No matter how many units, the (wise) landlord pays attention to turnover.
Bear with me here. I know we understand multifamily investments as 10x’ing the common small apartment.
But you can profit exponentially by absorbing the lessons of the minimal-unit landlord, and how he handles his tenants.
Focus On Tenant Turnover
On one hand, value-add investments involve turning over tenants so that you have a chance to upgrade the properties.
Turn over, in and of itself, is not something to fear. Especially following an acquisition.
In most cases you can’t upgrade the unit until the current tenant has left.
So it is the reason and the rate of the turnover that we need to consider.
Rental upgrade plays hinge on two types of renters:
- Existing tenants who desire more stylish units and can afford a slight monthly increase.
- Prospective tenants who have been eyeing the area/property, but who demand a minimum quality (in terms of modernized units).
In fact, these are two major factors that we research when we are considering a deal.
Because you can’t table a multifamily deal without tenants that are willing to pay for the increased value.
So when you look at the next investment summary, check the comps. What is the market willing to pay for “current style” units? How much has the syndicator allowed for in the business plan, and what sort of upgrades will that buy?
Then, once the majority of upgrades are done, and you’ve got the tenants in place… now what to do?
At that point, we want renters to be in for the long haul. Paying on time, leaving good reviews, and generally contributing to the overall “community” around the property.
When a syndicator picks a Property Management company to protect and cultivate your asset, they need to know a little bit about what a good PM targets in the first place.
Some things you should consider (for long term tenancy):
- strong lease and screening process: it’s obvious that you want to protect against predatory tenants, but I’m including this for the sake of completeness
- clean, safe, and affordable: good tenants have to feel like the amenities will always be well-maintained, and that they are away from violent and destructive crime, and (of course) the people in and around the submarket must have a median income that can afford the monthly rent
- responsive and proactive management: no one wants to talk to a call center, and no one wants to live under an “absentee landlord”; your PM team should have a track record of thriving tenancy under pinpoint maintenance (check their reviews)
- sense of community: this one is easy to overlook because of a “they pay, we provide reasonable units” mentality. Yes, all good owners cover the basics. But we have seen things like seasonal events (supportive “back to school” treats for the kids) and thoughtful amenity upgrades (tennis courts are not so popular, so we modify to pickleball in cases of older tenancy or jungle gyms in cases of young families) to create a sense of buy-in and belonging among renters
So encourage the good tenant turnover, and reduce the bad turnover, and you’ve got a workable (aka profitable) system.