You found a rental property where the current tenants are paying $950 a month, but comparable units in the area (check [HUD Fair Market Rent data](https://www.huduser.gov/portal/datasets/fmr.html) to verify) are renting for $1,200. That $250 gap looks like pure upside. Before you get too excited, you need to understand what that gap actually means for your numbers, how long it takes to capture, and what can go wrong along the way.
Why Properties Have Below-Market Rents
Sellers don't leave money on the table without reason. When you see rents significantly below market, there's usually a story behind it.
Long-term tenants who never got increases. The most common scenario. A landlord rented to someone five years ago at $900, raised it once to $950, then stopped. They valued stability over maximizing rent. The tenant pays on time, never complains, and the landlord avoided the awkward conversation.
Owner-occupants who rented to friends or family. Estate sales and inherited properties often come with tenants paying whatever rate was agreed upon years ago. Sometimes there's no formal lease at all.
Landlords who checked out. Some owners stop managing actively. They collect rent, handle emergencies, and ignore everything else. These properties often have deferred maintenance alongside the low rents.
Previous value-add investor who didn't finish. They bought with plans to renovate and raise rents, ran out of capital or motivation, and decided to sell.
Rent-controlled or restricted units. In some markets, rents are capped by law. This is less common in single-family and small multifamily, but worth verifying.
Understanding why the rents are low tells you something about what you're buying into. A long-term tenant who pays $200 under market is different from a vacant unit that's been sitting at a low asking price because nobody wants it.
How to Determine If Rents Are Actually Below Market
The first question: are the rents actually below market, or does the seller just think they are?
Pull active listings for comparable rentals. Zillow, Apartments.com, Craigslist, and Facebook Marketplace. Look for units with similar bedroom count, square footage, and condition within a mile or two. Active listings tell you what landlords are asking, not necessarily what they're getting.
Check recently rented comps. Harder to find, but more accurate. Property management companies sometimes publish this data. Rentometer and Zillow Rent Zestimates use this data (imperfectly). If you have relationships with local landlords or property managers, ask what they're getting.
Adjust for condition. A renovated unit with new appliances commands higher rent than a unit with 1990s finishes. If the subject property needs updates, the "market rent" you can achieve may be lower than the comps suggest.
Consider timing. Rents fluctuate seasonally. Summer months typically command higher rents in most markets. If you're analyzing in December, that $1,200 comp from July might be $1,150 today.
Talk to the current tenants (carefully). If the property is already under contract, you may have the opportunity to meet the tenants during due diligence. They'll often tell you if they've looked at other places and what rents they've seen.
A realistic rent analysis might show that the $250 gap is actually $150 once you account for the property's condition and current market softness. That's still meaningful upside, but it changes your numbers.
The Math of Rent Upside
When you buy a property with below-market rents, you're paying today's price for tomorrow's income. The question is: what's that future income worth now?
Valuing the Gap
Suppose you're looking at a fourplex with total current rents of $4,000 per month and market rents of $4,800. That's $800 monthly upside, or $9,600 annually.
If you apply a 7% cap rate to that additional income:
> Additional Value = $9,600 / 0.07 = $137,143
In theory, if you could raise rents immediately and the property would reappraise accordingly, that gap represents over $137,000 in potential value. Commercial properties (5+ units) are explicitly valued this way. Residential properties follow the same logic less directly through comparable sales.
But you can't raise rents immediately. Which brings us to the timeline problem.
Timeline Reality
Most leases run for a year. If a tenant just signed a 12-month lease at $950, you're stuck at $950 for twelve months regardless of what the market will bear.
After the lease expires, you have options:
Realistic timeline for capturing the full gap on a fourplex:
| Year | Action | Rent Achieved |
|---|---|---|
| 1 | Inherited leases, modest increases where possible | $4,200/month |
| 2 | One unit turns over, renovate and re-lease at market | $4,500/month |
| 3 | Second unit turns over or tenant accepts increase | $4,700/month |
| 4 | Fully stabilized at market | $4,800/month |
That $9,600 annual upside doesn't appear on day one. It phases in over 2-4 years as leases roll and tenants turn over.
Running the Numbers: Two Scenarios
Let's walk through a real analysis on a duplex with below-market rents.
