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Financial advisory
brokers because it can create opportunity in the minds of potential buyers. A buyer may think; “I can buy this property and raise rents immediately – for instant return!” This phrase, however, could mean several things – and many of them aren’t good. Some possibilities are:
1. It is not true. Do your homework: look at the surrounding market and determine what you think is the market rent. Is the rent indeed below market? The chances are pretty good that it isn’t. After all, since investment properties are valued and sold based on a multiple of income, wouldn’t an owner want the maximum income possible if he was selling his building? Wouldn’t that listing broker advise his client of the same? If the seller isn’t truthful about this element of the property, what else could he be hiding?
2. It is true – and there’s a reason for that. Below-market-average rents may indicate a below-market-average property. Is the property older than competitive properties? Does it have a lot of deferred maintenance? Is it missing key features such as covered parking or air conditioning? Be careful – you could end up working harder than average to find tenants paying you less money.
3. It is true. Many landlords, myself included, prefer to keep rents a little bit below the market average. By doing so; we can be more selective about our tenants – and only pick the best applicants. Additionally; our good tenants, once chosen, tend to stay with us for longer knowing a comparable property across town will only cost more money. As a new owner, you’ll want to be careful about raising rents. The tenants may already be nervous about new ownership – an immediate rise in rents could send them packing. The last thing you want is to pay “stabilized” prices – and end up owning a property with vacancy problems.
Five years ago, buying a property with “below market rents” could be an opportunity to buy and raise rents substantially. Today, however, rent control is the “law of the land” here in California. A property with rents that haven’t kept up with the market could take a long time to catch up again.
When reviewing potential real estate acquisitions, the presence of either characteristic discussed above is not necessarily a “deal killer;” (an absolute reason that you should walk away from a deal.) Rather, the presence of these characteristics can be an indication that you need to dig a little bit deeper as part of your due diligence process.
Securities offered through Emerson Equity LLC, member FINRA/SIPC. Emerson Equity LLC and Specialized Wealth Management are not affiliated. All investing involves risk. Always discuss potential investments with your tax and/or investment professional prior to investing. Hypothetical scenarios herein are provided to illustrate mathematical principals only, and they are not a promise of performance. There can be no assurance that any investment strategy will achieve its objectives.
68 DECEMBER 2021 - APARTMENT MANAGEMENT MAGAZINE AMM1/6