What should real estate investors do when they realize they’ve taken over a property in which the tenants are paying under market rents?
Many investors base their numbers off of how much a property should rent for, only to discover the current occupants are paying under market rents. This could mean tenants have been promised sweetheart discounts, units are rented out at low rates just before closing, or the seller actually lied about how much their leases were worth. Either way, under market rents can actually end up costing owners profits.
This hinders buy and hold investors and those flipping houses, as low income levels can dramatically and negatively affect resell value. So what should real estate investors do when they find themselves faced with tenants paying under market rents?
First and foremost, get the facts. Find out why the tenants are actually paying below comparable rental property rates. The worst thing you can do for your reputation is to become an out-of-control property manager by rushing into things.
Before taking any action or consulting the tenant, try to get a handle on the renter’s real performance. Are they ‘bad’ tenants you could potentially want out, or have they been A+ renters that pay early. Sometimes a good tenant is worth taking a hit in the pocket book, but that is for you to determine.
Ultimately, there are four options when dealing with potentially under market rents:
- Negotiate: Can you negotiate better terms?
- Force them out: Catch them violating the lease and evict (This can cause other issues and normally isn’t good business).
- Raise: Wait for the renewal date and raise the rent.
- Buy outs: Offer them a monetary incentive to move on and help facilitate the move.