Buying an existing rental property in a high demand neighborhood

[Cameron Hamidi]

Hello.  I have used the buy and hold calculator to analyze a potential single family property.  The analysis with the current rent only has $55 cash flow per month but with rent increase can go to +$200 in cash flow. The property has an existing tenant who’s paying $1500 and their lease is up in November of this year.  The house is in a demanding area and with a little bit of clean up and fresh paint can be rented for $1700 or more.  My question: Is it smart to buy a rental property that has an existing tenant? 

[Bruce Lynn]

Well there are a couple of ideas with this.  #1 you know what the rent is today...no guessing.  #2 no cost to lease and no vacancy if you keep the current tenant, so that saves you some $ up front.

Maybe you can raise the rent some with the current tenant and keep them if they'll renew.

Remember if you loose them to update the property, you have the update costs, vacancy costs, and lease fee costs.   My guess is also you get higher turnover with higher rent.   So paint and carpet is often about $5000-$7000, 1 month vacancy is $1500-$1800, lease fee $1800, so it will cost you somewhere around $9000 to loose the current tenant.   So it takes about 45 months to recapture your costs to update and retenant...that is if the new one stays for the 45 months and your lease assumptions are correct.

Depending on where you are in DFW, you also might consider trying to get the lease on school year.  We see demand highest in the summer months in many area, and tougher to lease in the winter.

Just some thoughts.