Rental Property- Renting Below Market Price- Negotiation

[Alexandra Preziosi]

Hello BP community!

This coming weekend I am due to check out a property with rental potential. This property is a duplex, where there is a vacant unit on one side and inherited tenants on the other side. The dilemma I am facing when thinking about a way to negotiate for this property is this---

1. The current rents are very below market value of rents in the area (about $500-600 less than market rent prices).

2. One side would be vacant and the other would remain to be occupied by long-term tenant, who would also be due to sign a new lease. I would be able to rent out the one vacant side up to market price, but the other side is still very much priced below market rents in the area.

3. Home is priced at market price when it comes to the comps, but since my rental strategy is cash flow, I am more concerned with the rent roll than I am the comps when considering it in the deal.

Here is a breakdown of the situation, in short:

5BR, 2BTH

Ask price: $340,000

Comps for 5BR, 2BTH in area: $350,000

Rent rolls with new market price rents in vacant unit, and current rents in occupied unit:

3 BR,1BTH- Unit 1- This would be vacant, so will be priced at market rent- $1,600

2 BR, 1 BTH- Unit 2- $1,000 (Occupied unit)

= Mo. income: $2,600

Rent rolls with new market price rents in vacant unit, and increased rent in occupied unit:

3 BR,1BTH- Unit 1- This would be vacant, so will be priced at market rent- $1,600

2 BR, 1 BTH- Unit 2- $1,100 (Occupied unit- New rent +$100)

= Mo. income: $2,700

Rent rolls with both units renting at market price:

3 BR,1BTH- Unit 1- $1,600

2 BR, 1 BTH- Unit 2- $1,400

= Mo. income: $3,000

Property needs little to no repair work.

Sellers are VERY motivated. For sale by owner.

Now, this is where I would appreciate some advice from the BP community. I feel I have an ethical dilemma. Here are my main two concerns in regards to negotiating the asking price:

1. I know I can raise the rents of the vacant unit up to market price ($1,600), but my dilemma is in regards to raising the rents on the current tenants too dramatically. These tenants have been there for a long period of time, but will be signing a new lease if I were to become the landlord. As it stands now, I really would not want to raise rents more than +$100 more than current rent (so, to $1,100 mo.) to start. Though, this is still almost $300 shy of market price, so it would not match the income potential for the property if it were to be renewed at market price.

2.  Given the 1% rule of rental analysis, best case scenario without having to raise the current tenant rent to more than $1,100 to start, and renting the second unit at market price at $1,600, my offer would have to be a max of $270,000, about $70,000 less than ask. On the other hand, raising the rents of the occupied unit closer to market price would have me more willing to negotiate closer to their ask, and thus, be better considered for the deal.

I do not intend to compromise my numbers analysis in this process, but I also do wish to consider the ethics of the situation as well.  

Questions:

Am I being too closed-minded about increasing the rents of the current tenants?

Does it make more sense to offer $70,000 less than the ask with the reasoning behind it being so that I do not have to hike the rents too much?

Newbie investor, so all suggestions in regards to a creative way to negotiate this deal are appreciated!

What would be your strategy in this scenario?

Thanks!