How Below-Market Rents Create Hidden Value in Multifamily Deals (Santa Monica 6-Unit Breakdown)

When most investors see tenants paying $800/month in Santa Monica, they see a problem. Long-term tenants, rent stabilization protections, and no easy path to market rents. But that $800/month is exactly where the opportunity lives. In this deal breakdown, I walk through a real offering memorandum for a 6-unit, 1-bed/1-bath apartment building in Santa Monica where tenants are paying significantly below the $2,500–$3,000/month market rate. That’s a spread of up to $2,200 per unit per month — and understanding how to capture it is the difference between a mediocre deal and a great one. The Rent Roll: What It’s Telling You

The rent roll is the first thing I look at on any multifamily deal. On this property, in-place rents average around $800/month — roughly 70% below market. That gap is your upside, but only if you understand the rules governing it. Santa Monica has some of the strongest rent stabilization ordinances in California. You cannot simply raise rents to market rate. You cannot evict a tenant just because they’re paying below market. The annual allowable increase is set by the city’s rent control board, and it’s typically a fraction of what the market would justify. So how do you actually capture that spread? Cash for Keys: The Practical Strategy Cash for keys is exactly what it sounds like — you offer the tenant a lump sum payment to voluntarily vacate the unit. Once they leave, you can renovate and re-rent at market rate. The math is straightforward. If a tenant is paying $800 and market rent is $3,000, you’re leaving $2,200/month on the table. Even a $20,000–$30,000 cash-for-keys payment pays for itself in less than a year at market rent. Factor in the unit renovation cost and you’re still looking at a strong return on a per-unit basis. The key word is voluntary. The tenant has to agree. That’s why the negotiation matters, and why experienced investors budget for cash-for-keys as part of their acquisition cost — not as an afterthought. What Makes This a Good Deal? The upside isn’t in the current income — it’s in the delta between where rents are and where they could be. A 6-unit building with $800 average rents in a market that supports $3,000 has roughly $158,000/year in unrealized gross income. Even capturing half of that through a phased cash-for-keys strategy materially changes the property’s value.

But the risk is real. If tenants don’t take the offer, you’re holding below-market units with limited recourse. Due diligence on tenant profiles, lease terms, and local ordinance specifics is non-negotiable.

• A 6-unit Santa Monica apartment building has tenants paying ~$800/month vs. $2,500–$3,000 market rate
• Rent stabilization prevents direct rent increases or eviction for below-market tenants
• Cash for keys is the primary strategy — pay tenants to voluntarily vacate, then renovate and re-rent at market
• The $2,200/month per-unit spread represents ~$158K/year in unrealized gross income across 6 units
• Budget cash-for-keys costs into your acquisition model — it’s a cost of capturing value, not an extra

Frequently Asked Questions

TRANSCRIPT:

Hello, hello, welcome back. Stefan Morris here, AdviseRE. Today, we’re gonna dive into a topic of how to create more value for your residential properties in a city that has a rent stabilized ordinance, such as Los Angeles. As you know, we are here in the city of LA and we love it for a lot of reasons. We got movie stars, we got beaches, we have fantastic weather. We also have laws that are, well, at the face of it, seem very good and very protective for tenants, but also restrict housing supply. The rent stabilization ordinance is one of, if not one of the main causes for this particular housing shortage. Let’s talk about how this works out and how you can create value in these type of properties, especially if you’re considering buying one. So picture this scenario. You look at an apartment building and it’s a six unit apartment building, all one bedroom, one bath units, and they might be in the city of Santa Monica, for example.(…) And when you’re considering looking at the package that the broker provides you in the offering memorandum, they show what the rent roll looks like, okay? And so one bedroom in Santa Monica,(…) if it was nice unit might go between, as of the time of this video, $2,500, $3,000 a month, maybe a little bit more depending on the quality and all that and the amenities provided. And as you’re looking at the rent roll, you see one of the tenants has a $800 a month rent payment. Why are they able to pay so little? Well, the city basically froze rent increases for a long time or they suppressed them at very small amounts, somewhere between one to 3% over the years and their rent expense only grew up. This much while the city skyrocketed, it has supplied dwindled and demand increased, especially as people want to live in the beach city. How do you resolve this value and what are the positives and negatives of doing so?

