7-unit rental complex

[Ila Darafshandar]

A friend of mine recently bought a 7-unit apartment in San Diego. Since the rent roll was too low, she had to secure financing through a private lender that based the loan on market rent rather than the current rent. Despite the previous owner raising rents last month, she is still falling short by $5,000 each month. What advice would you give her on how to bring the units up to market rent?

[Dan H.]

Quote from @Jesse Rivera:

Didn't she have a plan when she bought it? She must've seen the rent roll.

And can I get the number of that private lender? 

Without use of no fault eviction, she is negative cash flow for years. how many depends on current rent roll and what increases the market can bare.  This year the 8.6% maximum allowed increase is higher than the market rate increase.   In general only units significantly below market rent will be able to raise the maximum increase.  Saying that, I am 1 month into the new year and have already given out 2 maximum rent increases (both units are way below market rent).   market rent increases has been very small in my sub markets (I suspect near flat metro wide).

Ideally the property appreciates and historically it is true.  There is also equity pay down and the tax benefits including accelerate appreciation. 

A few years ago I purchased a property that was significantly worse than negative $5k/month cash flow.  Today at 40% expense ratio it has positive cash flow, its value is $1m above costs, and I used accelerated depreciation.  In this case the accelerated depreciation resulted in ~$200k in tax savings. 

A property with negative cash flow at purchase can be a good investment.   I would not judge an investment property purchase solely on its initial cash flow.  

Best wishes