Current Rent is $600 below market

[Jonathan Giglio]

Hello, I am considering buying a property that has a 6% cap rate and only cash flows about $200/month. However, one of the units is currently renting for $875/month. Using rentometer.com, I've determined the average 1bd/1br rent in this area to be $1,400. 

Does anyone have any stories about what they did in this situation? There must be legal limits as to how much you can raise rent. $500 a month in crease is a lot for me as an investor, but is also a lot for the tenant and likely unreasonable. The tenant has been there 15 months and wishes to stay.

What would you do? Thanks.

[Joseph Cacciapaglia]

I would be very careful basing decisions on Rentometer.com. Here in San Antonio, it tends to be very high in several parts of town. I would suggest getting some actual rental comps. If $1400 is in fact the market rate, then I would suggest bringing your tenant to somewhere close to that on the first lease renewal, unless your state or city has rent control and doesn't allow this. It's possible they'll decide to move out, but then you can release it at the market rate.