(Due Dilligence) Marking Existing Tenants to Market Rent

[Brandon Yamada]

When I perform initial due diligence on multifamily properties in Los Angeles County, there is a common thread. It is 100% occupied but the tenants are significantly below market rent sold as rentalupside for the new owner. However, it introduces more risk in owner execution. With high mortgage interest rates and high property values, these in combination push down your key metrics like cap rates / increase the GRM. For most of these deals, in-place will not even pencil out paying debt service (not even including expenses), so it's ultimately a pass for me unless I would feel confident to raising rents to market quickly.

I had a few questions summarized below. 

What would be a good rule of thumb for underwriting vacancy in these scenarios? (Usually it is an increase of 50%-100%, which does sound reasonable for these areas). 

How have tenants responded to this? (I assume not well for getting a nice deal...) Did you perform gradual rent increase to market for long-term tenants or present the shock of market rent when it was time to renew? (I am looking outside of the City of Los Angeles and rent control areas.)

How did you find a new tenant in a timely manner? Did you need to perform renovations to get to market rent?

How long did it take you to stabilize the property? Is it worth pursuing deals with the potential of market rents? Could it just be a sign that the prior owner was too scared to raise rents or was too comfortable with their return due to lower cost of debt/property acquisition?

Thank you. Would love to hear all advice. Should there be other things to consider?