Ohio four plex multifamily - What numbers to use

[Tommy DeSalvo]

And I'm back to the forums with another deal. This time it's an off market 4plex. The owner is an older gentleman that is trying to sell off his properties and retire peacefully. He hasn't raised rents in well over 10 years, and this is the part I'm wondering about. His units are $75 under average market rents. At the current rents, the numbers do not meet one of my metrics - $100 minimum profit per unit per door. However, with a $30 raise per unit, it does meet that.

Now, the question is: Should I use his current rents or the raised rents? Can I use the $30 raise or should I run the $75 raise? How often/how much can I raise rents in Cincinnati, Ohio? Should it be gradual, $25/year? or just up it as much as possible to the $75 as the units turn over?

[Daniel Mohnkern]

I would give my offer according to the current numbers but use likely numbers I could attain as determining my interest.  The speed in which I would get to my desired rates would be determined by the law and the likelihood of losing tenants.  Each area is different but I would raise them as quickly as I thought would make the most financial sense. In other words, if I didn't mind a complete turnover, I would have the tenants sign a new lease at market rates and deal with the fallout. If I didn't want the turnover,I would do it gradually over the course of a few years.

[Tim G.]

I agree with Daniel, you should base your offer on the current rent numbers.

With that being said.....

How long have the current tenants been in place?  If for a long time, you should have a conversation with them about raising the rent.  They most likely know they are getting a good deal, so you can ask them what they think is a reasonable rent increase.  If they are involved in the rent increase conversation, they may not feel "alienated" by the new landlord.  You can also talk about a scheduled rent increase.  1st year is $25/mo.  2nd year is another $25/mo and 3rd year is $25/mo.  Or do $37/mo 1st year and $37/mo 2nd year.  Now you're up to market rents and they don't feel like you hammered them with a big rent increase right away.

I also think you should have a reason to justify the rent increase to the tenant.  Ask them what issues they are having with the property.  Then tell the tenant "I'm going to increase the rent $25/mo (or $50/mo) but i'm going to improve that part of the property for you.  Does that sound fair to you?".  Makes the tenant feel like they are at least getting something for the rent increase.

My coworker bought a duplex in St. Bernard a few months ago with well below market rents and this is how he went about it.  Worked very well for him.

[Coleman Nelson]

From my understanding there aren't any laws restricting rent increase in the area...I'm not sure about Section 8 housing though.  If the units would be in demand at higher rates, I recommend to raise them when the tenant's leases are up. Maybe keep them just below market to increase demand. If you get a head start, hopefully you can reduce turnover to weeks instead of a month.

If rates are that far below market, you may be more likely to forego necessary maintenance and CapEx, which will deteriorate the property and keep you from being able to raise the rates down the road.

[Ryan Ball]

We always base our offers off of in place rents but as a prior poster said consider the potential rent increases in evaluating the property.  One thing to consider is whether the rent is low for the area because the units are in below average condition or the existing owner just doesn't know the market.