Deal with a few red flags

16 Replies

I'm looking at a 12 unit building in the Midwest. Cash flow is very impressive on my analysis of rent roll. However, when looking at rent roll, I noticed that 2 weeks before the property went up for sale. Rents in three of the 2 bedroom/1 bath units were increased from 650 to 850. Market rent for this area seems to be about 700-750. I'm assuming they did this just prior to sale to inflate their numbers? Is this too much of a red flag to buy the unit? If I was a tenet, I think I'd probably consider moving out if my rent was suddenly increased 25%. 

Thanks in advance for your advice!

@Thomas Lowe , I agree with Eric. I can’t see a reason why they would raise rents $200. In the end, compare our current leases with the trailing 12 and base my offer off that.

The only way to ferret this out for sure is to use Estoppel Certs signed to the LL and tenants. You want to be sure the tenants are actually paying their rent and that they are not just passing money back and forth to make things look good. You could be buying a real headache if you do not check it out.

@Thomas Lowe yes that is very common; generally I put in the offer at a price that makes sense to me and know that more negotiation will take place later and the seller knows that too. I remember feeling uncomfortable the first time as well.

@Bjorn Ahlblad , this is why buying a professionally managed property from respectable PM helps to greatly reduce the risk. When I see asking prices from personally managed properties lacking in the documentation and less established formalized SOPs, I’m expecting to see lower prices to mitigate the buyer’s risks.

@Bryan Mitchell @Bjorn Ahlblad . Really appreciate the insight guys. It is operated by a property management group. I’m uncertain if they are reputable. I recalculated my offering price based on the original lower rent prices and it comes out to $603,000. Asking price is 675,000. 9.17% cap rate. 2845 Glenaire dr Cincinnati, Ohio. In case anyone is interested

@Thomas Lowe I am familiar with the listing you are referring too. I would say generally speaking in the Cincinnati market you need to be very careful with locations, they can be hit or miss and its very neighborhood and even block by block dependent. If you have a strong manager in place even some of the roughest areas can be successful. Just understand what you are investing in before you do it. As for the numbers, 56k a door is pretty high for that area but unfortunately a lot of investors particularly out of state are willing to pay the premium to have somewhere to park money. As I advise my clients in this market, you are not really competing with the seller for a fair price, you are competing with the market and the other buyers. While 603k may be a more reasonable market price based on past performance, many investors are willing to pay more for the potential upside in proforma going forward. Best of luck on your deal! 

@Thomas Lowe - this is (unfortunately) a fairly common practice in MF real estate. When the properties get big enough you can spot it on the income statement, as when they increase market rents, theres an associated jump in the vacancy line. Good luck

Hey @Thomas Lowe , I'd consider this more of a yellow flag and something to dig deeper into but most sellers won't get into specifics until there is an agreement in place or at least an offer.