alexandria Garreau
Just a few questions, is $2,500 market rent ?
Was your mortgage on an ARM ? Curious why your mortgage automatically went up. Usually when people refi and in this market rates are higher but they pull $ out during the refi.
- 2yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@Alexandria Garreau if this is actually a property in Ontario I think you have rent control there correct? You are likely limited in what increase you can do.
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
I'm guessing your mortgage came up for renewal hence the increased rate. I'd make sure you increase your rent the max allowed under ON laws. This assumes you are below market value. It might take two increases (so just over 1 year) to cover that $120/month, but you will get there. If it was cash flowing $900 a month before over the long term, you're still ahead.
I'm hoping the comment about variable rate was because you renewed at a variable rate, not that you were on a variable rate for years and never locked in. We were told several times the interest rates were going up in Canada and anyone on a variable rate should have locked into a lower fixed rate.
Many cities and provinces are cracking down on short term rentals. I know BC did.
People who aren't familiar with Canadian banking-you can't buy down your rate. You can shop around, but prior to recent changes (and I'm not sure the govt has approved them yet), you can't even change who you get your mortgage through without a stress test. That test means approving you for a rate that is 2% higher than the current interest rate.
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Quote from @Lucia Rushton:
@Alexandria Garreau
Just a few questions, is $2,500 market rent ?
Was your mortgage on an ARM ? Curious why your mortgage automatically went up. Usually when people refi and in this market rates are higher but they pull $ out during the refi.
They said they had a variable rate, but not sure if that was after the renewal or before. Mortgages in Canada are different than in the US. We have the total amortization period (eg 25 year mortgage), but within that we have a term (eg 2 year term, 5 year term). Our mortgage rates are only good for the term of the loan (eg 5 years) and then we have to renew our mortgage. When we renew our mortgage, it is at whatever the current interest rate is-which may be better or worse.
- Rental Property Investor · SW Ontario · Member since 2023 · 3 posts · 3 votes2y
Quote from @Theresa Harris:
I'm guessing your mortgage came up for renewal hence the increased rate. I'd make sure you increase your rent the max allowed under ON laws. This assumes you are below market value. It might take two increases (so just over 1 year) to cover that $120/month, but you will get there. If it was cash flowing $900 a month before over the long term, you're still ahead.
I'm hoping the comment about variable rate was because you renewed at a variable rate, not that you were on a variable rate for years and never locked in. We were told several times the interest rates were going up in Canada and anyone on a variable rate should have locked into a lower fixed rate.
Many cities and provinces are cracking down on short term rentals. I know BC did.
People who aren't familiar with Canadian banking-you can't buy down your rate. You can shop around, but prior to recent changes (and I'm not sure the govt has approved them yet), you can't even change who you get your mortgage through without a stress test. That test means approving you for a rate that is 2% higher than the current interest rate.
I probably should’ve clarified this in the post so everyone had a bit more backstory. My parents helped me buy this property back in 2021 because they wanted to see me benefit from some of my inheritance money and this is what we agreed on. My dad took charge and set everything up & did not give me the chance to do any of it on my own (now looking back I wish I did all the financial stuff). I brought up numerous times my concern for the rates going up and actually told him I would want to wait to get an investment property because I KNEW what Canada was in for. He locked in at a variable rate anyways, said we would flip then sell it in a year. He forgot it was variable, I thought the whole time it was fixed, 2 years 7 mo later the bank sends me a letter saying that nothing is being paid down and the current mortgage payment isn’t even covering the whole interest. So we had to go in and re adjust it. My term ends Apr 2026. I honestly at this point want to sell, but also feel defeated if I do. Anyways, I know I’m a rookie and likely look like a newb, but I’m 23.
I appreciate everyone’s insight & my Bf and I love bigger pockets & it’s inspired us immensely! I’m learning lots from everyone and appreciate the patience.
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
While the intent was good, you should have been more involved and the lawyer would have explained the variable rate when you signed the papers-along with your banker. Use this as a learning experience and take the time to figure out what you want to do next. Real estate can be a good investment and I don't think prices will go down a lot overall. I bought my first place when I was your age and it was to live in while I went to grad school and I rented out the other room in the condo.
