Property Manager 路 Royal Oak, MI 路 Member since 2012 路 12k+ posts 路 9k+ votes
1d
SELL!
You don't know how to properly screen S8 tenants, so will continue making the same mistakes馃あ
FYI - the tenant CAN afford the rent, otherwise S8 would NOT have cut how much they're paying - they just don't want to pay the rent due to their "entitlement mentality" - If you don't know how S8 works by now - SELL馃あ
i wouldnt sell. the house isnt the problem, the tenant is. a 3.5% loan with 10 years left is the best thing you own, and like you said anything you 1031 into costs more a month.
first thing id do is call the housing authority and ask why their part dropped from 2k to 500. sometimes its a missed recert or paperwork and it gets fixed. sometimes the tenants income went up and thats just the new number. you need to know which one.
if they really cant pay their part then yeah, they have to go. id offer a little cash to be out by a set date before id file, its usually faster and cheaper. and id ask a florida eviction attorney before taking another partial payment, that can mess up your notice.
how many bedrooms is it? i rent my houses by the room, each person on their own lease. one person paying late costs you a room, not the whole month. harder to run from another state tho
With the location (I'm figuring C to C-) and knowing tenants, (especially subsidized tenants) can really mess up a nice home, I'd 1031 out of Dodge.
Many parts of FL are in price/sales decline, and it seems to be headed lower.
Think about putting that exchange property in a more 'tenant-affordable' area with a lower price points, like OH or PA. Example: you can find a cash-flowing duplex in NEPA under $300k.
Before deciding, find out why the housing authority's share dropped. Usually it's a recertification showing higher tenant income, which means the tenant now owes more and isn't paying it. That's a nonpayment issue, and Florida's nonpayment process is relatively quick. On selling: at $350K with ~7% selling costs, you'd net roughly $105K of your $130K equity unless you 1031. With 10 years left at 3.5%, the house is paying itself down fast. I'd resolve the tenant first, then decide with a paying tenant or an empty house in hand.
Property Manager 路 Royal Oak, MI 路 Member since 2012 路 12k+ posts 路 9k+ votes
1d
SELL!
You don't know how to properly screen S8 tenants, so will continue making the same mistakes馃あ
FYI - the tenant CAN afford the rent, otherwise S8 would NOT have cut how much they're paying - they just don't want to pay the rent due to their "entitlement mentality" - If you don't know how S8 works by now - SELL馃あ
CPA, CFP庐, PFS 路 FL 路 Member since 2017 路 5k+ posts 路 3k+ votes
1d
Mary, I'd probably separate the tenant issue from the bigger investment decision. If the property is renting for $2,500 and the mortgage is around $2,000, I'd first figure out the true cash flow after taxes, insurance, vacancy, maintenance, CapEx, and management. A $500 spread before those costs may be much thinner than it looks.
The 3.5% mortgage is also something I would be very reluctant to give up without a strong reason. If you sell, you are not only giving up the property, but also replacing very cheap debt with whatever financing is available on the next property. If the property still works as a long term rental and the area has reasonable rental demand, holding could make sense. If the property is consistently difficult to operate and the return on the $130K of equity is poor, selling could also make sense.
I would not do a 1031 simply because you have to. The replacement property needs to make sense on its own. And if you hold for another 10 years until the mortgage is paid off, that does not by itself eliminate the tax consequences of eventually selling. The depreciation and gain from the property still need to be considered when planning the eventual disposition.
I鈥檇 compare the after tax economics of holding, selling now, and selling later rather than making the decision based only on the tenant situation. Feel free to DM me, I鈥檇 be happy to send over a few resources that may help you compare the rental and tax side of the decision.
I agree with what others said about separating the two issues-current tenant struggling to pay the rent and wanting to sell. Talk to the current tenant and tell them they appear to be struggling to pay the rent on time and offer to let them out of their lease without penalty IF they leave the place in good condition. You still have their damage deposit.
As for selling, not sure what the market is like where you are, but ask yourself if you want to buy another rental or if you'd be better off investing that money elsewhere. Interest rates are higher than they were 10-15 years ago and if you aren't getting good tenants, the costs at turnover are going to add up.
Investor 路 Collierville, TN 38017 路 Member since 2017 路 648 posts 路 472 votes
1d
Nobody has asked the question that decides this, so let me: WHY did the HAP go from 2,000 to 500?
