Reward Loyalty or Chase the Dollar

Estimated reading time: 3 minutes, 15 seconds

We are in the process of acquiring two different rental units on the same lot... We based our capitalization on very conservative numbers and static rent that will remain constant for several years. The problem is: The current tenant (who is the owner's ex-wife) has been there for several years and is not paying market rent. She is actually paying much less than what we estimated is needed for the units to capitalize in seven years.. a number we agreed upon during company inception. The following are the numbers used to analyze this investment:

As you can see, the best case scenerio is to raise the rent to a market rate of $600, which will in turn allow the property to capitalize in 7 years. If we allow the current rent to remain, this property will capitalize in an unacceptable 9 years. We have different views on how this situation should be handled. Personally, I have gone the "tenant loyalty" route and it never pans out... My feeling is that the lady is living there with her son probably in a very linient financial situation. She has no job to speak of..... and I feel that the ex husband is most likely not collecting the rent that is due him. The house is paid for, there are no liens attatched, he does not pay a mortgage. My gut instinct is telling me she is not paying... at least what they are claiming. It is a strange relationship to say the least. They are most definitely not living together.. when we looked the house over a second time, he actually showed up. I'm going on a tangent here, but the house has zero gutters and the current owner has no plans of installing them. This prompted us to do a thorough property inspection before we go into phase 3 of actually purchasing the property..

I digress, I feel we demand income verification to see where the rent would come from for starters, then proceed to raise the rent to market standards. If she does not comply, then we give her 30 days to vacate the premise. The partners seem to disagree, though each have not formally made a statement for or against.

Their stance is the following: We do not "rock the boat" so to speak and mantain status quo.... She continues with her current rent well into the forseeable future.. their thoughts are that if the unit were to remain empty for a couple months, it would eat up any monies gained and we could avoid that by simply keeping the current rent intact. Keep in mind, these are above average properties, we have quality tenants in our other units and actually have a waiting list for two of them.... We do not have problems filling vacancies. Even so, if we were to approach a bank with these numbers (in case we needed to refinance) it would not look nearly as attractive to them. Vacancies are built into our formula, so I feel we should not be near as concerned. In addition, if we needed to unload this property to another investor, we need them to see the maximum this place can rent for... I personally am always concerned about an exit strategy... We have little to gain by keeping her there with no proof of income and the current rent... we are actually losing 3 years of the house's capitlization.... This is afterall a business, it needs to be treated as such... when we get to the point where we are running a charity the game plan will change, until then, we always need to be aware of how it affects our bottom line. She has been there a long time, Yes, but is it our perogative to reward that and mantain her status quo? Or should we be concerned about our endeavors as a company and raise the rent to what it can be in this economy?

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