buying multi how to approach LOW rents - Posted by Miguel

Posted by Rich on March 21, 2006 at 16:19:28:

This is a wonderful, concise post. It matches my experience exactly and does it in a succinct manner.

buying multi how to approach LOW rents - Posted by Miguel

Posted by Miguel on March 19, 2006 at 08:00:48:

Hello everyone -

I am buying a 4 plex. The apartments are all rented but the rents are way below market. They are all on month to month leases. I will be getting the prop. under market value - about 20%. Here are my questions:

  1. How do I approach tenants about rent increases? When?
  2. Should I put in contract - that the owner has to vacate current tenants - my concerns about that are: I am getting prop. at good price, there is minimal current cash flow but covers bills. But huge potential. Should I attack the rental increase one tenant at a time to minimize my exposure to expenses after purchase.


Re: buying multi how to approach LOW rents - Posted by Frank Chin

Posted by Frank Chin on March 20, 2006 at 08:15:26:


You got two good answers already. It depends a lot on your local area.

I recall a conversation a while back at a local grocery store where the owner had a rental of 20 years, and his “tenant manager” came by to chat. At the time, market rents were $1,100/unit. He charged his tenants about $900.00, and this manager around $800.00.

I commented that while I undercharged, I charge slightly more than him, like $950.00. I currently owne the place 25 years.

The tenant manager remarked that a “foreigner” bought a similar building on the corner, and raised the rents to market, or a little over as the market was very tight. The result was:

  • Tenants come and go every 12 months, and it took 60 days to fill a vacancy.
  • Those who take the unit are borderline credit, and wound up skipping on rent.
  • He had to fix the place between vacancies.

The owner commented that while he owned the building 25 years at the time (this was about 10 years ago), the longest tenant was there 35 years, being an eight year old girl, with her parents being the tenants. When the tenant moved, her daughter took over the lease.

He remarked with some sadness that his tenant of 35 years passed away with cancer at a young age, and this was the first time he’s renting out that unit.

Then, the three of us, the grocer, his tenant, and myself discussed the merits of charging high rent, versus charging a little lower, and maintaining long vacancy (or no vacancy) and getting quality tenants.

I just rented out an apartment this weekend where the market is $1,300/month, and I asked for $1,175. I got an ad in the paper and the phone rang off the hook every 10 minutes on some days.

When applicants asked to rent up May 1 to give the owner 30 days, I said “sorry, I got enough people for April 1”.

By being a little cheaper, I rented it out a month sooner.

One time, one applicant complained about my 1-1/2 month security policy, another applicant who heard him pulled me aside and said he’ll give me two months if I give him the apartment.

How you market and price your rentals determines your long term success in the business. I find being a little cheaper give me a big advantage.

Frank Chin

Re: buying multi how to approach LOW rents - Posted by good reason

Posted by good reason on March 19, 2006 at 16:28:26:

One way to approach it is to immediately begin sprucing up the general areas with paint, plants, and pizzaz. When you then send out the notices for an increase in rents, as well as officially notifying them the place is “under new management”, the tenants should already feel things are “changing for the better” and thus believe they aren’t getting the rent hikes for no good reason. This can help them rationalize the increase, esecially if the place looks a lot better, and they may be more likely to stay. If they do leave anyhow, the place will be already spiffed up to attract new tenants.

Very Common Situation - Posted by Jimmy

Posted by Jimmy on March 19, 2006 at 08:34:05:

I see this all the time. Here are some pointers:

  1. Your purchase price should reflect the existing rents, and not the potential rents. To do otherwise gives the seller credit for something he did not do. Raising rents can be painful process. Read on.

  2. You inherit the leases as they are written. You cannot raise rents until the lease term expires. If a tenant is month-to-month, send them a letter at least 30 days in advance, informing them of the increase in rent. Ask them to sign a lease modification. If they refuse, prepare yourself for a vacant unit. If a tenant signed a year lease, and they have 6 months to go you are stuck for 6 months.

  3. Take a close look at the rental market in the immediae vicinity. How many “for rent” signs do you see? If a lot, prepare yourself for vacancy when you inform the tenants of the bump. If everything is full, go ahead and test the waters.

  4. Understand this: Vacancy hits your pocketbook two ways. The obvious rent payment is missing. But vacancy also accelerates maintenance and repairs. and vacant units are frequent targets of vandalism and break-ins. in the past 6 months, I have had 3 air conditioners and 2 refrigerators stolen from vacant units.

Good Luck

Re: buying multi how to approach LOW rents - Posted by Rich

Posted by Rich on March 21, 2006 at 16:18:08:

Raising rents without giving the tenants something in return will cause them to look around. If you raise them slowly, the might only look. I like being at the bottom middle of the market because I get more applicants to choose from and don’t have to accept someone I’m unsure of just to fill the vacancy. If it takes 60 days to rent - the rent’s too high. You really don’t want a revolving door just to get rents up to what others are charging because each new person you rent to is a risk that you could get the tenant that generates so many horror stories.

Re: buying multi how to approach LOW rents - Posted by Jlaass

Posted by Jlaass on March 20, 2006 at 14:22:57:

I agree w/Mr. Chin and also w/good reason. If you spruce up the property and charge a little below market and provide good service you’ll have some tenants for life. My mentor has done the same and it works. Turnover kills profits! Good luck.

Jlaass, commercial PM