PWND? Found out "low income" tenants make more than me.
I inherited tenants at a duplex I bought in February. Both units had low income racial minority families with school-aged children. (Race is relevant because I'm white, and there's a well-publicized issue in Portland right now with gentrification and displacement due to rising housing costs.)
I agonized about how to handle the situation, because they were paying half of market rent. Ultimately, I decided to raise their rents by about half, from $695 to $1025, which was still only about 75% of market rent.
Laws in Oregon require 90 days' notice to raise the rent that much, so they are currently still paying $695 until June 1, at which time it will rise to $1025.
I'm losing money now, but after June 1 it should cashflow about $200/month/unit, BUT there is a ton of deferred maintenance that could cost $20k-$60k, depending on how much work I decide to complete.
I found out that one of the tenants (family with one kid and another on the way) earns more than I do at my job (they probably make between around $45k between the two of them), and in the other unit, it's a couple with 3 kids and a dog, where the mom works full time (in a department store) and the dad goes to community college and gets stoned at home during the day (but I have no evidence of that other than personal observation when I repair stuff over there).
The point is, as each week passes and I lose money paying for the loan on this property, I feel PWND. I want to raise rent again, effective 10/1, to $1200, which is the HUD fair market value that Section 8 pays in this area. (That's still low, but whatever.)
On the other hand, at least one of the units needs a lot of work, so if the tenants leave, it would be vacant for a little while and I'd have to pay for the repairs. In the long term, it would be better to turn the unit. In the short term, it's going to cost me more $$$, and I'll be displacing two more families to wherever far away from their schools and jobs in Portland.
So there's a financial reason to keep them there for now. As a side note, I'm planning on purchasing another property soon, so cash is good for me to have. I don't really want to spend it all renovating this property. But I have a business line of credit at 8%. ANYWAY . . .
Have I been pwnd and if so, should I do anything about it? Or just wait it out and raise the rent in a year?
Oh, and one of the families (the one that earns more than me) is having a baby in August. If that makes a difference.
@Account Closed,
Well, remember: they will likely ALWAYS be working a J.O.B. while you are working your way toward financial independence on the way to financial freedom.
Rather than covet what they have now, let them covet what you will have later.
David J Dachtera
"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
- DJ Benedict
Hey @Account Closed! I don't envy you in this quagmire ;) One perspective would be to not worry about what they can or can't pay. Only worry about what you can control -- you need to make money and still run a business with integrity. So find the balance with what is right for you. Doesn't sound like your thinking about evicting them, so they may choose to stay if you raise the rents. Good luck!
@Account Closed are these tenants Sec.8 and paying a portion of the rent, or are they just getting lucky with low rent?
If they're Sec8, I'd raise it to the highest you're allowed to by HUD, it won't change their payment, even if they're gaming the system. If they're not Sec8, and they're paying less than 1/3 of their income in rent, then I'd raise it so they're now paying 1/3 of their income towards rent.
Try to take the emotion out of it (hard when kids are involved), it's a business and you're doing the right thing by giving them time to get up towards market rent.
Thank you for the definition link, as I had no idea what you were talking about (I thought you were typo'ing the word "owned".
What they earn is really irrelevant, especially if you need to collect $X to make the building pay for itself. I would look at it like this: if you don't collect enough on this building, you will either sell it or lose it, and what is the likelihood that the new owner will think it's OK to lose money?
If they collect housing assistance, and you are way below that, they should still qualify, and if they don't get it, then they will either have to pony up or move somewhere else. Yes, moving sucks, regardless of whether they work hard or sit home and smoke dope, but it's not the end of the world.
Dani Z.
Thank you for saying "pwnd"
@Account Closed Haven't heard that term in a long time, reminds me of the old Halo days on Xbox.
Ultimately you will know best what the best decision is financially for you. But just remember that what they make has no bearing on what you should or shouldn't charge. The local market is what tells you that.
Sounds like you have a pretty good plan. I would wait until you buy your next property before raising rent again if you're worried about them moving out and having to do repairs. see how much $ you have left over to do repairs once you purchase your new property. Then raise rent again on them and if they do decide to move out, do the repairs and raise the rent to market value.
You could always offer to pay them a couple hundred to move out and leave the place clean if you don't want to feel bad about kicking out minority low income people. Us portlanders are too nice sometimes :)
@Account Closed
I was in a similar situation regarding low rents + deferred maintenance a year ago. I think if you break it down into all possible scenarios, there is a clear best choice
YOU MUST RAISE THE RENT ASAP! You did not buy this to lose money. One thing you will do for sure is raise the rent. Since they aren't your ideal tenants anyway, raise rents as fast as legally allowed until you reach market rate or at least a rate you are happy with.
