High Rents and Due Diligence

[Paul Gwilliam]

I'm looking at a property to buy that is 11 units in a college/low income area.  The rents for a 1 br I show should be around $400/mo.  

The pro forma rents were $500-$550.  When I got into due diligence, I see the rent roll is the same, the signed leases match, and I toured the property with the property manager, asking several residents what their rent was, verifying they are paying the higher rent.

It looks like they are really getting these higher rents.  I asked the property manager how he's getting these numbers when market is only ~$400.  He shrugged his shoulders and said, "People pay it".  My question is how should I treat this in due diligence?

The property manager seems to be very hands on at the property and knows all the tenants by name and they seem to like him.  That relationship may account for some of it, but I just don't understand how this is happening and if I should trust it even though I've verified it directly with the tenants.

What should I think?