Well, you can offer cash for keys as a solution. And so somebody paying such a below market rate, let’s assume $800 a month, like I said, versus a $3,000 potential rent is a spread of $2,200.

And so if you were to offer them a check of, let’s just assume they were willing to take it, $40,000.(…) And so the tenant’s happy with that because they get a lot of money upfront. It’s effectively free rent for many years. Maybe it was in their plans to leave anyway, and you handing them a check to leave was a fantastic outcome. You can’t evict them because rent stabilization ordinance simply states that you can’t do that. They have a perpetual lease for life, or as long as they want to stay there. And you can’t raise the rent on them more than anywhere between zero and 3% depending on the time.

And so you think, gosh, I’m only getting $2,200 a month. I’m gonna only get $26,400 more a month than rent. It’s gonna take me about a year to year and a half to do it to write a $40,000 check. I don’t know, maybe it’s not a good idea. Maybe it is a good idea.(…) Who knows? But in this particular scenario, you definitely wanna take it. And there’s one major reason why. It’s the value improvement that you provided for this property.

So again, let’s assume that you’ve increased the rents by $22 a month, that’s 26,400 a year. Assume a capitalization rate of 5%.

What would that work out in terms of value creation for your property?(…) It’s very simple math. If you take 26,400 divided by 5%,

you would come up with a number of around $528,000.

What that basically is saying is somebody out there is willing to pay $528,000 for that additional cash flow of 26,400. It only costs you $40,000 to get it. You would do this deal all day long. You’re earning a $480,000 profit on the project. And all you had to do was pay for cash for keys. Now that’s not all you have to do. Of course, you’re gonna have to go into the unit and update it and provide new appliances because presumably the appliances, the cabinetry and the floor, probably from 20 or 30 or 40 years ago, so they’re severely outdated. But even after factoring all that costs, it’s a home run deal. And this is absolutely one of the things that folks like to do in rent stabilized communities is they like to go in and buy cash for keys in order to achieve this particular outcome of improving the value of the property.

If we take it a step further, having value on your personal financial statement is nice. It’s nice to look at how your equity has grown, but that’s a paper concept. How does this translate to cash? Well, aside from the increase in monthly cash flow, which might, depending on your situation, and this particular one, it’s very rare to get this particular outcome. You might be getting something that’s 100,000, 120,000, depending on the situation and the spread and differential and the tenant and all these other factors. But how else are you gonna extract cash out of the property? Well, after you’ve improved the cash flow, there’s an absolutely fantastic opportunity to go back to the bank and say, hey, I want higher proceeds.(…) I borrowed $2 million on this $3 million acquisition, and after I’ve done these cash for key plays,

I can get all my equity back with a higher loan amount. That’s a fantastic outcome because I can turn around and take that money and buy another property and do the exact same thing. And this is the name of the game in a lot of these rent stabilized cities is paying for these cash for keys.(…) If that sounds really easy, I should warn you, it’s not that easy in particular. One is you’ve actually got to build relationships with the tenants, you have to build a trust, and quite honestly, you have to offer something that is economically fair. You can’t come in and say, hey, I’m gonna give you 500 bucks, leave the unit tomorrow. Nobody’s gonna take that, and in fact, they’ll be insulted by such a silly offer. Not only, I should also mention, $500 is probably not even a legally authorized amount that you can offer these tenants. A lot of these cities are gonna require you to provide certain minimums, and I believe at the time of this writing or this video that Santa Monica and LA have roughly a minimum around $20,000 for a cash for key concept. And it also depends on the bedroom counts and all that good stuff. But realistically speaking, you’re gonna have to provide an offer that is economically viable for them, as well as you. You still have to make money on this process. Now, is it predatory or not? I don’t believe so. You’re providing a lot of money for somebody who just happens to be living in a unit, and they’re gonna walk away with a fantastic paycheck at the end of the day. Other folks believe that perhaps this is not the best way to use it. It seems predatory and all that good stuff. I’ll leave it up to you to decide which one it is. All I’m simply stating is this is a fantastic real estate strategy for improving wealth, for improving an economic outcome out of your investments, and it’s something you should highly consider. If you’d like to know more about the mechanics around this, or if you’re interested in just understanding how this works in particular, then feel free to reach out to us here, and we’ll be more than happy to assist you. Thanks so much for watching.

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