Four Things To Do When Market Rents Decline

 

According to the U.S. Apartment list, five large cities saw a decline in the median rental rates over the past 12 months: Baltimore, Chicago, Pittsburgh, Portland, and Seattle. No city or region of the country is safe from declining rents. As landlords, we need to track our local market and make adjustments to maintain as high an occupancy number as we can.

When the collapse and resulting recession hit in 2008, rent growth froze. For some regions of the country, any increases were hard to push because people started looking for other means of housing, also call a Shadow Market in Housing. And the shadow rental market exploded. The owners of new and empty houses and condos pulled tenants from traditional multifamily. To be competitive against this situation, management needed to make retaining good tenants along with marketing to new tenants a priority.

When rents continued to fall in 2009 and 2010, there wasn’t’ much to do to increase rents. The country was still reeling from the collapse. With such high vacancy, tenants had plenty of units to choose from and demanded bonuses and incentives which often appeared as a reduction in price for rent.

Fast forward to 2019. Depending on your region of the country, you could make small concessions to getting a renewal, such as a $100 Amazon gift card or a $100 AMEX Cash Card. You could even do a grocery gift card from Kroger or Walmart for renewing tenants to stay another lease term. We usually do a choice of carpet cleaning, painting of a room or even a small capital improvement to get the tenant to stay. Anyone of these things is far less than the cost of turning a unit, dealing with the vacancy and lease renewal costs from your property management company. This typically only works for Class C units.

Aside from improving the tenant experience and getting them to stay in the unit, here are four things to do when you think rents start falling in your local market:

1) Verify the Falling Rates: Look at your competitors in a 5-mile radius by looking at Zillow or Cozy. Have they reduced their rent over the past several months? Keeping an eye on what the local market is doing is important not only if you think rents are dipping but also if they are increasing. One reason they could be making their way up is that your competitors are improving the property and you may not be. Or they may be offering a free 40” TV as opposed to 30 days free (which is much less expensive). If the landlord has a good tenant on the hook, they may cut the tenant a deal and give them an 18-month lease for a slightly lower rent rate. Depending on the asset class and what is going on in the economy, people will be more cost-conscious. For instance, you can offer a $200 gas card as an incentive if gas prices are on the rise. Of course, ‘charm pricing’ is always important as people will perceive a big difference if we list an $800 unit for $795. Keep this in mind as you price your units.

2) Multiply your Customer Service: Taking care of your current tenant basis is important to hold the line on vacancy. This means staying on top of service requests and work orders. Rent growth is already a losing battle when vacancy is on the rise. Don’t compound the problem by slacking on tenant requests. If you are using property management, something which I strongly suggest, they should be on top of the requests. You just need to make sure things are getting done.

3) Build a Marketing Strategy: I’ve put out a great deal of material on the various marketing tactics you should consider when targeting a given demographic. You should also consider what your local market is doing to pull those prospects in.

For instance, if you are in a heavily hit market with an oversupply of 2 bedrooms, you may want to consider turning your 2 bedroom unit into a 1 bedroom by locking or sealing off the door to that second bedroom. This tactic will get you some additional occupancy. You may also consider giving away two months free with a lease with the first and last month of the lease being the free months. You can also add basic cable or wireless internet for 6 months so you can get them in the door.

4) Stress the Urgency with Your Team: As the leader of the group, you need to communicate your vision to your property management and construction team. They need to understand that the goal is full occupancy. You need to outline the plan for the team at large so they understand that keeping vacancy as low as possible is critical. Weekly meetings with each property manager to go over critical issues, cost control initiatives, and new move-ins are also recommended. Keep the meetings to no more than 1 hour and always have an agenda so the property manager has time to prepare.

An economic slowdown or depression will cause people to substitute expensive rentals for cheaper ones, putting downward pressure on rents. History has shown that it would also cause people to move in with family or take on a roommate, further decreasing demand for multifamily rentals. Additionally, anything that makes buying a home more cost-effective will make rents lower as well because people will perceive buying a home as a cheaper option. As houses become cheaper, those tenants will move out of a rental and become homeowners, decreasing demand for rentals.

