Question:
“We own a duplex and are considering selling it. Our rents are way below market because we’re just not very good landlords and our tenants have been there forever. Will that be a problem?”
Answer:
You’ll still be able to sell your duplex.
But because a large percentage of potential buyers are investors, and investors are looking at the dollars, here are the issues that below-market rents can present:
#1 – Determining Value
If your property is in an area such as Clairemont, where the duplexes tend to be very similar, it’s pretty easy to determine the value of your duplex.
But in an area like Pacific Beach, where duplex locations, styles, ages, sizes, and rents vary greatly, investors rightly or wrongly do look somewhat to the existing rents to help them determine what they think a property is worth.
There are various rule of thumb formulas (“gross multiplier”, “cap rate”, etc.) that all start with the current rents. So having below-market rents can cause some investors to arrive at a lower value.
#2 – Cash Flow
Even if an investor doesn’t look to your rents to determine value, if your property is leased with those low rents locked in for many months, this will lower a potential buyer’s cash flow and cause them to pay a little less for the property.
So my advice is, raise your rents before you sell. Remember that if you raise the rents by more than 10%, you must give a 60-day written notice.
