First Multifamily Investment - Question about Market Rent/Tenants

[Kush Patel]

Hey all,

I reside in MA and am new to the BP community. I have spent a fair bit of time on this site and am ready to dive in to my first multifamily deal (I have some experience investing in commercial real estate).

The apartment building (15 units with live-in manager) I am evaluating is currently rented to individuals who are subsidized by the government (generally SSI, not Section 8). The issue I am finding is that the rents for these units (~200 sqft studio's) appear to be very high on a $/sqft basis relative to what else is available in other properties close-by. To frame the difference, the apartments in this building are renting for $2.5-$3.5/sqft ($500-$700 total rent, including utilities) versus $1.00-$1.50/sqft for other, nicer apartments ($750-$1,000 rent, typically not including utilities).

My gut feeling is that tenants on SSI/Gov't subsidies have few housing options and therefore pay a premium on rent (on a $/sqft basis) due to not meeting income requirements, lack of credit, and being TAW. Am I on the right track with this thinking? If so, are there any expenses I should model with this type of tenant in addition to a higher vacancy and credit loss rate?

Any other advice would also be appreciated. Thanks!