Buying 2-4 Plexes, Raise Rental Rate

[John Taconutz]

Hello all,

What a great forum.  I am considering the purchase of 2- 4 plexes. All are 1 BR 1 BA. Realtor is touting that the units are at below market rates and can be increased to improve cash flow.  The units are month to month at $525, with one unit recently rented at $675 on a one year lease.  I have research similar area comps average around $600/mo.

Some information:

Current asking price is $370,000

Current expenses(with month mort of $1,500) are $4,916 using the "back of napkin" technique discussed here.

My expenses include 10% vacancy, 5 % repair, no PM though.

Cash Flow $4,350-$4,916=($566)

Cap Rate $4,916-$1,500/$370,000=11%

Cash on Cash is 79%

Questions:

1.  Am I crazy for even thinking about a negative cash flow property?

2.  Can you raise rental rates significantly without losing tenants?

3. Has anyone done this before and been successful.

I have a commercial property but I have never dabbled in the residential side.

Thanks for any feedback.

John