Are Low Rents a Reason Not To Purchase an Investment Property?
Let’s face it; rental property owners are not getting rid of assets that are performing well and flying high! With that said, as an investor you need to be able to toe the line of balancing today while factoring in for tomorrow. Lyndsey Pachon Broker/Owner of Nexus Property Management Fall River, MA goes into detail live on “The Round Table Radio” with renowned Top Real Estate Agent Emilio DiSpirito!
So let’s look at a common example taking place in Fall River, Massachusetts. There is a (4) family rental property for sale with each unit having 1 to 2 bedrooms for a total purchase price of $180,000. While the price is attractive, the rents are severely below market value! What happens is inexperienced home owners keep rents at below-market prices in order to prevent tenancy gaps and tenants leaving frequently. Unfortunately, no matter what the rent is people will ALWAYS have to move for one reason or another. That is why this practice is not sustainable or profitable.
In this example the rents are $500 per unit. That gives you $2000 in gross monthly income BEFORE you have to pay your various expenses. At the end of the month you may be lucky just to break even. But, then, uh oh!, the water heater just let go! At this point your digging into profit that you don’t have and working backwards in your investment career. Sounds like a bad deal, right? Well, not so fast!
Raise Rent Without Causing Vacancies
What Lyndsey will suggest to our investors is to gradually increase the rent on the tenants so that you do not create a mass moving situation where you now have 4 turnovers to do! Somewhere in the range of a 5-10% increase is fair to the tenants, and also eases the burden to you as the investor. In time, the goal is to get your units to at market (or above) pricing. Currently in Fall River, Massachusetts a 1-2 bedroom that is professionally managed and in rent-ready condition should obtain between $800-$1000 per month. This price will vary based on amenities offered such as parking, laundry, pet policy, storage, etc. If we are conservative in this example and say that all units rent for $800 after the rent increases/turnovers are complete we are now seeing $1200 MORE in monthly income than when the property was purchased! This is extremely substantial! Want to buy it now?!
This example is one that is common, but will not always be the case. Sometimes you find the same property but each unit is not habitable, and needs $10,000-$15,000 in renovations per apartment. In that situation it would NOT be a good idea to apply our philosophy as your payback period would take quite a long time! The moral here is to ensure that you are not looking at properties with blinders, but rather an open mind and a realistic approach. Assess each property individually and see if it can work for your needs. As always, feel free to contact Nexus™ and inquire about our Nvest® service in where Nexus Property Management® provides FREE buyer agency services, advice, and round-the-clock availability to get you to your goals faster!
Lyndsey Pachon is the Broker/Owner of the Nexus Property Management Fall River Massachusetts Franchise which manages rental property and provides buyer representation for real estate investors and landlords in Fall River, Taunton, New Bedford and surrounding areas.
Nexus Property Management® is a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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