I run a few hundred voucher doors and I have never once seen an authority cut a HAP by fifteen hundred dollars arbitrarily. The housing assistance payment is the lesser of the payment standard or the gross rent, minus the family's total tenant payment, which is roughly thirty percent of adjusted monthly income. So a swing that size means one of three specific things happened, and which one it is changes your entire decision.
ONE - THE HOUSEHOLD'S INCOME WENT UP. Someone got a job, or a working adult joined the household, or income that was previously unverified got verified at recertification. The tenant portion rises and the HAP falls by the same amount. Note what this means: the tenant is not poorer, she is richer. She may genuinely be able to pay. She may also have had no idea the increase was coming until the notice arrived.
TWO - THE HOUSEHOLD SHRANK. People moved out, the family now qualifies for a smaller bedroom size, and the payment standard that applies to them dropped with it. This one matters most, because it means the family is over-housed in your unit and the fit problem is structural rather than behavioral. That tenancy is probably ending regardless of what you decide.
THREE - A RENT REASONABLENESS OR PAYMENT STANDARD REDETERMINATION. Less common at this magnitude, but worth ruling out.
You are entitled to the owner copy of the rent change notice showing contract rent, HAP portion and tenant portion. Call the authority, ask for it in writing, and ask which of the above drove it. That is a phone call and an email. Right now you are contemplating a 350,000 dollar decision without the one piece of information that determines whether this is a tenant problem, a fit problem, or nothing at all.
THE PART THAT IS NOT ABOUT THE TENANT
Separately, and I say this plainly because I think it is the real answer: the voucher change did not break this property. It revealed something that was already there.
2,500 rent against a 2,000 mortgage is 500 dollars a month before taxes, insurance, maintenance, vacancy and capital. In Florida, insurance alone can take most of that. That was true last year at full HAP. What you had was a property that looked fine because the money arrived on the first without fail, and reliable income is very good at hiding a thin spread.
So you have two questions, not one, and you are currently answering them as if they were the same question. Question one is what to do about this tenancy. Question two is whether a 2,500 rent against 2,000 of debt service is a business you want. Diagnose the first before you decide it.
ONE THING IN YOUR FAVOR THAT YOU ALREADY SPOTTED
You are right about the rate, and I would weight it more heavily than you are. A 3.5 percent note is the single most valuable thing in this deal and it is not replaceable. Trading it for today's rate on a similar basis is exactly the problem you identified yourself. Trust that instinct. The tax side of a 1031, including depreciation recapture and what paying the loan off does and does not change about your gain, is a question for a CPA rather than a forum, and I refuse those on sight.
AND ONE THING I HAVE TO PUSH BACK ON
The tenants usually section 8 and trash the house. With a few hundred voucher doors I will tell you straight that damage tracks screening and management, not the voucher. The voucher describes how the rent arrives, not who the person is. If anything the program gives you something market-rate landlords never get for free: a third party inspects your unit on a schedule, which is an annual condition audit somebody else pays for.
The lever is screening, and you can screen a voucher holder exactly as hard as anyone else. Call the prior landlord yourself rather than taking a reference letter. Ask the one question that gets an honest answer: would you rent to them again.
Rental Property Investor 路 Clinton, MA 路 Member since 2018 路 38 posts 路 26 votes
1d
I would personally look at it on a return on equity perspective - you have 130k in equity at the moment. with 500 in cash flow it would take about 22 years to recoup that. and thats with no money set aside for repairs or vacancy. Likely this number is like 50+ years. I would 1031 into another property that will give a better return -you can trade up to a 2-3 family that will return easily double that number and have minimal money down.
Property Manager 路 Phoenix, AZ 路 Member since 2024 路 534 posts 路 203 votes
21h
With only about 10 years left on a 3.5% loan, a big chunk of each mortgage payment is paying down principal. That's part of your return too, and it gets missed when you only look at cash flow. I'd pull an amortization schedule and add the yearly paydown to the cash flow before comparing it to a 1031. If taxes and insurance are included in the payment, take those out first. A new property at today's rates will build equity much more slowly in the early years, so compare total return to total return, not just cash flow.
If it turns out the tenant really can't afford their share now, it may be worth talking with them and their caseworker about moving to a place that fits their budget. Voucher holders can usually move with their voucher, so ending the lease early by agreement could work out better for both of you than an eviction. They avoid an eviction on their record, and you get the house back sooner.
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