basing analysis on future rent increase?

[Michael Kissel]

I found a 3 unit property in good shape and in a good area near me.  Its a for sale by owner and they are not willing come down on the asking price.  The issue is that at the asking price and current rents, the cash flow before taxes is only slightly over $100 per month total with approx. 2.9% cash on cash return.  A deal not worth doing, right?  However, all the leases are on a month to month basis and the rents are about $100 below market rate.  So if rents are increased to market rate, now the cash flow is just under $400/month with cash on cash return of 9%.  Now its worth considering since its in a good area and I would say lower risk.

My main question is, when doing the analysis, such as using the calculator on this site, do  you ever base it on market rate rents if the current rents are below market?  Or is that a bad idea and bound to get you in cash flow trouble?

[Sean Tracey]

Are all the units currently occupied? Have you factored in any vacancy as a result of pushback from current tenants that wouldn't want to see their rents increased to market rate? That might be additional vacancy to what you would already factor in. Also 9% seems a bit low to me for what may turn out to be a not very passive investment.