Calling BS on ‘major room for rent increases’

41 Replies

I am calling BS on agents saying ‘major room for rent increases.’ I have not bought a rental property (yet), but I’m researching the possibilities. I am highly skeptical that a new owner can just come in and say ‘hey tenant whose been here for however long, I’m the new owner and you are paying $600 per month but market rates are $800 now, starting next month rates are going to market rate, want to stay or move out?’ My hunch this is more marketing ploys to entice rookie investors than it is realistic to actually increase rents considerably in a short amount of time. Right?

@Justin Gottuso

Well, it depends. My last duplex I bought the rents were $1,100. I made some quick improvements and rents are now $1,430-1,480. Mostly what I would watch out for is the real estate agent that puts out a Pro Forma trying to justify the asking price based upon some magical future rent that the current owner has never gotten.

You always need to do your own research and run the real numbers. Never trust the numbers from a listing agent without verification.

It simply means the rents are well below market rents. Its not BS in any sense if the rents are below market. 

"Room for rent increases" doesn't mean you'll keep the same tenants, it just means the rents aren't at market.  If you are looking to invest somewhere you should really know what the market rents are, so its easy to verify if there really is upside. 

If you don't want turnover, it often makes sense to have smaller (or no) rent increases on reliable low-stress long-term tenants. This makes more sense in C areas with higher risk tenant populations. Once you find good ones you hang onto them for a while. 

@Russell Brazil Agree with Russell, I often see properties that a LL has owned for a long time, is content with lower rents and there’s room to increase rents.

I purchased a property in January where rents were/are $925. I just finished a remodel of the first unit and rented it for $1,325.

Know your market and do your research.

@Justin Gottuso the last property I bought rent was at $1,100 and 2 months after buying it I had it leased at $1,675.

it’s not BS, it just takes effort. If they tell you that there’s major room for rent increases and the tenant will be okay with it then that’s likely a dubious claim.

But if they’re simply stating that rents are below market and there’s a value add opportunity, then that’s entirely normal and often where opportunities lie.

@Justin Gottuso every deal I’ve done has gone something like this. When rents are under market, tenants usually know that and are expecting them to be raised. If you fix a few things up to sweeten the deal they’re usually okay with it. If not, they move out and there are lots of other tenants out there waiting in the wings. As far as why the former owner didn’t have things at market already; some older landlords have their buildings paid off, are tired, and just don’t want to bother putting the effort into fixing things and raising rents, or they don’t know what market rate is.

@Anthony Wick good tip! How do you get a realistic gauge on real market rates? And I’m skeptical about seeing that kind of rent increase in C neighborhoods if most of the people can’t afford the increases...

@Bjorn Ahlblad Yea... makes me wonder... or the property is hiding something. Lots of the listings say ‘curb offers only.’ So is it normal to have big physical inspection stuff come up in your experience with lots of repairs needed?

@Russell Brazil like how my orients who own multiple homes haven’t raised rents much over the years to keep good tenants and they are overly nice/not focused on earning more income. They tell me their rents are below market. So there would be properties with landlords/owners like this...

@Nicky Reader that’s what my parents have done with their properties, low/no rent increases and they stay longer. But it’s also because they’ve always managed them themselves without property management company.

@Matt J. nice! So did you buy, remodel, refinance and take your money out/BRRR style or something else? And did the same tenants stay or did they move out and got new ones?

@Daniel Haberkost nice!! Mind if you share what you bought it for and how much the improvements cost/what was done? Trying to get a better sense of what it will take/cost when I get something that’s below market rent but needs some work

@Steve K. That’s helpful to know the process/one way to go about it. ‘Hi I’m the new owner and I plan to make your place nicer... it will cost x amour more per moth when the work is done, if you want to stay that’s great but if it won’t work out I understand’

Market rents are irrelevant initially since you are bound to the terms of the existing lease so when I am buying with tenants in place I base my offer on the current rents. I will increase rents to market rates on a turnover. When current lease expires I will have a small rent increase if I want to keep the tenant and if I don't care for the tenant I will turn the property over.

@Justin Gottuso I’ve bought, moved one tenant out (before COVID hit) remodeled that unit and rented to a new tenant. I’m in WA and through August 1st no evictions/lease terminations are allowed. Once that’s lifted I’ll move a couple more tenants out and remodel those as well. My cost for a full remodel of each unit is about 20k.

I’ll either sell next Spring or refi and pull my initial down payment back out.

You gotta look at a lot of deals and know your numbers but it’s possible to find good deals even in a hot market like Seattle. This deal was given to me by a wholesaler I met on BP!

@David Wandel ooh ok. Basing offers on current rents. In Columbus seems like too much demand where prices are much higher than the 1% rule, like 250k properties that rent for 1,100 per month. Why would I buy that property? And also seems like sellers are basing list prices off of projected rents with future increases, not current rates.

@Matt J. yes to seeing lots of deals! It’s been helpful to read a weekly digest of properties an investor-realtor who I met here on BP sends out. He does a nice analysis with rent comps and his take on the property. Lots of deals don’t work out but sometimes a gem comes along. Sounds like you are essentially flipping the property, just waiting about a year instead of selling immediately. Why not hold onto it for a few years before selling? Just to get the cash out and keep doing other deals?

You need to do your own underwriting and not take anyone's word for anything. Check the rents and compare them to other nearby buildings. There may indeed be room to bring rents up; but it pays to know if the units are already at market or if you are going to be held back by existing leases.

As far as inspections go I would not buy a MF if I could not inspect every unit, and the rest of the property. I don't make offers contingent upon financing but they are always contingent upon inspection.