Introduction and Q re Below Market Renters

[Dan Curto]

First, I’m new to Bigger Pockets and real estate investing generally. I’ve lurked for some time, read books, listened to podcasts and am now ready to jump in.

My first question is I’ve found a potential multi-family that is reasonably priced and would cash flow nicely if rents were at or near market rates. At market rates the property cash flows around 15-20%, at current rent rates it cash flows around 3%. The property is fully rented with long term renters that are paying about 66% of market rates. On the one hand this presents a buying opportunity. But I also see big hassles if I just raise the rent by 50% after the current leases run. Thoughts on how to think about this situation?  

[Thomas S.]

First if it is presently producing 3% the seller has it over priced. Value should be based on cap rates and that will be directly reflected by the below market rents.

Pay for todays rents not tomorrows.

With the rents that far below market I would clean house. Jack the rents to market, suffer what ever turn over shakes out and find good tenants that can afford market. The present tenants are dead wood and not worth holding on to. If they decide to stay they will likely be a major pain in the butt expecting all sorts of upgrades to "justify" having to pay market.

Pay only what it is worth today and clean house.