Of course you will do research on the area you are looking to purchase. But what if the property has been rent controlled? What if the tenant has been there for a long time? What if the previous landlord has not increased the rents? You are looking to purchase the rental property, but will it make enough in rents to offset the cost of the expenses – mortgage, taxes, fees, utilities, etc. How do you negotiate the price of the property to make sure you will be making a profit on the renting of the apartments, or commercial spaces?
Let me tell you how I dealt with this when I was interested in buying a classic four-story, four-apartment brownstone in New York City. One that was vacant had just come on the market as part of an estate sale. The house had been built in 1865 and the 90-year-old deceased gentleman had lived in this house for his entire life.
In considering my purchase, I was having difficulty calculating the potential rental income for this property because I wasn’t sure how much I could obtain through negotiation with future tenants. I asked the real estate broker selling the building if he would let me borrow a set of keys and show one of the four apartments to a few potential residential tenants. I assured the broker that I was sincerely interested in buying the place, but I was unsure of its rental potential.
My next step was to place an ad in the paper, citing the rent at “$1,500 a month or best offer.” I immediately received 41 responses. When people called, I told them up front that I would probably buy the building but I purposefully cited the rent slightly lower than what I thought the market was at the time, and I was still in negotiation. Then I scheduled appointments with the first ten people who had called.
The first people who came told me they would be interested in renting the apartment for $1,500 if and when I bought the building. The next person who came also liked the apartment. I asked him if he would be willing to pay $1,600. He said, ”Yes, most certainly,” and wished me luck in the purchase of the building. With every new prospect, I raised the asking price on the rent.
When talking with potential renters, I wrote down each person’s name, telephone number, and the stated (and agreed on) rent amount. I did this with each person who came by until one gentleman told me that I was crazy to be asking $2, 100 a month. He absolutely wouldn’t pay it! I knew then that the market rent I could command was $2,000. Next, I recalculated my income and expense projections, and was satisfied with the result. I then called the real estate broker and negotiated the price and conditions. When I bought the property 60 days later, I had each of the prospective tenants’ names and numbers in hand. A week after I bought the building, I succeeded in renting each apartment at $2,000 a month.
This strategy ensured I would be making enough money to the building to be a sound investment. By doing my research and having the knowledge of what the properties can return on the investment I was much better prepared for the negotiations on what I would pay for the purchase of this building. What other things would you do to be prepared for the negotiations? What is a list of the information you need before you purchase the property? How do you know what to pay for the property to make the best of your investment?
Are you thinking of purchasing a new property?
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