Anyway, what do you think? Have you ever applied these tactics? Let me know in the comments. I’d love to hear from you.

If you liked this, go ahead and give it a thumbs up. Also, check out the Bulletproof Cashflow podcast on iTunes or Stitcher, and subscribe to our YouTube channel. We are working on getting new content out all the time to help you build your success in the world of multifamily.

Be great.

How to Prepare an Offer on a Multifamily Deal

 

We are in a competitive market today. When you are preparing an offer on a deal that you want to buy, you need to do your best to be easy to work with, aggressive and able to close. This means handing over a Letter of Intent that is strong and has the best chance of winning. Doing the homework ahead of the LOI is important and this info applies whether your deal is $100,000 or $10,000,000.

Ultimately, you are looking to write the LOI the way the seller and broker wants to see it, complete with the price and terms that will get the deal done. But before you get into that, you need to prepare for writing up the offer. Here are the three things you need to do before you actually write the LOI:

1) You Need to Ask Questions
When you call the selling broker and introduce yourself, tell them about your background, team and what market you are buying in. From there, you want to express your interest in the property and ask questions about it.

– How much are is the seller looking for?
– What due diligence period is the seller looking for?
– How much earnest money is the seller looking for?
– What is the most important thing to the seller, besides price?
– How would the seller like the LOI written?

Maybe the broker that is selling the deal is also the one that sold it to the current owner. Ask the broker, “How was the offer written previously?”, “What did it sell for last time?”, “Why are they selling today?”.

You see, when you get to the point of preparing the LOI, you can write it the way they want to see it, and you have a better chance of winning the deal. Because you wrote it the way they want it, they will agree with your price, due diligence and down payment. You want to give the seller what they want.

2) What Price and Terms are Acceptable to the Seller
During this conversation, you want to go into a deeper dive with the broker around what they believe the deal will be worth to the market. This info is typically backed with data that supports the price. On larger deals, the broker will forward a ‘Broker’s Opinion of Value’, also called a BOV. This is prepared by the selling broker after they inspect the property and pull the recent listings and sales nearby. Make sure to pull your own data to make sure their opinion isn’t skewed. It is very easy to do as certain properties in better condition will get a higher price.

After you get an idea of what they are looking for in terms, continue to ask questions.
– Who is the decision maker?
– What’s their story?
– What price will this sell at?

They may tell you that “this deal will sell for over $5MM”. Keep that number in mind and wait it out a bit. You don’t want to offer too much too early. Often times, brokers will inflate the prices and they will get a bunch of lower offers. If your analysis can support a $5MM price, send it over and call the broker to verify receipt. Ask them how your deals stacks up. Ask them how many other players there are and how many offers they have. The point is, go in strong with your best and final bid so you can lock the deal down.

3) You Need to Express Confidence to the Broker
As you go after a deal, you need to know that you want to have it in the first place. Do you want to handle that property for the next 5 to 10 years? Are you sure you want to be in that location? Are you sure you want to take on the repairs and maintenance of that property? Are you sure the area will improve the way you think it will? These are all things you need to ask yourself.

With this out of the way, you then need to express confidence to the selling agent that you are the one that can close the deal. They need to have confidence in your ability to deliver. You want to express that you are super easy to work with. You want to pull them in and get the property under contract. You need to get control of the deal. But first, you need to get an LOI together.

Once you get through these three things, you can put your Letter of Intent (LOI) together. If you want any chance at winning, you need to be aggressive with your offer. This includes putting together the shortest due diligence you can do, going in at your highest and best price, and removing all the contingencies before you go to finance. Again, you want to be easy to work with. Do not include crazy stipulations or other types of unconventional clauses unless they asked for them and it’s what THEY want. I suggest using a broker that specializes in writing up multifamily deals. They will tell you how to write the deal up. Your broker may have even worked with the seller’s broker in the past and they know how they like to see the offer written.

Anyway, how are you putting deals together? What sort of questions do you ask? Let me know in the comments.

If you liked this, go ahead and give it a thumbs up. Also, check out the Bulletproof Cashflow podcast on iTunes or Stitcher, and subscribe to our YouTube channel. We are working on getting new content out all the time to help you build your success in the world of multifamily.

Be great.