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Real estate investors considered themselves fortunate with the confluence of market forces over the past few years.
The environment of low-cost money, high demand and rising rents powered unprecedented business growth. And frankly, it spoiled us.
So when interest rates doubled, inflation and inventory concerns increased operating costs and rent growth flattened, some investors faced corrections. Profits were down, real estate companies announced layoffs and other investors retreated to the sideline.
This period notably has affected the small- to midsize-investors who operate properties of 100 units or fewer and are particularly susceptible to market forces.
The good news is those confronting this volatility have some recourse. It involves getting back to investor basics.
Successful investors in multifamily real estate know the playbook: Maintain high occupancy, price rents at market levels and control costs. Yet sometimes we stray from the playbook when money is cheap and indicators consistently rise.
When conditions aren’t favorable, investors should retrench, renew their discipline and remember the principles that made them successful.
Need a refresher? We all do sometimes. Here are my suggestions for getting back to basics in real estate investing.
Assess costs
In boom times, investors might pay less attention to costs. They tend to accept rising rates and costs and simply cover them. Why get more than one quote when a carrier or contractor has been dependable for years? Now is a good time to shake that sedentary thinking. Let’s start with insurance.
According to the National Multifamily Housing Council, multifamily property insurance rose 26 percent in the past year and increased even more robustly in regions affected by extreme weather.
Meanwhile, MarketWatch reported that 90 percent of homeowners paid higher premiums last year. What do homeowners do when facing higher rates? They shop for new policies. Multifamily real estate investors should do the same.
Consider putting your entire policy out for bid before renewing with an existing source.
The same applies to maintenance contractors and vendors. Owners understandably grow comfortable with certain contractors, especially those that provide timely and dependable work. Acquiring multiple bids can freshen the process, perhaps leading existing vendors to offer better deals. Further, consider deferring nonessential and cosmetic improvements until cash-flow conditions are more favorable.
Revisit tax assessments
Property values climbed during the COVID-19 pandemic, and so did taxes. For instance, according to the National Association of Realtors, single-family property taxes increased 3 percent in 2022 and 1.8 percent in 2021.
Taxes in some markets — such as Tampa, Florida, the report notes — rose at much higher rates. When taxes rise, investors should consider reviewing their assessments.
States and municipalities provide appeals processes for assessments. In Philadelphia, for example, property owners can appeal assessments to prove whether their estimated market values are too high, too low or in line with regional comps. Tenants responsible for paying property taxes are among those authorized to file an appeal.
Since assessments tend to escalate annually, an appeal could reset a property’s value and lead to significant tax savings.
Conduct preventive maintenance
Maintenance is a huge cost in operating multifamily properties. An efficient schedule based primarily on preventive maintenance can spread these costs evenly across a budget cycle and mitigate large expenditures.
Yet some property owners fall into negative habits and suspend preventive maintenance for a fix-it-when-it-breaks strategy. That fails when a leaky faucet or running toilet devolves into major water damage.
Be proactive instead of responsive. Property owners who invest in preventive maintenance ultimately lower maintenance costs.
Screen tenants thoroughly
Choosing tenants is a key business decision in real estate investing. Property owners who don’t screen tenants properly can harm their business if some tenants don’t pay rent, damage property or violate rental agreements.
Attentive owners and investors seldom waver on these principles, but some get lackadaisical when operations are rolling smoothly.
At a minimum, proper screenings require the following:
- Rental application and background check
- Employer recommendation
- Current income verification
- A qualifying credit score
- A tenant history
Importantly, property owners must ensure that their screening processes comply with the Fair Housing Act and state and local tenants’ rights laws. Applying consistent policies to all applicants is paramount; doing otherwise is illegal.
Adhere to proper rent collection procedures
Rent collection is a complex concern. In 2021, the Consumer Financial Protection Bureau found that renters owed more than $29 billion in back rent.
In early 2023, the Biden Administration released its blueprint for a Renters Bill of Rights that includes resources for eviction prevention, diversion and relief.
While these important measures help safeguard renters, property owners face challenges in recovering unpaid rent.
According to the National Apartment Association, the debt recovery rate is 15-20 percent, with some submarket rates falling below 10 percent. The NAA offers a guide to debt-collection practices, which property owners could alleviate by employing clear rent-collection policies.
Automated systems track and collect payments electronically, notify renters of overdue payments and administer late fees. Ensuring updated collection systems benefits all parties in the rental process.
Use advertising wisely
Marketing often represents a modest part of a property owner’s budget: About 4 percent per unit in mid- and high-rise apartments, according to the NAA. Still, multifamily housing operators can lower costs by limiting unnecessary advertising buys or shutting off digital ads temporarily. Promoting properties with few or no vacancies is money better spent elsewhere.
Of course, some marketing strategies remain vital year-round.
Potential renters demand transparency regarding rental costs and unit availability and appreciate floor plans and digital tours. A good website manages these needs. In addition, at MZ Capital Partners, we maintain brand awareness campaigns throughout the year. However, we also target property marketing to where it best can lead to lease signings.
Show properties with intent
High vacancy rates cost money, so property owners must maintain an edge in keeping them low.
Digital property showings are essential tools in multifamily housing, but in-person showings still matter. Many prospective renters want to inspect a unit personally, tour the property and neighborhood and determine whether the place fits them. Therefore, owners must show properties with that in mind.
Owners should train property representatives to provide expert tours and create a sense of urgency in the process. Showings should stress the unit’s short window of availability, especially in hot markets, highlight its unique features and encourage prospective renters to apply now. Passive showings prompt renters to pass. Active showings give them a reason to sign.
Even in volatile economic times, multifamily housing remains a strong investment. According to J.P. Morgan, multifamily housing “is in a much better spot” to withstand a possible 2023 or 2024 recession than other real estate sectors. Therefore, investors shouldn’t tense at market instability.
With essential planning and operational efficiency, investors can maintain high occupancy, strong cash flow and a solid balance sheet.
Michael H. Zaransky is the founder and managing principal of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals in multifamily properties.
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