Purchase Price is Market But Rent is 10 Years Behind

[Adah N.]

Would you buy a 2-4 unit property that needs 85% increase in rent to match market rate and purchase price?

[Nathan Gesner]

I try to buy it based on what rents currently are, not what they could be. If the rents are 85% below market, it's unlikely the seller would base sales price on that because it's obviously worth more. I would probably try to meet somewhere in the middle by justifying a lower purchase price based on the amount of money lost with current rent rates.

If rent income should be $3000 a month but it's only $500 a month, that's a loss of $2,500 a month. Spread over a year, that's a loss of $30,000. So maybe you approach the seller and tell them the building is worth $200,000 but you'll lose $30,000 the first year before you can get rents up to market. Offer $170,000 to compensate you for the projected losses and the work it will take to bring them up to market.

It's the same thing you would do with a bad roof. A home in great condition is worth $200,000 but you notice this one needs a new roof and it will cost $15,000 to have it replaced. So you offer $185,000 to compensate you for the cost of the new roof.