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?

[Steve Olafson]

There are a number of factors that could come into play here. 

It could be that this property has features that make it in demand for residents in the area.  I have a property for example that is single story, has back yards, and washer/dryers are included.  It rents for well above the comps in the neighborhood. 

There are trick that people can play that you should look for.  They could offer move-in specials where the resident does not pay the first month in exchange for higher rent.  This encourages people that don't have much money to start with and cannot get into a more affordable place to move in.  Also, the landlord could take away tenant screening and move people in that cannot get into other places.

Review the lease packages for proper screening and move-in specials.