Property with Existing Leases

[Account Closed]

Howdy BP'ers!

When analyzing a potential deal, how do you consider existing leases with below market rents?  My minimum CoCROI is 12%. I'm analyzing a quad that will generate 13% at market rates and 7% at current rents. Two of the units are month-to-month -- once they are rented, the CoCROI is 10%. The other leases expire next summer.

What methods have you used to determine if it's worth waiting for the leases to expire, clean units and rent at market vs finding another property?

[Brandon Sturgill]

@Account Closed This is the situation in 80% of the MF properties I've looked at...we run a as-is and proforma scenario. Truth be told, the biggest determinant is the lease terms. One important factor the folks conveniently leave out is the turnover costs associated with preparing a unit for a new tenant...quite frankly, my position with existing tenants is to always do an initial increase (even $25/mo.)...and annual increases thereafter if they are paying 70-80% of market rents.

The question is do you want to pay $6,000 today to turnover the unit for $200/mo. in increased rent?...for example.

It's really all relative. I'm a fan of stability and hedging risk. If there is solid debt paydown for in-place rents that are close to market and can be increased marginally on an annual basis, I'll leave the tenants every time. On the other hand, a tenant paying 50% of market rents needs to go asap.

This is really a personal question...I don't need cash flow...I need future value and free-and-clear properties. What you need may vary greatly. 

Best of luck