Rent Amounts Way Below Market on Duplex I am considering buying

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Rent Amounts Way Below Market on Duplex I am considering buying

Ben Larson
Cottage Grove, WI · Member since 2016 · 6 posts · 1 vote

I am strongly considering a duplex to owner occupy for my first investment property.  It checks all boxes in terms of quality, space, schools and neighborhood. My concern is that the rent amounts from the current tenants are really low and don't make sense with compatible properties found on Craig's List and Zillow.  Both sides are 4 bedroom, 3 bath  currently renting for $1440/month. The three properties that compare are listed for $1850 and $2095/month.  I don't know much about how long the tenants have been renting although they are both on a month-to-month lease which I also find strange.  The property is in really good shape and well taken care of.   As I mentioned before it is in a very good neighborhood and very close to a good school.  It is only 10 years old.  It has been on the market for a little over 2 months and had one price reduction on the listing of 10K in Mid-April, also factors I find curious.  I have run the numbers and if I get market-value rent it will cash flow very nicely.  My plan is to buy the property, move into one side and raise the rent to market value (plus a 1-year lease) on the other side, either with the current tenants or by finding new ones.  Because I am new I feel like I might be missing something which scares me.  If rents are below market value with current tenants and a property has been on the market longer than you think it should be in today's environment, what does that mean?  What would you do to make sure you are purchasing the right property?  Please let me know your thoughts.  Thanks!

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  • Roger Vi
    Investor · Everett, WA · Member since 2014 · 180 posts · 76 votes
    10y

    Rents being below market is a normal thing. Every landlord has their own way of doing things and I know a lot of them that just don't care about market rent. As long as its rented and they aren't losing money, they just try to be as hands off as possible. Very common with older landlords, my guess is they have other business they would rather focus their time on. The rents you are describing are actually a lot closer to market than a lot of "below-market rent" properties I've looked into.

    Most importantly, make sure you are calculating your market rent correctly! Are amenities comparable? Washer/Dryer in unit and undercover parking can command $200/month more in my area. Attached garage would make that $300+.

    I would be more concerned about the 2 months its been on the market and the price reduction. What is the average time for other duplexes to sell in this area? Has there been any offers? If the price was reduced after someone offered and backed out, call the agent and ask why. If something came up during the inspection they will have to disclose it to you.

    Also, is this duplex overpriced? Something I've noticed very common in my area (been a sellers market for a while) is owners of rundown multi-family homes will list their homes for sale at a ridiculous price. You can see plenty of deferred maintenance just driving by but they are pricing it like its new construction. I believe the strategy here is to see if some rookie with plenty cash will bite on the high price. Since the building is rented out and cash flowing monthly, this is a win-win situation for the seller. 

    Hope this helps. 

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  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    10y

    How much is this property? What are the comparables' in the area? Make sure you double and triple check what market rents are for the area/proximity of this property! On average, how long are multifam. homes on the market in your area? Don't treat multifam. homes the same as SFH as far as length of time on market and purchase price.

    Do you have an agent? If not get one! Have them look into the property and ask the sellers agent for "feedback" on the property. This is info you won't get by asking the sellers agent yourself. This is agent talk and it goes a long way in the way the deal is made, in my experience! Being on the market this long could mean so many things...I wouldn't worry about stuff like that as your due diligence will figure it out. Submit an offer, get an inspection, and then go from there.

    Doing a house hack as your first investment property is a very good way to get into REI. If I could go back, this is what I would do.

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  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    10y

    Also month to month isn't a big deal, actually its a lot better for you. M2M could mean the tenants have already lived there and fulfilled their lease. Or the landlord likes M2M leases because it gives some power back to the landlord, you can get rid of the tenants easier! This is stuff you will/should figure out by having your agent ask the sellers agent. Also you want to know if the units are metered separately, at least electric! You want to have your agent get the schedule E or tax return from the seller, you'll have to be under contract first to get this in most cases. This way you can look at the expenses and run your numbers more accurately.

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  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    Schedule E's from the seller for a small multifamily are rather pointless -- they're not going to run things even remotely similar to the way you run them, so the numbers aren't worth looking at. Assuming, of course, you know the market you're purchasing in. If it's hard to fill a vacancy in November but easy in July you should know that without looking at historical rents. What good does it do you to know that the current seller has 25% vacancy? They might not advertise, or they might be causing it by inspecting the units every month, etc.

    You do want copies of leases and estoppel, however.

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  • Ben Larson
    OP
    Cottage Grove, WI · Member since 2016 · 6 posts · 1 vote
    10y

    Thank you all for great advice!  I am going to look at the property again today and I will ask my realtor to talk to seller and try to get some of this information.  I'm sure I will have more questions and I will let you know what I find.

    Thanks Again!

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  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    10y

    I would wonder if they're in rent control or are Section 8, and it might be a pain to raise rents or get them out.

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