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The Sublet & The Buyout

Does your lease or the rental agreement have a stipulation within in it about allowing the subletting of the unit? As a property owner and landlord, this is something you want to make sure you know and understand. Do you want your tenants subletting the condo or property they're renting from you (the investor and owner)?

Subletting apartments is common in cities like New York, San Francisco, Seattle, Miami, where long term residants pay rents below market value and the tenants sublet to friends or others and actually make money by maintaining their lease.  They might have a house outside of the city and then keep this apartment since it's close to their work and the nightlife.

I have a friend who lives in a building in San Francisco where there’s rent control. He’s now being asked to move out and accept a lump sum. Not a bad break for him as a tenant. For the new owners, they want him out since they’re losing money every month.  The area is improving with new restaurants going in and general gentrification is happening in the area. 

The Buyout

The tenant has been living in the building for nearly 10 years and pays $650.00 per month, when the going rate for the studio is  actually upwards of $1200.00 per month. So each year the owner of the apartment complex is losing close to $7,000.00.

Potential tenant would pay: $1,200x12 = $14,400 per year
Current tenant pays: $650x12 = $7,800 per year

Loss for the owner each year: $6,600.00

The new owner can easily pay a lump sum to the tenant so the tenant will move out, and then recoup the money in a year or two. If you’re a tenant, negotiate with the owner for the highest payout, if you’re an owner, know what you’re getting into before you buy the property, and look to negotiate with tenants to move out, in the long term you’ll make money back.  When buying an apartment complex take a close look at the so called legacy tenants, those tenants who pay below market value--this is a good negotiating factor and could reduce the overall price.

The terms of the rental agreement are month to month, but an owner can’t force a tenant to leave. There is an owner occupancy loop hole, but moving into an apartment building and paying the rent for each unit in the buildings, would most likely no make financial sense. Perhaps this could be done though, move everyone out, remodel and then seek out a higher paying tenant since you’ve made improvements and now all the legacy tenants are gone.

Another factor in allowing the subletting of your units is the wear and tear.  Allowing other tenants to live in the unit will generally take a toll on the unit itself, more people moving in and out of the unit does harm to the interior of the unit--and subletters have less of a stake in the care of the unit.

But despite all the potential risks to the unit or condo, subletting your property is now a huge business. Here are just a few of the new companies who want to help you sublet your property:

Airbnb www.airbnb.com
FlipKey www.flipkey.com
HomeAway www.homeaway.com
VacationRentals. www.vacationrentals.com
VRBO www.vrbo.com

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