Rented too Low

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Rented too Low

Troy Kerr
US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes

Good afternoon BP,

I recently got my first property rented.  I needed to rent fast so I lowered the price from 2200 to 1850.  The Management company gets ten percent 185.  The Mortgage is 1500.  

I bought the property no money down for 244k.  I should see about 125 dollars in cash flow.  This is my first property.  I think it may have been a mistake lowering the rent.  But a wanted to make sure that I wasn't stuck with two Mortgages.

Does this sound like any of your first timer stories?  please tell me what you think my best path forward would be?  I think she has more potential.

Is it feasible to raise the rent on the next lease?  Could I have made more cash by managing the property myself since it is brand new, built 2014, 5 beds/ 2.5 bath Norfolk, Va?  

Thanks in advance BP.

Troy,

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  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    11y

    There are two ways to invest with the least amount of risk.

    1. Buy with cash. The property will always cash flow and if you hold the property you don't have to worry about market swings.

    2. Don't put any money in the deal. You cannot lose what you didn't put in.

    To put $0 in and have the property cash flow is a great feat and not easily done. I don't think that you added in all of the expenses though. I don't know if you took into account for maintenance, taxes, insurance and vacancy.

    Yes, you can raise the rents at every lease period. the question is if your market can sustain the higher rents. Your PM should be able to clairify this for you.

    [email protected]239-339-3969
    Bartomeo Property Management4.7150 Reviews
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  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y

    thanks BP.  I will hope to get greater returns at my next contract.  The norfolk va area is a strong military town,  with a high turn over rate.

    I guess I have hopes to buy and hold.  With wishes of great cash flow by the time the properties  start being paid off.

    Is this what buy and hold means?

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  • Jeff B.
    Real Estate Investor · Lake Worth, FL · Member since 2009 · 263 posts · 92 votes
    11y

    Troy originally from Virginia Beach.  You can manage the home yourself as long as
    you are willing to educate yourself on the "Virginia Landlord tenant act" the pdf can be downloaded from the state website.  The language is pretty easy to understand and search for specific info in the Act.

    I use a realtor who provides the VAR Form 200 residential lease it is pretty solid and contains a section for military members, diplomats and so forth.

    Additionally you need to make sure that the tenant signed a Military Crash Zone addendum and all other required addendum's.

    Lastly you just need a good spreadsheet which you can develop over the coming month's that covers rent, expense, taxes, insurance, repairs, marketing, advertising fees, and any utilities you provide.  

    As you know you will want to raise the rent on the next lease renewal to as close to fair market rent to help build reserves for the future replacement or repair of the home.

    0Reply
  • Raphael F.
    Military Service Member · Toano, VA · Member since 2015 · 8 posts · 0 votes
    11y
    Hey Troy welcome, Question what property management team did you use if you don't mind and how has you experience been so far, iam in Hampton roads area as well,Williamsburg area. Which is why Iam asking . Will be Searching for one myself in the near future. :) Thanks
    0Reply
  • Justin Tahilramani
    Rental Property Investor · Fayetteville, NC · Member since 2014 · 884 posts · 670 votes
    11y

    @Troy Kerr -It sounds to me like you made the decision to lower rent in order to mitigate the risk of two mortgages. Should you have held out for more? Hard to say - could you have afforded to wait for more?

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  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    11y
    Troy Kerr congrats on your first rental. Did you decide to lower the rent or the PM company? Not sure I understand why there was such a big drop in the price. Part of the PM's responsibility is to know market rents and anticipate how long it will take to rent.
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  • Christopher Brainard
    Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
    11y
    Originally posted by @Troy Kerr:

    Good afternoon BP,

    I recently got my first property rented.  I needed to rent fast so I lowered the price from 2200 to 1850.  The Management company gets ten percent 185.  The Mortgage is 1500.  

    I bought the property no money down for 244k.  I should see about 125 dollars in cash flow.  This is my first property.  I think it may have been a mistake lowering the rent.  But a wanted to make sure that I wasn't stuck with two Mortgages.

    Does this sound like any of your first timer stories?  please tell me what you think my best path forward would be?  I think she has more potential.

    Is it feasible to raise the rent on the next lease?  Could I have made more cash by managing the property myself since it is brand new, built 2014, 5 beds/ 2.5 bath Norfolk, Va?  

    Thanks in advance BP.

    Troy,

    Hi Troy and welcome to BP,

    I think you may been a little aggressive with your rent reduction, it has been my experience that you can easily raise rents up to about $50 a year without much push back from the tenant. I think you will need a different tenant if you need to raise the rent $350. I think I would have went for something like $1999, then proceeded to bump rent up on an annual basis until I got to market. 

    Additional food for thought: Make sure you budget for Vacancy, Capex, Repairs, Taxes, and Insurance when you are looking at cash flow. Although you are getting $125 a month right now and the property is newer, once you having maintenance needs or hitting capital expenditures, years of cash flow can be eaten up in a single incident.

