Overpaid for a rental, Now how to raise rent?!

16 Replies

So I think I overpaid for a rental, which was a mistake. The bigger mistake was that the price triggered a much higher tax bill that is killing me.  But let's focus on what I can change. I'd like to increase rent and I think that I can. But first I wanted help from the community. 

The house is 5 bedroom 2 bathrooms close to the Ohio State University currently rented to college kids. The Setup is like this.

3rd: BR/BR

2nd: BR/BR/BR/Bath

1st: Bath

So the first floor bath is kind of awkward for the third floor tenants to walk down 2 flights of stairs to shower. 

I am relatively sure I can fit in a decent 3rd floor bathroom. I feel it would make the unit hugely more livable for the 5 individuals that are usually renting it from me. I have the space for it, and good access to run mechanicals.  Do you think this is something I should pursue? Current rent is $1700ish range. I am thinking this could get me another $100-200 a month?

IME a bathroom on the third floor with bedrooms is a huge selling point. Its very private for those that live on that floor. 

Eric,
Just a question to see if I can help, why does the higher price trigger a tax bill? Is this an income tax bill? If you have a buy and hold rental and if you are doing your taxes right, you should have a net loss on your rental and owe no taxes.

Let me know if I can help. Thanks,

Yes, $1900 would be a conservative number.  That is according to the listings I see online. 

Lots of the homes are >100 years old. So they have a small number of bathrooms for a large number of adults. Some of the college students double up. From where I sit having addition bathrooms is one of the biggest selling points. A 5 bed 3 bath would be a rare find. Usually the ratio of beds to baths in the area is 3:1.

Am I wrong in this? The less sharing the better when it comes to bathrooms for college students right?

Originally posted by @Mark Welp :

Eric,
Just a question to see if I can help, why does the higher price trigger a tax bill? Is this an income tax bill? If you have a buy and hold rental and if you are doing your taxes right, you should have a net loss on your rental and owe no taxes.

Let me know if I can help. Thanks

Mark,

Thanks it's a property tax thing. Higher sale price triggers higher taxes. I should have done a drop and swap but I was foolish and in a hurry. That could be a whole different post. 

Really I should be able to get higher rents for the area. I have already done a few small things like increased off-street parking, which is big for a house with 5 likely drivers. 

So to make this thing cash-flow the way I think it should I want to add that bathroom to the third floor. Really I am looking for someone with experience with renting to college kids what their most valuable aspect in a house is. 

I don’t know your area, but from the way it sounds, a 5/3 would be more valuable than a 5/2.

As long as there isn’t a glut of extra housing, you should be able to charge more for more bathrooms.

I’d also at least consider other value-adds. I’ve always thought a every two week cleaning service would be a great addition. :)

Originally posted by @Eric Hart :

Yes, $1900 would be a conservative number.  That is according to the listings I see online. 

Lots of the homes are >100 years old. So they have a small number of bathrooms for a large number of adults. Some of the college students double up. From where I sit having addition bathrooms is one of the biggest selling points. A 5 bed 3 bath would be a rare find. Usually the ratio of beds to baths in the area is 3:1.

Am I wrong in this? The less sharing the better when it comes to bathrooms for college students right?

@Eric Hart I don't have any rentals on campus; however, I worked for several years in real estate market feasibility for large multifamily projects and 2 of those years I was nearly exclusively analyzing student housing projects. It is definitely the trend for new builds to have ensuite baths for each bedroom so I agree with you that additional bathrooms are very valuable in the student housing sector. Feel free to message me if you want to talk more about student housing and good luck adding that bathroom if you do take that project on! 

Originally posted by @Amanda Roderick :
Originally posted by @Eric Hart:

Yes, $1900 would be a conservative number.  That is according to the listings I see online. 

Lots of the homes are >100 years old. So they have a small number of bathrooms for a large number of adults. Some of the college students double up. From where I sit having addition bathrooms is one of the biggest selling points. A 5 bed 3 bath would be a rare find. Usually the ratio of beds to baths in the area is 3:1.

Am I wrong in this? The less sharing the better when it comes to bathrooms for college students right?

