Rental Renewal

I recently reviewed a small apartment acquisition where the buyer paid a 6.5% cap rate. The in-place rents were lower than market avearge, but the pro-forma rents showed a significant increase after renovation. The value-add plan included upgrading appliances, flooring, and adding a laundry facility. One tenant's lease was up for renewal, and they were paying $1,200 per month for a 2-bedroom unit. The buyer planned to raise the rent to $1,600 after renovations, which would increase the property's overall revenue. However, I advised caution, as the tenant had been with the property for over 5 years and might not agree to the rent hike. I suggested offering a modest rent increase or incentives to retain the tenant, rather than risking a vacancy. This approach would help maintain cash flow while still allowing the buyer to benefit from the property's potential for renovation and resale.