In this article, I am going to tell you how you can make money with low rents; the two primary reasons why landlords keep their rent below market; and how you can profit handsomely because of it according to the Local Records Office.
I am a value investor. What does that mean? That means I look for opportunities in the marketplace where I can buy a property that has a small problem, fix that problem and make a bunch of money because of it. In the marketplace, this is called “value add.”
Real Estate Investment
If you want to maximize your return on your real estate investments, you should be buying a property that has a value add component.
One of my favorite “value add components” is buying a property that has low rents. Of course, when we buy a property with low rents, we are going to buy the property based on the actual cash flow of the property. Therefore, we are going to buy based on its actual numerical value.
I stress this because some brokers and sellers try to sell properties based on “Pro-forma” numbers. If you swap the word “Pro-forma” for the word pretend, you will understand the value of these numbers.
With income properties, we always determine value based on actual cash flow. This is step one to making money with low rents.
The next step is to understand why those rents are low. When I say low, I mean they are not at the market rate, but below it. Typically, rents are kept low for two reasons.
Landlords Don’t Want to Increase the Rent
The first reason is landlords are afraid to increase rents because they are afraid tenants will call and ask for repairs to be done to their properties.
This is crazy because if common repairs are not done on a regular basis, those repairs will get worse and will cost a lot more money to fix. The money to fix them could have come from the rent being brought to market.
Plus, the more wear and tear an apartment has, the lesser quality tenant you will get who will accept that type of living condition. Now not only do you have a property that has lost value because of needed repairs but also you have fewer quality tenants who will turn over more often, costing the owner lost rent from vacancies.
Landlords Don’t Want Tenants Moving Out
The second reason is landlords are afraid the tenants will move out if they raise the rents. Well, if you are taking care of your tenants like you should be, treating them like the gold that they are– let’s face it, your tenants are your business’ cash flow, and you’ve got to take care of that income stream– and you raise your rents to the market rate, your tenants will not leave.
Why won’t they leave? Because you are taking care of them properly and they won’t be able to get a better deal somewhere else with the same quality ownership. So we scour the markets for owners who have these erroneous mindsets and buy their properties from them based on the current cash flow stream.
Evaluation of the Property
When we take over the property, we do an evaluation of the property. We make the necessary repairs if any are needed. Sometimes there are some needed and sometimes there are not. Then we have the management company start raising the rents as the leases start to renew.
Since leases are typically a one-year term, and all lease contracts are transferred to the new owner, it takes a full year to raise all of the leases. But as the year goes by, your cash flow is getting higher and higher and more importantly, the value of the property is getting higher and higher. And, all you did was do what the previous owner should have done– do regular repairs on the property and raise the rents.