@Eric Hart I don't have any rentals on campus; however, I worked for several years in real estate market feasibility for large multifamily projects and 2 of those years I was nearly exclusively analyzing student housing projects. It is definitely the trend for new builds to have ensuite baths for each bedroom so I agree with you that additional bathrooms are very valuable in the student housing sector. Feel free to message me if you want to talk more about student housing and good luck adding that bathroom if you do take that project on! 

 Thank you Amanda!

That is exactly what I was thinking, just did not have the data to prove it. No one wants to walk down 2 flights of stairs to take a shower and up 2 flights of stairs in a towel! I have a different rental with bathrooms on all bedroom levels and I get much more per bedroom in rent for it.

These bathrooms where put in when indoor plumbing was considered a technological innovation, so they might have under estimated how often and how long people spend in them. I will shoot you a PM. 

@Eric Hart have you researched the price for your area and specifically for college students? They're paying less than $350 a month per person, which seems awfully cheap. I suspect utility use averages $75 per person or $375 a month. You're probably paying for lawn care. After expenses, I bet you're making less on this home than you would if you just rented it out to a family for a set price.

I just did a quick Zillow search of 5bedroom houses near the university and almost every one rented for over $2,000 a month. Those do not include utilities or lawn care.

I would guess you're below market.

how much will it cost to do a bathroom  ???   5k or more to retro fit one.. then get another 200 a month.

take you 30 months just to break even.. or more.

This sounds like a very bad financial investment. Cost for a added bath, based on your numbers, does not have a reasonable pay beck time line. You are simply throwing good money after bad.

As Nathan suggests this property seems way under market even as is. You should be anble to raise rents far more than $200 without adding any additional expences (bath). 

If utilities are included this is a far worse investment that you presently believe.

Originally posted by @Thomas S. :

This sounds like a very bad financial investment. Cost for a added bath, based on your numbers, does not have a reasonable pay beck time line. You are simply throwing good money after bad.

As Nathan suggests this property seems way under market even as is. You should be anble to raise rents far more than $200 without adding any additional expences (bath). 

If utilities are included this is a far worse investment that you presently believe.

I am being conservative here, to be on the safe side.

Is 2-3 years payback too long?

First things first. Analyze the property. You say "I think I overpaid". You need to know for sure. Obviously, this was because you didn't anylyze it properly from the start. Crap happens. But, that needs to be dealt with. Find out for sure what similar things are renting for. How negative is the cashflow? Then and only then can you start to make decisions on how to fix it...if you even have to. 

Originally posted by Account Closed:

First things first. Analyze the property. You say "I think I overpaid". You need to know for sure. Obviously, this was because you didn't anylyze it properly from the start. Crap happens. But, that needs to be dealt with. Find out for sure what similar things are renting for. How negative is the cashflow? Then and only then can you start to make decisions on how to fix it...if you even have to. 

 Yes things were cash flowing fine, probably $500 a month or so. But due to this crazy tax increase I'm down to about $100 a month. It should stabilize in a year to about $250 in the black a month. I can spend 5k to earn an additional 2,400 a year, I dont see why I would not do that?

Worst case I could add the bathroom and sell the place? I am intentionally not sharing all my numbers as this is my first post and I am not sure how all this works.

Thank you for being patient with a newbie!

OK, well that good. At least it isn't negative. Are you sure you can do this job for only 5K. Seems low. Would that 5K be better spent towards another property purchase? Sounds like the best thing would be to take the hit, look for the next deal. One beginner to another.

I don't know much about this but maybe you can fight the assessed value. I don't know if that would work being that they went off your purchase price. Might be something to look into.

Ok so I tired to do the math, and it feels too good to be true. I put in a bunch of data points for rentals that were currently available, ran the regression, and this is the formula I got.

-76+165(beds)+350(baths) +.28(sqft) = Monthly Rent

So this regression would tell me adding a bathroom would be worth $350, adding a single sqft would be worth 28 cents etc. If anyone remembers their statistics please let me know! 

Honestly I do have problems with my data, I am pulling directly from zillow, and this is stuff that is still available for rent (not currently rented) way past the traditional 'rental season'. Under that formula my house should rent for 1908 (which matches zillow rest estimator) and would go for 2250 with the added bathroom.