Author Topic: Big decision on whether/how much to renovate after inheriting Section 8 tenants  (Read 1386 times)

redrocker

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I have a shotgun double that's been a bit of a problem child for the 2.5yrs I've owned it. I inherited tenants from the previous owner and it was my original intent to keep them for as long as possible for various reasons, not just financial.

However, this has proved a challenge for a few reasons. There is a lot of deferred maintenance that needs to be addressed, the house is under the jurisdiction of the city's historic preservation commission, and the tenants on each side are both elderly/on disability, on Section 8, and have become increasingly difficult to manage. Not counting depreciation, on Schedule E I've barely been cash flow positive and this just isn't worth it considering I have an annual inspection on each side to stay in the Section 8 program and the resulting list of required repairs has kept me busy for almost 2 months each past year. Raising rent doesn't seem to be a viable option for either tenant's respective situation.

I've decided to ask them to leave at the end of the summer (both are on month-to-month lease at this point). That's going to be emotionally difficult for me to begin with. That difficulty is compounded by my own uncertainty of how much time and money to spend fixing up/renovating/restoring before putting back on the market. I just cringe when I walk into either unit and I get overwhelmed looking at all the cleaning/fixing/upgrades that would need to take place before *I* would consider living there. So until I actually have the opportunity to start making progress, the loose yet constantly growing to-do list in my mind feels daunting.

Painting throughout - everything including ceilings - is absolutely mandatory. There are no ceiling fans currently so adding those is also high on the list. Current appliances belong to tenants so I'd need to get at minimum a fridge and range for each side, probably a stackable washer/drier as well since the laundry rooms are too small for a conventional pair. Kitchen cabinets may have to be thrown out and replaced due to sanitary concerns.

Some big questions I've yet to resolve:
1) Flooring? Floors are currently tiled throughout. Due to sanitary habits (or lack thereof) of current tenants I don't know what to do about the existing grout. Additionally, in this city wood floors are fairly common and sought after. I have a strong aversion to tile myself and I'm not sure how much it would hurt me to keep it. It would likely be replaced with vinyl faux wood planks if I were to change it but that would probably run me at least $2k in materials on each side (800 sq ft x2 units at $2/sqft plus subflooring)

2) Climate control? There is currently a single window unit on each side providing both cooling and heat (for the few weeks that we actually need heat here). I know from experience renting in this town that this is not really adequate heat. The only window units I see down here say "for secondary heating only." For anyone who's been to New Orleans in the summer, you know the heat is brutal and if I stick with window units I probably need to add at least two to each side. However, I've really been kicking around the idea of adding a central HVAC for each side. At $4.5k for each side, it's not the smartest financial move short-term but I'm concerned about finding tenants at even average rent for the neighborhood without it.

3) Natural gas? Gas is pretty common and makes both the hot water heaters and winter heat a lot more economical. Currently one side has a gas meter but the other doesn't. Both sides have electrical water heaters. Haven't gotten a quote for adding gas but regardless if I go to a central HVAC, having gas on each side would make gas space heaters a possibility, which would be a huge improvement over the window units in the winter. This is lowest on my priority list for upgrades.

4) Full renovation to a single family home? My real estate agent - who I trust and I have a good relationship with - has suggested in the past that I consider gutting and converting to a single to flip. As I'm currently FIRE (and unable to get financing on other investment property without ceding control of my investment assets), I don't think I *want* to sell, even considering the relative headache that this particular property has been. I prefer the long game myself and the speculative buying in this city has been obnoxious. Fully renovated, I doubt the house would sell above $280-290k. Cost for renovation hasn't been looked into for this property but it would need to be gutted to studs and have the electrical completely redone. I doubt I'd want to rent as a single family after making that investment either. While I get postcards about once a month from speculators, I doubt they'd pay me enough to make it worth giving up the income stream.

5) Keep as Section 8? One big motivator of me getting in and fixing up the place would be to get off the Section 8 inspection cycle and deal with more self-reliant tenants. However, I have considered that making the bare minimum repairs and starting fresh with new Section 8 tenants is probably the least risky option, financially. I wouldn't have to add appliances (or be responsible for them), lack of central HVAC wouldn't be a deal breaker, and receiving rent on time *could* be almost guaranteed as opposed to having service industry tenants (the prime rental occupants of this neighborhood/city)

The numbers:

I have $83k left on the mortgage at 4.625%. Flood and house insurance are relatively high, monthly note including that and property taxes is $800/mo. Current rent is $1250/mo, when water/sanitation is accounted for. I admittedly don't have a good grasp on market rents, although I think anywhere in the $800-1000/mo for each side is feasible depending on condition/amenities provided. Therein lies the rub for me. Can I get to the perceived median of $900/mo without central air and wood floors? I don't expect a clear answer on this forum as I realize this is driven by personal preferences in a fairly unique locale but I wanted to at least see what other landlords thought.


NoNonsenseLandlord

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get rid of the Section 8 tenants and leave it a duplex.  You will make more renting it as a duplex than a SFH.  If you make it a SFH, it will be worth less to an investor too.

If you keep Section 8, make sure they have 625+ credit scores.

You need to get tenants that are easy.  Section 8 tenants are a lot of drama and not as much money.

Here is the decision I went through.
http://www.nononsenselandlord.com/2014/08/section-8-tenant-leave/

redrocker

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Here is the decision I went through.
http://www.nononsenselandlord.com/2014/08/section-8-tenant-leave/

Funny, I'd actually read that piece some time ago. I haven't quite had the level of drama you've encountered but just the potential for it definitely has me wary. Thanks for the reminder and the other thoughts.

NoNonsenseLandlord

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Here is the decision I went through.
http://www.nononsenselandlord.com/2014/08/section-8-tenant-leave/

Funny, I'd actually read that piece some time ago. I haven't quite had the level of drama you've encountered but just the potential for it definitely has me wary. Thanks for the reminder and the other thoughts.

I am glad you found that article.  It is one of the most popular.