    If you have the spare time, I would read up on property management practices for your area and work toward self-managing. I manage all my own properties and the time investment is minimal (most months). The only down side is that when things break, you do need to be able to respond promptly. 

    -Christopher

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  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Troy Kerr:

    Good afternoon BP,

    I recently got my first property rented.  I needed to rent fast so I lowered the price from 2200 to 1850.  The Management company gets ten percent 185.  The Mortgage is 1500.  

    I bought the property no money down for 244k.  I should see about 125 dollars in cash flow.  This is my first property.  I think it may have been a mistake lowering the rent.  But a wanted to make sure that I wasn't stuck with two Mortgages.

    Does this sound like any of your first timer stories?  please tell me what you think my best path forward would be?  I think she has more potential.

    Is it feasible to raise the rent on the next lease?  Could I have made more cash by managing the property myself since it is brand new, built 2014, 5 beds/ 2.5 bath Norfolk, Va?  

    Thanks in advance BP.

    Troy,

     While I don't believe the 2% rule is relevant in many places, I do like the 50% rule (search the forums and you'll find lots of info on it), and think it works well -- basically, principal and interest should be no more than 50%, then you should have decent cash flow after all expenses, including insurance and taxes.  If that works in your $1500 mortgage, great.  Otherwise, prepare for negative overall cash flow after expenses.  The no money down thing makes having to pay for some expenses/repairs over cash flow budget not so bad, but as a general rule, I stick to the 50% rule.  

    I'm not sure a $2200 rental is easy in Norfolk, so I understand the reduced rent, but a good property manager can show you comparable current rents for the neighborhood, and it helps if you are not on the top end of the scale, so ask for actual comparable rents at turnovers and adjust accordingly in the future.  My PM in Raleigh will send me average rents for the previous year 90 days before lease end and their preferred range and ask what I prefer for 1-year and 2-year leases (I prefer 2-year at a slight discount).  

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  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y

    @ Lynn M.

    Lynn I'm elated to know that there are investors here in the local area.  I knew you guys existed but was never lucky enough to cross paths.  

    My intent here was to get a feel for what the pros thought of my first go around.  I believe that great critique is the best way to prompt improvement.  It is apparent that I have a lot more reading to do.  

    Question.  Is 10 percent management fee standard?  And when does one get the clout to negotiate?  This way I may be able to minimize expense.

    In my simple reasoning I thought that having the Tenant pay the mortgage was deal enough.  Any surplus then, I reasoned was simply a bonus.  The tenant then having paid the mortgage I would see profit in the extended future.  Again, having been exposed to the cashflow that is possible with proper Planning I now see that my calculation were at a minimum, Simple.

    Thank the lord for this site.  Thanks immensely Lynn. Now I see, that ill be doing a lot of reading in the near future.  Hope to be a pro one day.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @John Casmon:
    Troy Kerr congrats on your first rental. Did you decide to lower the rent or the PM company? Not sure I understand why there was such a big drop in the price. Part of the PM's responsibility is to know market rents and anticipate how long it will take to 

    Lowered the rent because I did not want to be stuck with 2 mortgages.  the property is a hack.  I did not have the funds necessary to wait on maimimized rental.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @Justin Tahilramani:

    @Troy Kerr -It sounds to me like you made the decision to lower rent in order to mitigate the risk of two mortgages. Should you have held out for more? Hard to say - could you have afforded to wait for more?

     That sir, is the three hundred dollar question.  I was geeked.  Just, so happy to get my first deal done, I think I glossed over the details.  Iron, this is exactly when I came across this awesome site.

    I'm like poe from kung fu panda.  My first one might take a beating.  Still though, I'm just happy to be here. Ha hah.  

    Thanks Justin..

    0Reply
  • Corey Chonsky
    Rental Property Investor · Norfolk, VA · Member since 2014 · 55 posts · 30 votes
    11y

    Hey Troy,

    I'm a new investor in the Norfolk area as well and I'm also in the navy. I found myself in a similar situation when I was stationed out in Washington state. We had a house built in the Bremerton area when we first got there and in good navy fashion I did not stay very long. Our property manager recommended what I thought was an aggressive rent and the house sat vacant for about two months before it was rented. I started to get pretty nervous even though we had saved some money but in the end it worked out because we got what we were asking, it cash flows, and since it was a new construction there has not been to many maintenance items. This house doesn't look great on paper as a rental but it has worked out for us. However, I'm not going to make a habit of buying rental properties like this. Hope it works out for you.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @Raphael F.:
    Hey Troy welcome,

    Question what property management team did you use if you don't mind and how has you experience been so far, iam in Hampton roads area as well,Williamsburg area. Which is why Iam asking . Will be Searching for one myself in the near future. :)

    Thanks

     I used Judy boone.  Too soon. To tell now how exactly their service is.  Keep in touch and I'll keep you updated.