Deferred maintenance is there regardless. You can change tenants 100 times and raise rents 200 times but none of that will ever take care of the deferred maintenance. Make a list of work that needs to be done and identify the urgency of each. Immediately fix the safety hazards and the ones that will cost you more in damages if you let them go (ex: leak in the roof).
What is left on the list will be the ones that can wait and won't cause any significant immediate damage. My biggest expense that fell in this category was new windows. The current windows worked, but they were 25 years old, not energy efficient, and unlikely to attract high-quality tenants at market rent. With these repairs, I concluded it was better to wait for a move-out. Most of them only seemed to make sense to attract a better tenant. Fixing these with you not-so-perfect current tenant is counter-productive; especially if they end up breaking or damaging something.
So now you have your list of repairs and rents rising on the tenants you despise. Now its about patience and knowing you are in a win-win situation. If tenants stay, you get more rent and you can delay some of those maintenance issues further and free up your cash/credit. If they leave, that is your chance to complete those repairs, potentially raise rents even higher, and be more selective with your next tenants.
Here's something to think about regarding your next property. I am not sure what your financial situation is, but I would make sure that purchasing another property is the best personal/financial decision before proceeding. It seems you are fairly new to land lording. It might be a good idea to let this first experience sink in before you expand your rental portfolio. You will learn a lot of things about your property in the next 1-3 years that will help you make a much better choice on your next investment. Another thing to keep in mind is that you want to have enough reserves to handle any unexpected situations that may come up. This is especially true if the deferred maintenance is already building up on your first purchase. If it costs 20-60k, I would do some calculations and see if doing those immediately will get you a better return on your money than purchasing another home will. I recently put about 20K in a rental and am collecting at least 10K more per year that I could not have gotten without these repairs. Best part is I charged most of this on a 0% intro credit card, basically a "RAISE YOUR RENT FOR FREE" card.
Last thing I will say is to learn to accept your tenants for who they are. If everyone was as hard-working and ambitious as yourself, this real estate game would never be possible. America truly is great. Each lazy pot head collecting government rent vouchers is one less competitor and one more customer.
Hope this helps and good luck with your real estate ventures!
Your income is not relevant to what their market rent should be but I see your point that you are providing a subsidy to market by underpricing and you probably can't afford to. Even if you can afford it unless that is your mission why would you. I assume they are month to month if you are planning to increase in July again. If so they could leave anytime so I would be ready to turn over the units regardless.
I would see what kind of issues and work has to be done between now and July. If you want to keep them you can adjust your raise to where you think they will stay. Otherwise let them know in July the increase you plan. I would expect though that at market rent they would be in market condition so you need to downgrade your expectations if they are not in good condition. What kind of tenant do you want? does the gentrification issue matter to you? If it does then consider the section 8 market. If not then rent at market.
One more thing @Account Closed Just want to hear more about your advice. You would suggest the OP buy their next property before calculating how much repairs will cost and how much money they have? Then you would raise rents to pay for these repairs? And you would pay the section 8 renters to clean up on their way out?
I am not trying to be mean, just want to make sure you didn't mistype a word or if I am missing the big picture. I am just seeing this as irresponsible advice but would love to hear more as I am not the smartest guy and would love to learn a new trick or two if you have one. Please elaborate...
@Roger Vi OP said she needs cash to purchase her next property so I'm suggesting to keep the tenants in until she purchases her next property and then evaluate how much cash has left over and can put into the units. I'm not suggesting she use the future rents to pay for repairs, just what's left over after her next property purchase.
As for paying tenants to move out. Obviously, from a business perspective it isn't ideal to be paying tenants. But in Portland you have to give 90 days notice to raise rent or kick tenants out. I'm suggesting that she could pay them to voluntarily move out early if she was didn't want to wait the 90 days or just to feel better personally about not kicking/forcing out low income minority tenants. Additionally, paying tenants to move out can ensure that they don't destroy the unit before vacating.
I've never personally paid a tenant to move out but I've thought about it just to make it a win win for everyone. After all a couple hundred bucks in the long term of the property isn't really that much. Especially, if it makes you feel better about supporting a family and ensuring minimum damage to your property upon move out
I personally would avoid section 8 as well.
Sorry if my first post wasn't clear, does this make more sense?
@Roger Vi said: "Last thing I will say is to learn to accept your tenants for who they are. If everyone was as hard-working and ambitious as yourself, this real estate game would never be possible. America truly is great. Each lazy pot head collecting government rent vouchers is one less competitor and one more customer."
Excellent! And I concur heartily! Except I don't take Section 8 :) Truth, though. That's one reason I don't look down on the people buying shiny new cars, clothes, stuff they don't need on credit cards. If everyone was a saver, or an investor, or an entrepreneur, my own enterprise would be within serious competition at best and over saturation at worst. I freely admit that my market's proliferation of lazy people (landlords included) makes life easier for me than if I were in a much more competitive market.
