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Should I change tenant for more £ or keep because they are so good?


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Hi All,

 

We own (with mortgage) a ground floor maisonette, we have had the current tenants since we bought the property (6yrs). They are very good tenants (always pay on time, maintain the up keep, always ask if they can make any changes etc).

 

They have asked if they can continue to stay next year when the contract expires (Dec 14). If we agree then they want to re paint the rooms and spruce up the general appearance. We have no concern with their taste in colour or the quality of work etc as they have done it before few years back.

 

BUT

 

We checked the general rental rates in the area, similar abodes are renting for approx 13% more than we are getting.

 

Currently the rent is paying the mortgage and any letting fee incurred so we are 0 on the P&L. I guess its the long game of hoping the Value of the house goes up to get anything out of it. 

 

Should we 

  1. keep the tenants - (good tenants, they will paint the inside and reliable etc) 
  2. look for new tenants 

thank you for you help

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A good tenant who looks after your investment is worth their weight in gold (well almost)

for a 13% differential I doubt it is worth changing

 

Don't forget to factor in the agency cost of finding new tenants, cost of refurb (as it is unlikely the tenants will refresh if they are leaving), the uncertainty of new tenants - are  they going to be as constant as these? Sounds like your rent is guaranteed for 18 months or more - many a landlord would envy this.

 

You can also put your rent up a bit too to bridge the gap

 

Your baby could go out with the bathwater if not careful

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I'm with Tim. By the time you have a void, re-letting fees and pay for the refurb yourself, it will take you a long time until you notionally "break even" with your higher rent. Increasing your existing tenants' rent in December is a delicate subject, but it sounds like they love the place and see their medium-term future there, so they might be willing to go up slightly.

 

Of course, as you're only breaking even at the moment, you need to consider whether you could afford to absorb a loss if your mortgage becomes more expensive or your expenses increase in some other way.

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I know that I am shooting myself in the foot by recommending this, but if you have tenants who have been there for 6 years a cost saving measure could be to manage the property and rent yourself and do more of the spadework.  You would have to be diligent on the essentials like gas safety checks etc but that could work.  You have the track record of the tenants so it is more a maintenance job of keeping on top of the day to day stuff.

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Thank you both for your prompt response.

As i was writing this post, I kept thinking that a bird in the hand worth more than 2 in the tree!

 

 

I'm with Tim. By the time you have a void, re-letting fees and pay for the refurb yourself, it will take you a long time until you notionally "break even" with your higher rent. Increasing your existing tenants' rent in December is a delicate subject, but it sounds like they love the place and see their medium-term future there, so they might be willing to go up slightly.

 

Of course, as you're only breaking even at the moment, you need to consider whether you could afford to absorb a loss if your mortgage becomes more expensive or your expenses increase in some other way.

 

Rob - thanks for the advice (boosted that you wrote here! (celebrity!))

 

 

I know that I am shooting myself in the foot by recommending this, but if you have tenants who have been there for 6 years a cost saving measure could be to manage the property and rent yourself and do more of the spadework.  You would have to be diligent on the essentials like gas safety checks etc but that could work.  You have the track record of the tenants so it is more a maintenance job of keeping on top of the day to day stuff.

Thank you Tim! Very sound advice. I have considered doing this and may consider this when we renew the contract in Dec.

 

So we have decided to keep the tenant, but also inform them that we will be increasing the rent. We will inform them on the market rate in the area and compromise on an slight increased amount. I'm sure they will negotiate down too.

 

Hopefully they will understand this.

 

Also time to renew the mortgage to get a better rate. 

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Hi there

 

Some good points made already about the value of good tenants and I totally agree with these.

 

One thing I might do is ask them their opinion on the level of rent for the apartment for the renewal to just have a conversation about it - have you ever put their rent up, or when was the last time - then at least you can highlight the facts if you decide to renew at the same rent and perhaps it sets the scene for the conversation to review it in a year's time? But given that they actually spend money on the property that is technically your responsibility is a bonus and part of how you should evaluate the numbers too - it is common to have some spend each year or two on refreshing the place and by the sounds of it your tenants have picked this up instead of you :)

 

You could as Tim alludes to look at other cost saving measures, letting fees are one and the mortgage cost is another big one...if you are on a repayment mortgage then the house capital is also being paid off even if break-even or if interest-only maybe you can remortgage or switch to a better product and make some savings but again there are fees involved in this.  I would also assess the local market from a capital appreciation point of view - has the property risen in value or is it likely to? There are other aspects of the investment apart from the short term rental figure.

 

One thing I evaluate before making a final decision is this:

 

If the rent was say £800 per month as an example and it takes two weeks to refresh the place and then two weeks to find a new tenant that would be a month's void between tenancies (at least). If the refresh costs you say another £800 (an assumption) then the cost of change and doing the refresh yourself would be £1600 or two months rent - or put another way 16.7% of the annual rent! Substitute your own figures to see how it looks using real numbers but it certainly would appear that you may end up slightly worse off for the first year of a tenancy change at least...and what if the new tenants don't pay, damage the place or leave quickly leading to another void?

 

It is right that we reassess our investment regularly, as you are doing clearly but sometimes there are factors beyond the hard numbers that might make an apparently under-performing investment worth sticking with after all...for a while longer at least.

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

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