    I tried town realty at first.  Cab can say that they sucked.  Judy boone is big in my area.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @Corey Chonsky:

    Hey Troy,

    I'm a new investor in the Norfolk area as well and I'm also in the navy. I found myself in a similar situation when I was stationed out in Washington state. We had a house built in the Bremerton area when we first got there and in good navy fashion I did not stay very long. Our property manager recommended what I thought was an aggressive rent and the house sat vacant for about two months before it was rented. I started to get pretty nervous even though we had saved some money but in the end it worked out because we got what we were asking, it cash flows, and since it was a new construction there has not been to many maintenance items. This house doesn't look great on paper as a rental but it has worked out for us. However, I'm not going to make a habit of buying rental properties like this. Hope it works out for you.

     Thanks for the vote of confidence Corey.  I will be sure to keep BP updated so you guys can also enjoy my journey.  

    Further, would you mind added me as a college.  I would like to make some local Co tacts.  Thanks.

    Troy,

    0Reply
  • Anthony Joseph Kendall II
    Avon, IN · Member since 2015 · 30 posts · 12 votes
    11y
    If you had considered yourself a seasoned investor you may say you made a rookie mistake. The most common thing I have come across in trying to understand REI is that it's always a learning experience. We always make decisions based upon the moments we are in financially, emotionally, and mentally. As long as you are not bleeding money and can live with your decision you're good. Plus you have the chance to change it up when the lease is over.
    0Reply
  • Scott Weaner
    Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes
    11y

    How can this home actually cash-flow? I don't think that you have accounted for any expenses other than the mortgage.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @Scott Weaner:

    How can this home actually cash-flow? I don't think that you have accounted for any expenses other than the mortgage.

     I havery not.  Hopi g to get I. A better situation next year.  Best I can hope is to claim losses come tax time.  I think the term is a fantom loss,  not sure.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y

    sorry for the past post.  I was busy.

    I hope this is crawl before you walk situation.  Hard to lose when. Each loss is a lesson.  I have been in worst situations.

    I get the idea now.  I'm not in the best situation.  Will work to improve.

    0Reply
  • Ken Powell
    Lender · Lusby, MD · Member since 2014 · 59 posts · 37 votes
    11y

    Troy,

    I made a few mistake with my properties too but you live and learn and don't make those mistakes again.  To keep it simple, yes you can raise the rent when the current lease expires.  I would suggest managing this property yourself.  Not only will you save $185 per month but you would also gain so much knowledge as a property manager.  Don't beat yourself up over the mistakes, learn from them.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @Ken Powell:

    Troy,

    I made a few mistake with my properties too but you live and learn and don't make those mistakes again.  To keep it simple, yes you can raise the rent when the current lease expires.  I would suggest managing this property yourself.  Not only will you save $185 per month but you would also gain so much knowledge as a property manager.  Don't beat yourself up over the mistakes, learn from them.

     Thanks ken.  I'll try.

    0Reply
  • Raphael F.
    Military Service Member · Toano, VA · Member since 2015 · 8 posts · 0 votes
    11y
    Originally posted by @Troy Kerr:
    Originally posted by @Raphael F.:
    Hey Troy welcome,

    Question what property management team did you use if you don't mind and how has you experience been so far, iam in Hampton roads area as well,Williamsburg area. Which is why Iam asking . Will be Searching for one myself in the near future. :)

    Thanks

     I used Judy boone.  Too soon. To tell now how exactly their service is.  Keep in touch and I'll keep you updated.

    I tried town realty at first.  Cab can say that they sucked.  Judy boone is big in my area.

    - Thank you, I will keep that in mind and stay in touch. i hope your experience goes great with them! If i find any other companies to that i hear good things about ill shoot them your way, always good to know. Good luck in your future with real-estate! =)

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y

    Please do that.  I am always on the hunt for better situations.  Please share the wealth.

    0Reply
  • Mike Moreken
    Investor · Trenton, NJ · Member since 2014 · 67 posts · 19 votes
    11y

    Watch out for rent controls in the municipality.  Mine is linked to CPI-U housing.  Of course you could try ditching tenant after lease ending and getting a new tenant at higher rent.

    I did here a real estate speaker say we will be hitting a period of lower housing + rent #'s.

    0Reply
  • Troy Kerr
    OP
    US Navy. Aviation Structural Mechanic · Norfolk, VA · Member since 2015 · 36 posts · 3 votes
    11y
    Originally posted by @Mike Moreken:

    Watch out for rent controls in the municipality.  Mine is linked to CPI-U housing.  Of course you could try ditching tenant after lease ending and getting a new tenant at higher rent.

    I did here a real estate speaker say we will be hitting a period of lower housing + rent #'s.

     What is cpi u?

    0Reply
  • Henri Meli
    Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
    11y

    I don't know why people call this "Mistakes". I call them learning opportunities. Not every situation will work out perfectly as you planned. That's just the reality of our business. You need to learn to be flexible. And every situation is unique for every investor. You made a quick decision, you moved on. That's actually good. I know investors who would have sat on this property for 6 months , losing money and blaming the market or the economy or something else.

    Welcome and good luck.

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