@Account Closed I would like to put in that the current rents should have been part of your analysis before buying the property. If you start out without cashflow you should have assets and a plan to make it cashflow Before you buy.
@Robert Klisak Thanks for clarifying. The $200 to get your tenant to move out makes a lot more sense now. Forgot about 90 days and how significantly under priced it was.
However, I would have to disagree with your suggestion of buying a property BEFORE calculating repair costs on current property. Sure it will help you expand faster, but this is only ideal if OP has unlimited cash. If cash is limited, purchasing another property could prevent her from paying for needed maintenance costs in the short term. I would much rather have 1 strong property that is caught up on maintenance than 2 weak properties that I have to keep worrying.
Two different strategies and I have seen them both work. I have family members and have spoke with other investors that delay maintenance costs as much as possible. These are the same investors that never raise rents and never have move outs. Tenants pay their mortgage and at the end of the day, investors reach their goal and their retirements are funded through real estate. I just personally prefer to keep up with maintenance and always be one of the better properties on the block. More work but more profit, worth it IMO.
This is what is great about BP, different investors with different strategies and we can all come together to share ideas. Thanks again for clarifying and I hope we've improved the quality of this post for future readers.
@Account Closed be honest with us did you use the term PWND as click bait to get us to read this? I just don't see how you have been PWND. In a market like Portland, $45K for two people together is low income. If I understood you correctly, two people combined make more than just you alone do. I assume that means each makes less than you? I don't see how you should feel bad about that.
Regardless, it doesn't matter how much money they make or you make. What matters is the fair market value of the property and the amount you need to charge to make it work. Either they can afford it or they cannot. You shouldn't be basing your rent increase on how much money your tenants make. Also when you ask someone what they can afford, did you really expect them to tell you some top market value? It is a flawed question. They have a vested interest in paying the least amount possible.
@Steve Moody and @Roger Vi, neither tenant is Section 8. I only used HUD's FMR as a guideline--it's an objective number that no one can say I pulled out of thin air. That said, I did call HomeForward yesterday to see if it would be possible to put these tenants on Section 8, and that way, if I raised rents to market, it would not adversely affect them. No dice. Apparently the wait list has been closed since 2012. Last time it opened, they had 21,000 applications for 3,000 spots. On the wait list.
Anyway, I don't think the tenants in either unit can qualify for Section 8 based on income. @Joe Splitrock the husband earns $40k and the wife earns...something...from running a day care out of the apartment, but I don't know how much. That's her only job as far as I know, so I conservatively estimated an extra $5k income, totaling the $45k.
Everyone is correct that tenant income should have no bearing on the rent amount. AND the reason I feel pwnd is because an acceptable amount of rent to pay is 1/3 of your income, and 1/3 of $45k/12 = $1250/month. And they told me they could only afford $850. I suppose that I'm too trusting because I've genuinely wanted to help these families stay in their homes. (I grew up in a single parent household having to move every year, and it's not fun.)
@Charles Morgan APOD/proforma was completed and this property cash flows after the 90-day notification period.
I guess my problem is, I don't appreciate being lied to after I go out of my way to help these people. Then again, I still feel for these folks, especially the kids, and want to be fair. Then again, I'm not a charity. Then again, vacancy and rehab are expensive. Sigh.
Maybe the moral of the story is, hire a property manager next time. I've been a landlord for 4 years and find it difficult to keep compassion out of the equation.
@Account Closed I've found that some people will spend 100% of their income every month, regardless of how much they make, or how much their income increases year over year. These tenants are used to paying a certain amount for rent, which hasn't changed in a long time. I believe them when they say that they can't pay more than $850, because they've chosen to spend their income on other things. If they had an additional $600 laying around every month they wouldn't be living in your place that needs work. Or they'd have saved up the $28,000 over the last 4 years and would be looking to buy a place.
I admire you for being compassionate, I hope that I would be too, but you still have to do what is right for your business. Maybe in 20 years when you have 50 units and own everything outright like Jim you can afford a few hundred dollars to help people out, but you're not there yet. It's ok to raise the rents, and it's ok if the current tenants can't afford it and move out. You'll be much happier with a nice unit, renting to people you choose, who can afford it. In the mean time, keep helping everyone by planting trees.
Looks like you caught feelings. You need to get rid of those immediately.
Sorry if that's harsh, but you're crossing oceans for people that wouldn't help you past a puddle.
First and foremost, you are in business to make money. After that, you can choose to help people.
You don't have to be a completely heartless slumlord type, but be honest about the situation.
Do those tenants care one bit that you have bills to pay too? Absolutely not.
I have a big heart, so I know it's a tough lesson to learn that other people don't have the same heart or level of understanding.
If you can't handle it directly, then you need an intermediary (or two).
If you haven't realized it yet, you are the CEO of your business. You need a team. And you need to call a staff meeting.