Talk to your bank and find out what is happening because what you said doesn't make sense for a regular mortgage. The payments should be covering the interest (and most of the payment in the early stages of the loan goes to the interest). If the bank pays your property taxes on your behalf (ie they are added onto the mortgage payments), then yes the amount may change annually if your property taxes go up.
go to the bank by yourself and take notes and ask questions. Don't bring anyone with you because the tendency can be to rely on them to remember or understand and you need to make sure you are doing that and taking charge.
What was your dad's plan to flip it in a year? Did you do major renos or was the hope that the market would just go up and cover all of the closing costs and put money in your pocket? As I said the intent was good, but you need to take charge as it is your money and your dad also (while well intentioned) made some mistakes and didn't include you as part of the decision making. If he wanted to you to learn, he would have explained what he was doing and why.
I'd talk to a realtor, get an honest assessment of what you could get if you sold it in the spring and then decide what you want to do. Unless house prices go up, if you have a large amount of money, put it in the bank (eg GIC use a TFSA to avoid paying taxes on the interest-if you've never used it, you should be able to put $88K in there and add more next year). do the math on the dollar amount you should have after paying everything and see where you are. With rentals where you make your money is ensuring costs are covered and the tenant paying down your mortgage for you.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes2y
Quote from @Alexandria Garreau:
Quote from @Theresa Harris:
I'm guessing your mortgage came up for renewal hence the increased rate. I'd make sure you increase your rent the max allowed under ON laws. This assumes you are below market value. It might take two increases (so just over 1 year) to cover that $120/month, but you will get there. If it was cash flowing $900 a month before over the long term, you're still ahead.
I'm hoping the comment about variable rate was because you renewed at a variable rate, not that you were on a variable rate for years and never locked in. We were told several times the interest rates were going up in Canada and anyone on a variable rate should have locked into a lower fixed rate.
Many cities and provinces are cracking down on short term rentals. I know BC did.
People who aren't familiar with Canadian banking-you can't buy down your rate. You can shop around, but prior to recent changes (and I'm not sure the govt has approved them yet), you can't even change who you get your mortgage through without a stress test. That test means approving you for a rate that is 2% higher than the current interest rate.
I probably should’ve clarified this in the post so everyone had a bit more backstory. My parents helped me buy this property back in 2021 because they wanted to see me benefit from some of my inheritance money and this is what we agreed on. My dad took charge and set everything up & did not give me the chance to do any of it on my own (now looking back I wish I did all the financial stuff). I brought up numerous times my concern for the rates going up and actually told him I would want to wait to get an investment property because I KNEW what Canada was in for. He locked in at a variable rate anyways, said we would flip then sell it in a year. He forgot it was variable, I thought the whole time it was fixed, 2 years 7 mo later the bank sends me a letter saying that nothing is being paid down and the current mortgage payment isn’t even covering the whole interest. So we had to go in and re adjust it. My term ends Apr 2026. I honestly at this point want to sell, but also feel defeated if I do. Anyways, I know I’m a rookie and likely look like a newb, but I’m 23.
I appreciate everyone’s insight & my Bf and I love bigger pockets & it’s inspired us immensely! I’m learning lots from everyone and appreciate the patience.
It happens to all of us. It's certainly happened to me. The difference between you and the average first-time poster here is that you're not in here beating your chest and insisting you can do no wrong because you're all that and a bag of chips. There's immense value and strength in that, and that's what gets you through these times.
- Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes2y
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!
