My Tenants Want the Basement Finished
Hello! I have a four bedroom three full bathrooms property that is currently occupied. I charge these tenants $2000 per month for rent. I verified the fair market value with Basic Allowance for Housing at $2169.00. I also checked the FY 2016 Fair Market Rent Documentation System which showed $1934.00.
The tenants would like me to get the basement finished. There concerns are that because the basement is not finished, it is very cold down there, but I think they just want the extra living space. I found a contractor that I feel comfortable enough to move forward with. The positives of a finished basement is that the value of my property would be increased. Also, my tenants seem happy with the property (outside of the basement) and I want to keep them happy so that I would not be finding new tenants every year. On the other hand, a couple of things concern me. I feel that if I get the basement finished that I should raise the rent by at least $100, but I want to make sure that I remain fair. I honestly do not know all the other things that would need to be considered in this situation. I wonder if getting the basement done while they are there can raise safety or health concern. Then, it seems that it might be best to write something up, so that they would not be able to raise any issues later.
I would appreciate any advice or guidance on how to best approach and handle this situation. Thank you in advance.
I've done renovations with a tenant in the home and it was a nightmare. Never again!
No sweat @Bryan Drury. You saw bad advice and pointed it out, that's what the forums are for.
Originally posted by @Account Closed:Hi @Bryan Drury and thank you for your response and kind words.
The end of April will complete my sixth month as a landlord. I mean that to say it is only the beginning and I know that I have a lot to learn. I have been a little discouraged throughout this process, but I am not ready to give up yet. I am continuing to learn and ask questions as things arise that I am unsure about.
I am thankful for BP, and all the advice and guidance that has been giving on this post.
I know that I am not ready to invest heavy in the real estate business just yet, and that is why I only have this one property. I will continue to learn and take things one step at a time.
@Mike Hanneman thank you for the words of encouragement. That is my plan exactly to stick it out. Even though I get discouraged, I have a strong desire to be successful in REI.
Hi Nicole, I would not do it with someone living there now. They rented it as-is. I also don't think it will make your property more valuable, that type of improvement may only make the house sell sooner. I would tell the tenant that the basement is set aside as inside storage and not designated living space. Kitchens, Bathrooms, Master Bedrooms, Location, Neighborhood and overall layout and finish options like lighting and flooring sell houses not finished basements. For example in my area not having a basement decreases value by $40,000 to $50,000, but finishing the basement may only increase value by $10,000. Maybe ask a Realtor about the facts in your area.
Also you may want to consider an owner finance sale to them if they qualify and let them finish the basement as owners, not renters. Good luck.
@Jake Thomas a insulated basement door is a great idea.
Also, @Jim Adrian Thank you that does help.
@Brandon Battle I tend to feel discouraged, but I am not ready to sell. I am going to stick it out.
@Thomas S. Great point
@Cerwin Haynes I am not ready to sell. On another note, I like that Idea "2-unit" & "househacking," I just wonder how is it living so close to your tenants. I was thinking the same thing, that the tenants do not yet realize what it takes to be a homeowner.
"Living with your tenants" gives you a distinct advantage in that you can legally be very picky in whom you rent to (look up Mrs Murphy provision). Tenants also are more likely to be respectful of your house when they know you live on the premises. You may ask, "well could they just knock on your door whenever they feel a problem arises?". In my case, I work from home in the evenings, so I put provisions in the lease that clearly defined what an ER or *dire ER* is, along with when and how to contact me for said issues. When you have the right tenant, they'll respect you in such regards. It also doesn't hurt that most landlords here in the Cuse go with month-to-month leases, which serves as an extra mode of enforcement.
Originally posted by @Cerwin Haynes:
@Cerwin Haynes I am not ready to sell. On another note, I like that Idea "2-unit" & "househacking," I just wonder how is it living so close to your tenants. I was thinking the same thing, that the tenants do not yet realize what it takes to be a homeowner.
"Living with your tenants" gives you a distinct advantage in that you can legally be very picky in whom you rent to (look up Mrs Murphy provision). Tenants also are more likely to be respectful of your house when they know you live on the premises. You may ask, "well could they just knock on your door whenever they feel a problem arises?". In my case, I work from home in the evenings, so I put provisions in the lease that clearly defined what an ER or *dire ER* is, along with when and how to contact me for said issues. When you have the right tenant, they'll respect you in such regards. It also doesn't hurt that most landlords here in the Cuse go with month-to-month leases, which serves as an extra mode of enforcement.
Admittedly, I stopped reading this thread several posts back .... but personally, I would tell the tenant " to go pound sand! " I would simply tell them that the returns do not justify the cost of the project and that the house was not advertised, nor rented, to include a finished basement.
Just for CYA reasons, (if you do not already have it in your Lease) you may want to consider including a clause that states "By signing this Lease Agreement Tenant's acknowledge and agree that they have examined the premises, and all contents therein which convey, and found them to be in clean, good, safe and satisfactory condition at this time (with exceptions noted on Move-in Inspection Sheet)". Or, similar Verbiage.
Hope this may be of some help.
Bill
@Account Closed
Hi Nicole,
I'm new to Bigger pockets and to Real Estate, although I did own a two-unit in the past. It was a nightmare. Although I'll be rehashing a lot of what Mike Hanneman said above, sometimes that repetition has value of its own.