Hire both a CPA and a property manager to work for you. Add more roles when it makes sense.
Lay it out properly. You are in business to make money, and their role in your team is to make sure that you make money, or at least not lose money unless it's part of the plan.
From that moment forward, all accounts are referred to by address and / or unit number.
Their primary job is to take the emotional baggage out of your business decisions, and to insulate you from those situations. Period.
You will be wealthier, and more importantly - happier, for it.
Thank you to those who commented, especially @Steve Moody, who put everything in context and drilled down to the heart of the issue, helping me to feel at OK, no matter what I do in this situation.
#2 General Landlording & Rental Properties Contributor
I realise I am coming in late on this thread and if you have read any of my posts you will know that compassion is very low on my list of priorities when dealing with business decisions.
My primary concern regarding your decision is in regards to why you would not raise and maintain your units at market rent. The only reason to be in business is to make money, preferably as much money as possible. You speak of deferred maintenance costs yet you choose not to earn the money to make those repairs possible. The reality is the more rent a tenant pays the better a landlord can afford to maintain their property. You need tenants that will appreciate the money and effort you put into a property and by doing so are prepared to pay top dollar for the use of the property. Charging under market rents hurts both you and your tenants in the long term.
If I were in your position I would place all my efforts into getting this property up to snuff before even considering buying another. Raise the rents to market, if they leave get in and prep the units, do repairs what ever is necessary regarding up grades.and re rent asap. Following that give yourself time to get financially stable again then move on.
And for your own sake lose the emotions. you are operating a business not a charity and in making business decisions there is no room for compassion. It is the individuals responsibilities to take care of their personal lives not their landlord. If they do not rent from you they will rent for someone else.
I would raise rent to $1200. But if they are only willing to pay $1100 then you have to decide whether or not it's worth finding new tenants. I know some landlords rent to tenants that make more money than them, particularly with higher end properties...however, are they more financially intelligent?
@Account Closed You don't need to hire a PM. I think the lesson you learned here will make it much easier to deal with future tenants in a more business-like manner. Any manager with a heart had to learn this the hard way, too.
But, I agree with others, you've been too nice. I'll bet you did not hold the amount of any rent you ever paid against your landlord. You looked for a place you wanted at a certain price range, and you chose to rent it, based on feeling it was a fair deal. Right?
Well, your future tenants will be the same way. Inheriting tenants is always hard, even if they're paying market rent. If they're not, you're just better off getting rid of them, because everything will be a fight with them.
When you pick your own tenants, that you have screened really well in a heartless manner using your strict criteria - managing them is sooooooo much easier.
It's not your fault that gentrification is happening. Or that these people didn't save up money and buy during the crash. It's not your fault that they are in the position they are in. The reality is, they can't afford to live there anymore. You bought the property because of gentrification and future value. You have the right to the fruits of your investment.
And thank GOD you couldn't get them Section 8. It would have been a miserable, long relationship that you couldn't end. Their financial problems are not your problem.
And really, I get irritated with news stories about how gentrification affects particular races. There are poor people of all colors. And rich people of all colors.
People don't get to live somewhere they can't afford. Even if they used to be able to afford to live there. That's just reality. Look at the San Francisco Bay Area, people who can't afford the prices close to their jobs, buy or rent farther and farther out. I'm guessing that's what's happening in Portland, too. It's always been that way. I completely disagree with the entitlement idea that poor people should be able to stay in an area that isn't affordable anymore. They'll have to look for low-income housing or move. But, it's not a private landlord's responsibility to provide public affordable housing.
I also agree that you should not buy another property yet. If there's any way you can afford to just get rid of these tenants, do so as soon as possible. Fix the units up and get tenants in who think they're a great deal and who have proven they can afford them.
Sometimes it helps to think in terms of what a car dealer would do, for instance. Would their car dealer give them a cheap price on a new car because of some sob story about how they can't afford the payments, but they still want a new car?
This is how you need to be, too. This is business. It doesn't mean you are evil, anymore than it makes the car dealer evil.
Tenants can be like kids. They'll push the boundaries. You can smile and stay calm and say, "I understand that you don't like it, but I'm terminating your rental agreement so I can refurbish the units."
Just picture having applicants come through your place saying things like, "Oh, I just love this place and the price is perfect!" :-)
Also, as far as managing, if your criteria is set in cement, it's much easier to say no to people, even if they yank at your heartstrings. "Sorry, no matter what your sob story is, I deny for evictions, bad credit, not enough income, criminal background, no relatives for references, good landlord references, stable rental and employment history, etc.
Once you get your criteria set in stone, and make it as tough as you can get away with, then pick your own tenants - you'll find managing becomes so much easier. You'll be dealing with reasonable adults, if you screened well. And you should have a decent tenant pool in Portland.
So, take a deep breath. You're going to be fantastic at this. And make money, too :-)