Should you raise rents after you buy?

[Kurt Grossman]

A 6-Unit property just purchased and the rents are low but the tenants are good. Did not want to raise rents but now that I'm trying to refinance the lender says it doesn't "Cash Flow". Would you raise the rents or shop harder for a better lender? Or both.

[Patti Robertson]

Did you buy with short term money?  Just wondering why you need to refi after just purchasing a full occupied building.  If a rehab isn't needed it's a lot easier and way cheaper to just buy with your permanent financing.

What we generally do in this situation is to have each tenant complete a rental application after we close.  We tell the tenants we need to know who is in the building, what their sources of income are, etc.  We don't pull their credit or charge them an app fee, but this will tell you how much they can afford to pay in rent, which will give you your options.  It will also assist you in collections should you need to go that route.  Also, you want to have the tenant's signature giving you authorization to make credit and background inquiries for the enforcement of the lease, which should be one of the permissions they grant on your application. Your ultimate goal should be to maximize your income and have staggered expiration dates, which will minimize the risk of having multiple vacancies at the same time.  Then set a strategy based on the current lease expiration dates, making only one move at a time, if possible, to keep your cashflow going as you turn units.  After the first two months you will know if you have non-paying tenants.  Those will obviously be priority #1 to issue non-renewals to and/or persue eviction, depending on the lease ending dates.   Tenants who have strong income and pay, offer stepped up increases with multi-year terms.  Tenants who have income under your criteria, leave MTM so you can give them notice one at a time. Have leases renew MTM as you work through your plan.  Your priority list may change as you interact with the tenants.  People who don't pay or who are downright rude and hateful get moved to the top of the list.

Congrats on your purchase!