You sound like a humble person, but I caution you against portraying yourself as a rookie to your tenants. Even if they know this, it doesn't mean you don't know what you are doing. My previous tenants passed background and credit checks, once they knew I was a newbie, they tried they're hardest to take advantge of that. Be careful about being too friendly too. Keep the relationship nice but professional. This can be very difficult at first, but its important because your tenant asking you if something is possible as opposed to holding it over your head or they're going to leave/stop paying rent etc. will largely be determined on their perception of you and what they can get away with. Regardless of what you've portrayed yourself as in the past they've only been there for 6 months, so you can start your new attitude today. I'm also a Biblical man and I strongly believe that doing things out of fear will lead you down the wrong path every time. And, don't feel sorry for yourself. Ever. You have a great challenge in front of you but even more than that, you have a fantastic opportunity.
Calmly assess the situation. What are your options if things go badly? Start looking for a good eviction lawyer now so that if the scenario presents itself you won't be playing catch up. If you haven't already, look into the regulations in your area regarding tenant rights, Landlord expectations ie. what to do with security deposit, and make sure all your bases are covered. Then when something goes wrong you'll be prepared, and feeling prepared takes a lot of fear out of it.
Besides, you found these tenants, I'm sure you can find more if you need to! ;)
Originally posted by @Account Closed Thank you for your quick response. I am not sure how to check if most basements are finished in the neighborhoods. The reason I am considering finishing the basement is because I have been debating on selling the property. I honestly don't know if I am cut out to be a landlord. Its scary wondering if the tenants are going to not pay rent one month, and then I would not have the money to cover the mortgage. This landlord opportunity was just supposed to be temporary until I can be in better place to sell it. At the time, I have concerns about if I would receive a buyer who would be willing to buy the house for what I owe on the loan. If all goes well with continuing to rent the property I will try to stick it out.I understand and that is what I was thinking that it not a good idea to have it done while the tenants are in place. The contractor is willing to start on Saturday, March 19, 2016 for $2100. I would buy the materials. Now that you are reinforcing all the concerns, I am even further reminded why this would not be a good idea while they occupy the property.
(Sorry for spelling issues in the follow post! I am on a new tablet and haven't gotten the hang of the much larger keyboard).
I will preface by saying I am new to this game. While I have been spending at least two or three hours a day for the past six months reading and studying the topic of real estate investing, I have not yet reached a financial position to execute a deal. As a a stark newby with no firsthand experience, please understand that my advice is not necessarily the most sound. Also keep in mind that I don't know your personal finances! There may be more that I am simply unaware of that would completely invalidate my thoughts on the subject.
That said, here is the situation as I see it. You have a property here that you are apparently already in a bad position on. If you are unable to afford the mortgage payment for any amount of time in the event of rent delays or unforeseen complications, then your margins are dangerously low. What you have is not an investment, but a serious liability! You had mentioned this was supposed to be a temporary position, and I can understand that, but it seems that (despite the great work you've done in finding fair market rents and being a considerate landlord), you have a property whose numbers just don't seem to work. You make your money when you buy, as they say, and it sounds like this buy may not have been a good one.
Potentially worse than the cash flow problem are your concerns about selling the property for enough to cover what you owe on it. While a major renovation/upgrade like finishing the basement may raise the value of the home and allow you to theoretically improve the cashflow, that's even MORE debt you would have to overcome on the sale on a property that you are already potentially underwater on! Not only the total debt would go up, but your monthly payments. If you can't afford the costs of the home withoutma tenant as-is, then you would be shooting yourself twice if/when you do eventuslly losr your tenant and have a period of vacancy.
Were I in your position, I think I would take a very thorough look at the books. Determine what price points I would have to reach to break even, and/or how much equity I would have to build to break even as a result of mortgage payments or improvements before making any decisions on further renovations. Don't forget to factor in closing costs on the sale and the additional debt built by the suggested renovations.
Good luck! I hope this has been somewhat useful in helping you to analyze the situation and make the best financial decisions for yourself! Again, I am still strictly an armchair landlord, and likely will be for another year or so as I work on establishing myself as a real estate agent, so please don't hesitate to consider other people's opinions on the matter. They very well may have greater insight than I.
Originally posted by @Thomas S.:
I agree with Brandon. Get out of the business. You will not recoup your investment in the basement at resale.
I honestly don't know if I am cut out to be a landlord. Its scary wondering if the tenants are going to not pay rent one month, and then I would not have the money to cover the mortgage.
You are not cut out to be a landlord and should sell before your worst nightmairs come true.
While this may have been a bad deal and the OP may be in over his or her head, that doesn't mean that he or she is incapable of learning! Anybody can be a great landlord, it just takes a commitment to self education. This deal is likely to end in disappointment, but OP could absolutely come back and succeed on the next deal with the benefit of further education, experience, and a well defined plan.
@Zachary Schneider I couldn't agree more. The vast majority of things I've learned (and I'm sure many other landlords as well) about Landlording over the years have come from hands - on experience and trial and error.
As the old saying goes ... Whatever you do not know about Landlording, the tenants will teach you.
When I first started out as a L/L I had a 1 page generic lease from an office supply store. Every time a tenant would do something screwed up that wasn't in the lease, I would add a new clause to it. It wasn't too long before I had multiple page leases, LOL!
@Account Closed Stick with it Nicole, you will be just fine. Many of us have been in similar circumstances at one time or another, and they always seem to work themselves out, as long as you keep your head in the game.
Don't let one tenant prevent you from reaching your goals and dreams.
That's an extensive job. I would not incur that expense. Upgrades at lease signing might include a ceiling fan, new faucet, etc, but all under $100.
You are in this far, you should stick with it. Work hard to keep vacancy low, build up an emergency fund.
Do not forget the tax advantages that owning rental property brings. Selling now won't get you any farther.
I wouldn't do it. Basements are always colder, that's just how it is, because heat rises. Train your tenants. Let them know it's as-is how they rented it.