Tenants want new lease, also want to buy a house in a year.

15 Replies

Hello all! I am a new member and I currently have been listening to the Bigger Pockets podcasts and have been really diving into the real estate investing world. I have been renting out a single family home in Connecticut for a year now and my tenants want to renew there lease for another year and they've told me they plan to buy a house in the town my home is located at the end of the next year lease. I am planning to buy another home (most likely a live on oneside rent the other multi family) next spring once I take care of some unwanted credit card debt and save some money for a down payment. My question is should I suggest selling my home too my tenants if they are interested? I just purchased the house a couple years ago 0 money down and I still owe a fairly decent amount so I may not walk out with much spending money depending on the price of the house. Or should I let them move out and expect to have a Reno cost around this time in August next year. Any advice would be appreciated!!! Thank you!

It depends what your goals are. If you want to build up a rental portfolio and that property is cash flowing, it may not make sense to loose the cash flow if you aren't able reinvest the money into something with equal or greater cashflow. If it isn't performing well enough to get you to your goals, it's definitely worth considering selling or refinancing it.  It seems like everyone "wants to buy a house" in the next year or two, but not a lot of people actually act on that. So you may just save up for the make-ready and hope they end up staying longer.  

@Adam D. I agree, it depends on how your rental is looking cash flow wise. If you’re making a few hundred $$ now, and will continue to after the Reno, why sell a cash flowing property? If you think you can sell it, and buy another BETTER cash flowing property, then it may be worthwhile. But to sell and get almost nothing in return, doesn’t sound like a great plan Keep them as renters at current market rents for as long as possible, then get new tenants when they move out.
@Mike McCarthy the home breaks even but it's fairly new at least so at least I don't have to cough up too much money for repairs. I will have to ride it out and see where I stand next year ! Thanks Mike!
@Adam D. if it breaks even I would not renew the lease next year and put it on the market to be sold. The current tenants or someone else will buy it. After selling it I would look for a property which will cash flow. Breaking even means that you will eventually lose money when either a tenant damages your property or something stops working and needs replacing or a tenant stops paying their rent and you are forced to evict.

I started looking into the numbers last night some more and I realized the estimate for my home has gone up 12% in the last year or so. When my tenants new lease ends next year do you think it would be a good idea to just re-rent the house for more so I do earn a cash flow with a possible refinance? instead of selling? the only thing I was trying to avoid was any major costs to repair that wont be covered with there security deposit .

Thanks Amy!

@Adam D.

Are you going to make a profit if you sell the house?

Check rentometer.com to see if your rent is lower than market. If you can't get any money out of it, I would sell it.

It doesn't sound like refinancing is an option. If your house went up 12%, I don't think you will have any money to take out. When I looked around for a HELOC, I was able to go up to 90% LTV on my house which would get you only 2% out. I guess you could look to see if you could get a refinance for 100%, but I haven't seen one of those.

If you think you will benefit from some appreciation, you could keep it, but if you are looking to make cashflow I would sell it. You may be able to get the current tenants to do a lease option, where they basically give you a deposit for the opportunity to buy the house in the future. If you do this, you get some money you could put towards purchasing another house and you continue to get the income from them as they rent from you. They are also likely to take care of the place better if they think they will be buying it. 

@Mat O'Grady Rentometer.com gave me an increase of 500$ per month for home similar homes in my area. Thanks for the suggestion I've never heard of this site. My tenants are great tenants and I'd hate to scare them off with an increase in rent. I'm not familiar with to many types of loans and I tried to do a refinance with a cash out and the loan company said it wasn't possible at this time due to what I still owed on the property. It was a 0 down first time home buyer loan. (Realized the hard way how bad those are too get) lol With the lease option should I consider reaching out to a realtor or a broker to help with more information on that process and if my tenants are willing to do that what would be the best option for me to do since I'd like to purchase a duplex next year? Thanks for the reply!! Adam

@Adam D.

Wow, a $500 a month jump? That would be pretty good. You are right that the increase will scare off your tenants, but in order for you to make money in real estate, you are going to have to do things that people do not like. 

Most real estate agents do not know how to do a least option. If you are interested in doing the lease option, I would research on this site as much as you can and see if you can find a lawyer who can help you draft up an agreement. 

Its not just a rentometer estimate you should use. Find some comparable properties to index your rental against. You should not be afraid to raise rent. Turnover costs money but so does subsidizing a tenants rent. You are at $6000 a year subsidy at $500/ mo. i suspect that is an overestimate but even so figure it out. If in a year you expect to profit well at market rent I would keep it, if it is break even sell it while you can consider it still as your primary residence.
@Colleen F. It turns out my tenants now want to rent a month to month with a 3 month notice of leaving. I think I could only get about 1600-1700 for the house compared to the surrounding area and the small size of the bedrooms.

So how much more is that then what you get now?  I would renew at market. I would charge extra for the month to month but that is my area. I would also ask for a payment on written notice of termination. Here winter terminations are difficult to fill. People change when they give notice mentally they move on.  Also put a clause saying they must allow you to show.

@Colleen F. If I went ahead and charged another 100 if they choose to do the month to month but also offered to keep the rent the same if they choose to renew the lease. Mostly because I want the security of having someone in the property. Although if they were to leave and I was able to re-rent the property for at least 1600 I could make at least 200 a month in cash flow

They probably want RENT with the OPTIONs to PURCHASE meaning the rent will be used to reduce the asking price. I suggest you not do it. But you can tell them before lease ends what you want out of it.