Hey Alexandria. Interesting dilemma, you've got there.
it is a cautionary tale of using variable interest rates on rental real estate. Number two is out. You won't be able to evict the tenant just because your cost of increased that needs to be a violation of the lease in order to evict them. Now. You can still have the conversation with them and let them know that you would like to increase the rent or sell the property, but that's probably not in your best interest.
pumping a bunch of money into a duplex conversion doesn't sound ideal either, but I guess if the numbers work out it could be a good fit. Not sure how you intend to do that for 15,000 though unless it already has a separate kitchen.
on the bright side, it doesn't sound like rates are going to go up and will most likely go down next year so I don't think your mortgage will increase any further at this time. $120 a month doesn't sound too bad so I would just hold on to it and reevaluate once you've had some distance from the shock of the mortgage rate increase. Try to refinance that thing into a longer-term fixed rate mortgage in the meantime, which may put you back into a good amount of cash flow
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Quote from @Timothy Howdeshell:
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!
Hey Alexandria. Interesting dilemma, you've got there.
it is a cautionary tale of using variable interest rates on rental real estate. Number two is out. You won't be able to evict the tenant just because your cost of increased that needs to be a violation of the lease in order to evict them. Now. You can still have the conversation with them and let them know that you would like to increase the rent or sell the property, but that's probably not in your best interest.
pumping a bunch of money into a duplex conversion doesn't sound ideal either, but I guess if the numbers work out it could be a good fit. Not sure how you intend to do that for 15,000 though unless it already has a separate kitchen.
on the bright side, it doesn't sound like rates are going to go up and will most likely go down next year so I don't think your mortgage will increase any further at this time. $120 a month doesn't sound too bad so I would just hold on to it and reevaluate once you've had some distance from the shock of the mortgage rate increase. Try to refinance that thing into a longer-term fixed rate mortgage in the meantime, which may put you back into a good amount of cash flow
If she refinances she has to pay the penalty (all of the interest until her term is up) and in Canada, she'd have to do another stress test for a mortgage-not a good idea. If she sells it, same penalty applies (unless she times it closer to when the term is up for her mortgage).
I agree eviction won't work and putting money into converting it into a duplex isn't a good idea right now. Maybe once she has more experience.
- Member since 2023 · 11 posts · 4 votes2y
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!
That's a tough situation you're facing with the increased interest rate affecting your rental property cash flow. Considering your options, #1 seems like a practical choice – being transparent with your tenants about the situation and proposing a reasonable rent increase. Communication is key, and they might appreciate the heads-up.
If you're eyeing the duplex option in the future, option #4 could be a longer-term strategy. It involves some investment but might pay off in increased property value and rental income down the line.
Also, assessing the market in spring (#3) could be beneficial if you're looking for a strategic time to sell. It gives you the chance to explore market trends and potentially make a profitable move.
- Member since 2020 · 351 posts · 329 votes2y
It’s not clear if your 120/mo includes budgeting for vacancies, maintenance and capital expenses. It seems as it doesn’t. You probably need 500/mo budgeted for those items. So you are really down 600/mo. That is you spent 320k on an house which only rents for 2350 per month. Even at 2500 you aren’t cash positive. Ultimately this means you made a bad investment as a rental. Your return on this property is likely less than 7% unless you see very high appreciation (double digit or near it). You essentially have two options-sell and reinvest in something else or try to salvage it. You should salvage the property if you have enough cash/income and have reason to expect exceptional appreciation. Salvaging it means putting in a bunch more money either by recasting or refinancing with an additional 50k invested or putting the extra cash every month.
- 2yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@Theresa Harris Thanks for the lesson in Canadian Mortgages!
- Rental Property Investor · Toronto Ontario · Member since 2024 · 15 posts · 5 votes2y
Hey @Alexandria Garreau,
Just seeing this thread now wanted to check in and see if anything was done? In this situation i would look into refinancing from a Variable into a fixed just to drop payments and stay afloat if you can't afford the $150/month burn. In doing so you might even be able to accesss equity via a home equity line or an equity take out, and in turn use those renovations to duplex the property. Effectively that would drop your mortgage payment by locking in, and then increase your rent buy adding a second suite. Furthermore, you would be able to hold onto the asset as opposed to selling it.
I'm sure there are many other variables to consider but this would be my approach. If you need any help or want to connect feel free to reach out. Im a licensed mortgage agent based in Hamilton and a multi-family investor as well.
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