Review the leases. Learn the names of all current residents, the rental rates for each unit, the lease expiration dates, the amounts of deposits, whether the owner provided rent concessions, and any supplementary payments for, say, pets, parking, or extra tenants. From the lease applications (if the seller will show them to you), you can try to determine the creditworthiness of the tenants, their places of employment, and the period of time each tenant has lived in the building. Such tenant information will provide in-depth (and perhaps a more accurate) view of both the quality and quantity of rental revenues.
For example, you could find that a high percentage of tenants have moved into the building only recently; they posted small security deposits; they tend to work in unstable jobs; and they suffer credit scores that scrape bottom. Obviously, a tenant mix of this caliber will typically result in high turnover, collection losses, and, perhaps, more damages to the property. Almost certainly, these tenants will not provide the amount of rent collections or net operating income that the owner claims. Discount accordingly Download MHFREE. On the other hand, you might find a building with a resident mix of strongly qualified long-term tenants who have posted large security deposits as well as deposits for their last month’s rents. In addition, the owners of this property show you a bonafide waiting list. In this case, not only does the owners’ reported rent collections seem reliable, but you may have found a building that would experience low vacancies even at higher rent levels.
Too many new investors accept the owner’s rent figures and then allow for a 5 percent vacancy factor. In truth, many property owners do not collect 95 percent of their scheduled rents even if they achieve 95 percent occupancy. So, Step 1, verify rents, verify the lease rates the tenants have agreed to pay. Step 2 realistically estimate vacancy and collection losses. Your profits, and the building’s value, rest upon bankable funds, not leaky leases.
To really learn about a building, talk with the tenants. This question nearly always elicits a response, “Tell me, what don’t you like around here?” Of course, sometimes the tenants will speak well of the building (or its owner). But more often they like to complain. They frequently hesitate to say good things because those kinds of comments could lead to an increase in rents. Some sellers add “Please do not disturb the tenants” to their advertising or promotional flyer. I would not disturb the tenants, but I would never let that statement deter me from talking with them.
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