1. perspective: $1200 a year is about 0.4% of the current value of the property.
2. Your rent will track market rents in the long term, but you don’t have to raise it continuously. When this tenant leaves you will raise to market rent. In the long run rents will track higher in discrete steps where those steps up are between tenants. Raising rent increases the probability of turnover. All you are giving up for lower turnover is the difference between a curve with steps and a continuous curve.
3. Look at the big picture. What is your alternative if you sell ?
Case 1: you sell.
You might clear $75-80K after selling costs.
If you invest that 75-80K and somehow get 5% in something just as risky as real estate, such as a REIT, that amounts to about $4000 a year.
Case 2: you keep.
You’re probably paying down $300 + in principal with each payment. So your tenant pays down $3600 per year of your principal. This is a direct increase to your net worth. Your costs went up by $1200, so figure a $2400 per year economic net.
So, to match the $4000 in case 1, you need the property to appreciate by $1600 this year. That’s a 0.5% appreciation. Add in another 0.5% to cover maintenance costs.
So by my guesstimate, if the property increases by 1% a year or more you come out ahead of case #1 where you sold and invested for a 5% return.
4. Think long term.
If you think long term, $100 a month is in the noise. In a couple years the tenant will leave and you’ll raise the rent by $100-200. Your principal portion will steadily increase. At some point in your loan term (around year 12 or so, depending on the rate), the principal is about half the monthly payment. Five years from now, you’ll be cash flow positive, with a loan balance also dropping by $6 k or more a year.