Property Details:
Financing:
Operating Expenses:
Scenario 1: Buy Based on Current Rents
| Item | Monthly | Annual |
|---|---|---|
| Gross Rent | $2,000 | $24,000 |
| Vacancy (5%) | -$100 | -$1,200 |
| Effective Gross | $1,900 | $22,800 |
| Taxes | -$285 | -$3,420 |
| Insurance | -$165 | -$1,980 |
| Maintenance | -$160 | -$1,920 |
| CapEx | -$100 | -$1,200 |
| Management | -$160 | -$1,920 |
| **NOI** | **$1,030** | **$12,360** |
| Debt Service | -$1,422 | -$17,064 |
| **Cash Flow** | **-$392** | **-$4,704** |
At current rents, this property is cash flow negative. You're feeding it almost $400 a month.
Scenario 2: Stabilized at Market Rents (Year 3)
| Item | Monthly | Annual |
|---|---|---|
| Gross Rent | $2,400 | $28,800 |
| Vacancy (5%) | -$120 | -$1,440 |
| Effective Gross | $2,280 | $27,360 |
| Taxes | -$285 | -$3,420 |
| Insurance | -$165 | -$1,980 |
| Maintenance | -$192 | -$2,304 |
| CapEx | -$120 | -$1,440 |
| Management | -$192 | -$2,304 |
| **NOI** | **$1,326** | **$15,912** |
| Debt Service | -$1,422 | -$17,064 |
| **Cash Flow** | **-$96** | **-$1,152** |
Even at full market rents, this property barely breaks even. The rent upside wasn't enough to make it a good deal at this price.
What Price Would Work?
To cash flow $200/month at market rents, you'd need to reduce the debt service by roughly $300/month. That requires either a $40,000 lower purchase price or about 2 percentage points lower interest rate.
At $245,000 purchase price with the same terms:
The below-market rents don't justify the asking price. You'd need to negotiate based on current income, not projected income.
Turnover Costs Eat Into Your Upside
When modeling rent increases, remember that turnover isn't free.
Direct costs:
Example math:
You raise rent from $950 to $1,200. The tenant leaves.
| Cost | Amount |
|---|---|
| Make-ready repairs | $1,200 |
| Cleaning | $200 |
| One month vacancy | $1,200 |
| Leasing fee | $600 |
| **Total turnover cost** | **$3,200** |
Your $250/month increase generates $3,000 annually. After turnover costs, you're only $200 ahead in year one. The increase doesn't really pay off until year two.
If you planned aggressive rent increases across multiple units, these turnover costs stack up. Four turnovers at $3,000 each is $12,000 in expenses that might not appear in your pro forma.
When Below-Market Rents Are Actually Good
Despite the complications, below-market rents can signal a good opportunity:
Stable cash flow during value-add. If current rents already cover expenses, you can make improvements without feeding the property. The upside is gravy.
Natural attrition strategy. Long-term tenants eventually move. You capture the upside when they leave without forcing anyone out.
Forced appreciation in commercial properties. On 5+ unit buildings, NOI directly affects appraised value. Adding $10,000 in NOI at a 7% cap adds $143,000 to the property value. You can refinance that equity out.
Rent-controlled markets. In places with rent control, below-market rents from existing tenants can reset to market upon turnover. This makes inherited tenants more valuable than they appear.
Common Mistakes When Analyzing Below-Market Rents
Mistake 1: Using "market rent" in your purchase analysis. If you're buying based on current income, underwrite based on current income. The upside is your margin of safety, not your baseline assumption.
Mistake 2: Ignoring tenant quality. That long-term tenant paying $200 under market might be worth more than the rent gap. They pay on time, maintain the unit, and don't call about minor issues. A tenant who pays $200 more but damages the unit or requires eviction costs far more.
Mistake 3: Forgetting the holding costs during transition. If the property is cash flow negative at current rents, you need reserves to cover that gap during the 2-3 years it takes to stabilize. Running out of cash before you capture the upside is a real risk.
Mistake 4: Overestimating market rents. You found one comp at $1,400. That doesn't mean you'll get $1,400. It might have been a desperate landlord, a lease signed six months ago before rates fell, or a unit with features yours doesn't have. Use conservative rent estimates.
Mistake 5: Not talking to the tenants. Before closing, meet the people living there. Are they stable? Employed? Planning to stay? A tenant who says they're moving in three months changes your math.
Running Your Own Numbers
When you find a property with below-market rents, run two analyses:
The right approach is to buy at a price that works with current rents and treat the upside as bonus return. If the seller wants to be paid for future rent increases they haven't captured, that's their problem, not yours.
Run your numbers using our [Single Family Calculator](/tools/single-family) for 1-4 unit properties or [Multifamily Calculator](/tools/multifamily) for larger buildings. Model both current and projected rents to see exactly how the deal performs under each scenario.