Verify Rents before Purchase? What to do with realtives?

Question

1)  I have a 6 unit property I may make an Offer on.  The landlord had leases but all the leaes have long expired. So, technically they are Tenants at Will or "month to month."  How do I verify the "real" rents? The owner tells me they are $550, 525, 575, etc. But I could take ownership and the tenant tells me otherwise.  I could imagine myself showing up the first month and the tenant tells me, "oh, no I have been paying $350 per month for ages."

2) How would you handle the following:  one of the tenants is a relative of the owner and is paying little or no rent.  If I buy should I have that unit vacant or take the building with the relative and hope I can negotiate a rent from a person who was living free for ages? I could imagine that this realtive will resent that they now have to actully pay. Seems like a headache will follow.

Tom C · Answer

Keep in mind that we are also talking 5 units. What are the chances of going conventional with 5 units? Most likely have to go commerical, which means the interest rate will be much higher and terms shorter. IMO

Jimmy NA · Answer

it is two properties, two deeds, a 3 unit and a 2 unit.
For the expenses: water, insurance, maintenence, PMI, taxes. 
FYI: I used a 10% vacancy on my income also.

MATT WARDEN · Answer

Seems slim. I'm ignoring your "total expenses" figure because I don't know what you factored in and didn't factor in.

NOI: 50% of gross rents = $1375/month
Mortgage: 30yr@7% = $1100/month (assuming no PMI)
Margin: 1375-1100 = $275/month or $55/unit-month

Jimmy NA · Answer

Yes, the property has been managed in a "relaxed" manner.  Owner has had it many years and has slacked a bit over the years, he has let things slide as far as up-keep and quality of tenants.   But, these factors are worked into the price. I think I see opportunity...... 
1.) So, I should get month-month signed before closing, got it.
2.) Still not sure if I close with the realtive in one of the units? I could see this individual really resenting having to pay as time passes.  I have learned people consume/spend etc. to their income levels: x amount comes in the door, x amount goes out in spending. Will this person adjust to this new "expense"? Will he adjust his spending in a very short time span? But, then again I could make it slightly below market rent just to keep the unit occupied and see what happens.....

Basic Info.

5 Units, Gross Rents: $2750
Proposed Purchase Price: $165,000
Total Expenses: $1100 per month

Tom C · Answer

ctrentalguy,

Sounds like very little profit for a lot of headaches. Even if you do a 30 yr Mort figuring your taxes in the low $1,500s, I wouldn't take it on at that price.

Joshua D. · Answer

I'm with Mike here.  Sounds like a plan.  As for dealing with the family member . . .  they pay the rent you set or they can move out.

Michael Rossi · Answer

This is VERY EASY!  Tell the owner that you'll buy the building but you want new leases signed with all the tenants and that you want copies of the leases.  Be sure to approve the new leases before the tenants sign them - you'll be stuck with them once signed.  The leases survive the purchase and you'll know exactly what the rents are.  If these are low income apartments, make all the leases month to month.

Be sure you get all the security deposits at the closing (you need copies of all the old leases also).

Good Luck,

Mike

Tom Wood · Answer

I'd be a little concerned on how well the current owner managed the property if all the leases have expired.  You could try and get all new leases signed by the tenants as part of the deal, but that's a lot of effort.

The relative should expect to start paying rent once the building is sold or be ready to move out.