Owner operators of investment properties at times get emotional about their tenants and properties. Recently, I may have made a $4,000 mistake because I like a tenant.
We recently bought a duplex where the rents were about 40% under market. The prior landlord did an amazing job operating the property, but fell in love with his tenants and kept rents at the same level for many years. The first of the two leases is up for renewal and I too got a little emotional about the tenant. Here’s what I did:
Dear Tenant, I really appreciate you and how well you maintain the unit. Thank you for all of your years renting. You are currently about $500 under market rent and I would like to give you the opportunity to renew the lease at a rate that is still significantly lower than market. The offer is to move from $800/Month to $1,000/Month. If you choose not to, I completely understand, as it is a significant financial leap. If you choose not to renew, we will be renovating the interior and marketing the property at $1,300/Month.
If this tenant chooses to renew, I know what I am getting. A good tenant, who pays on time and takes care of the unit. I won’t have any out of pocket expenses and will have no vacancy.
Increased rent: $2,400/Year or a 25% increase – Not Bad!
Zero Vacancy: $0 Cost
No Turnover Expense: $0 Cost
This option is appealing to me because I get to provide good housing to a good tenant. No headache (which is worth significant $$), no turnover cost and no vacancy. The financials look good.
The Vacate – Update – Re-Rent
If the tenant chooses to vacate, I will drop about $10,000 to $12,500 on the updating of this unit. It will take about 2-4 weeks and then another 2-4 weeks to show, lease and have a tenant move in.
Increased Rent: $6,000/Year or a 62.5% increase
Vacancy: 2 Months: $1,600
Total Cost of Vacate and Update: $14,100
Here is where I messed up. I got emotional about the unit. “Hey! I can get a 25% increase and keep the same tenant?! Heck ya!” The opportunity cost though of NOT updating and re-renting is significant! Where can you invest $14,100 and get a 25% return? ($6,000 Updated Increase minus $2,400 Renewal Increase over the $14,100 cost). The answer is damn near nowhere. A 25% return on $14,100?! How could I even thought a minor renewal was the right move. It wasn’t.
I may have gotten lucky though, as the current tenant has until October 25th to let me know if they plan on renewing at the offered amount, and have not signed yet. I don’t feel it fair or appropriate to rescind the offer at this point because why put salt on a open wound? THAT could be cause for a direct to Google/Facebook reputation slaughter and THAT could be worth thousands as well.
So currently, I am waiting and hoping that my mistake doesn’t come back to haunt me. That shows the importance of keeping your goals in your immediate vision and your business operating as a business and not as a emotional investment.