When the plan works on paper but the neighborhood drift over twelve months changes what a tenant will pay
A deal worth studying: bought at 310k with a 3.5 percent FHA down, PITI landed at 1,840, and the plan assumed 2,100 in rent at conversion based on comps pulled at purchase. Twelve months later the street had softened, a new listing two blocks away was sitting at 1,950 and taking concessions, and the realistic rent was 1,975 on a good day. That 125 dollar gap does not sound like much until you add vacancy reserve, a property management fee at 8 percent of collected rent, and maintenance at roughly one percent of value annually. The deal went from a modest positive to negative 180 a month before the owner had moved a single box. The occupancy period is the one stretch where the investor holds the property and cannot do anything about the rental market. Rents can move in either direction during that window and the purchase comp is stale the day closing happens. The assumption doing the most work in almost every live-in-then-rent underwrite I see discussed here is that the rent estimate from month zero is still valid at month twelve or thirteen, and it often is not. One way to run this more conservatively is to underwrite the deal at the lower of purchase-date comps or a haircut of five to seven percent on those comps, and treat any upward drift as the margin of safety rather than part of the base case. If the numbers only work at the optimistic rent, the conversion is fragile before it starts. What rent figure did you use to qualify the deal at purchase, and did you build any downward buffer into it, or did you take the comp at face value?
