Buying Multi-family and Increasing Rent?

[Jesse Kailahi]

I've been looking at multi-families, and few ever get close to cash flowing with my specific circumstances, but there are some properties that could work... but only if the rents were increased. So I was wondering how you would go about increasing rent for units that are far below the average rent for the area. 

Sacramento has no rent control, so theoretically you could bump the rent up to any amount as long as the tenant was month-to-month and gave 60 days notice.

If the tenant was on a lease, then you would have to essentially give 60 days notice, 60 days before the lease was to end.

So, if the rents are far below market, but the property is priced appropriately for the area based on comps, are you able to take any action as an investor to make it work? 

Are you able to sign new lease agreements upon purchasing the property? 

Are you able to receive the current lease agreements from the seller to get a feel for when the lease is ending? 

Any anything wrong with increasing rents by 50% or more (beyond the moral dilemma with increasing rents for LONG term, established tenants, like a 90 year-old g-ma)? 

Thanks! 

[Wes Blackwell]

@Jesse Kailahi

50% below market rents sounds too good to be true, and we all know the saying about things like that... it usually is. There might be more to the story depending on the property and where you're getting your information from.

A lot of "for rent" listings on sites like Zillow, Craigslist, etc. aren't made by the homeowner, they're made by sites like Apartments.com or some new rental app looking for new clients, etc. I just had a friend here in Sacramento try looking for a place in Midtown and she told me half of the listings she contacted were complete B.S.

But, if you simply wanted to test the higher rents, post an add on craigslist for renting the property at whatever price you want to test and see what kind of results you get. 

If you get a flood of calls then you'll know there is the demand. If no one calls you know that it was all a dream, you used to read Word Up! Magazine, Salt-n-Pepa and Heavy D up in the limousine.

As far as leases go, you can usually get the information you need (how long is left on the lease) from the listing agent prior to even making an offer. The existing leases will have to be honored until they expire on their end date.

An easier way to rehab all the units and move tenants around without seeming like Ebeneezer Scrooge would be to remodel the unit you move into, and then offer all the other tenants to essentially exchange units. 

For only a few dollars more they could rent your beautifully updated unit, and then you could move into theirs and start the rehab process all over again. Then at least you gave them the opportunity. 

And I probably second @Kenneth Reimer's advice about raising them a little more slowly than coming in and lopping everyone's head off with The Mighty Slumlord's Broadsword of Poverty (+50% to tenant rent, -50 karma per attack, +5% city homeless population).

As far as the trailing 12, full rent roll, and expenses from previous owner... plan on it but don't count on it. 2-4 unit multifamily is often a mom-and-pop operation and the lease agreement could be something as simple as a hand shake. Tenants may pay in cash and then the money goes who knows where and doesn't go in the bank to give you proper documentation. Sometimes a property management company will be involved and you'll have all this stuff, but I'd say at least a quarter of the time you don't get anything.

 As a side note here's a bunch of great information about raising rents in the state of California:

http://www.hrc-la.org/doc.asp?id=36