So I have a house in Memphis under contract for $75k. This would be my first rental property. There is a current tenant who as been there 9 years and rent is $950 and currently month-to-month. During due diligence I took a look at the rent history and the tenant has a balance of a little over $1,000. They usually pay about 3/4 the rent on time and then pay some more a little later. So they are always paying late fees. It looks like a few times they've paid a big chunk to get the balance back to zero.
Also I think if I were to put about $10k into it I could get it rented for around $1100.
If I keep the tenant there's around $1,500 in repairs that I would probably do but not all of it is absolutely necessary right now.
So I know getting a long term tenant is usually something you hope for but if they seem to be struggling to pay rent on time and in full is it worth it?
Also looking a little closer it looks like most of the rent is paid by the MHA (Memphis Housing Authority). Don't know what to make of that.
Hello Jeff MHA stands for Memphis Housing Authority (Section 8 government-subsidized rent). So the govt. pays for a % or all of the tenant's rent then the tenant pays for a % or none of the rent. pros and cons to that and there is much BP discussion on section 8 tenants.
I assume you are asking if it is better for you to #1 buy the property and evict the tenant and put in $10k in repairs to increase the rent or #2 just keep the tenant in there and put in few repairs and ride it out.
Increased NOI $150/mo x 12 = $1,800 (but will probably have a 1-3 month vacancy.)
ROI = 18%
plus increased equity and potentially a better tenant
Increased NOI $0 but you do not have a vacancy for 1-3 months for repairs and tenant placement.
Savings: $950/mo x 3 monhts no vacancy = $2,850
I am just kind of helping you consider your options. My opinion is if you have the capital do #1.
I would not evict them. You have a tenant you are inheriting and I will bet the portion that MHA pays is at least $750/mo and the tenant is responsible for the other $200. You are in the very unique position of inheriting a rental property where you are guaranteed to meet the 1% rule each and every month.
I will take those all day long....half of my units between Ohio and California are Section 8 and I love it. You can of course simply go to MHA and say, hey these tenants are month to month and I want to raise their rent because they haven't had it raised in a while.....THey will most likely look at that....and then,, presto...instant additional cashflow.....and most likely the MHA will pay the extra amount...not the tenant.
@Jeff Mills You can do a trial period to see how it works out. If you're inheriting the tenant, their lease may not be up yet. See how things go. If it turns for the worst, be prepared to evict. Good luck!!
I inherited a similar situation. Tenant had been there for 4 years in an outdated unit also section 8.
I spoke with them about the inconsistencies in when they pay rent and they said with their tight budget it’s easy to get behind and have it snowball. They asked if I pushed out the late due date to the 8th that it would help. I agreed to do that and they haven’t been late in two years.
I’m not saying pushing the due date to the 8th is the answer but speaking with them and figuring out their situation you may be able to find a solution. It is nice getting majority of the rent guaranteed every month.
@Jeff Mills I'm pretty sure section 8 tenants have strict guidelines about not being late on rent and that they have to pay their rent or else section 8 will stop helping them. As @James Wachob said, call MHA and talk to them about this tenant if you're wanting to keep it as a section 8 property. The other option is let them know you'll be renovating the property and give them time to move out, then sign an annual lease with the next tenant. I don't like the idea of month to month leases. They can leave you at any time and you have to pick up the pieces. I'd personally go with option 1: move them out, renovate and raise the rent. But just make sure that there are other properties with the same standards in your area before doing this. For example, you don't want to put the $10k in and then find out all other properties around you are outdated and rent for less.