Inflationary pressures, rising interest rates and property taxes are just a few of the headwinds multi-unit property owners experience in a fluctuating market cycle. Many small owners may quickly react to these pressures by raising rents, but a more deliberate approach is recommended, as oftentimes, even modest rent increases result in higher collection challenges.
Here are three steps apartment owners should consider amid a fluctuating market cycle.
1. Take a Snapshot of Where You Are
First, examine 36 months of “actual” collections for each property—ideally this number should be trending northward. Next, consider your controllable and uncontrollable expenses monthly for the trailing 36 months. Identify patterns and anomalies. Consider having an energy audit performed on your property. The audit usually identifies opportunities to reduce utility costs considerably, and most utility companies provide these services with little or no out-of-pocket expense. A Midwest apartment owner recently informed us that he reduced his utility bill expenses by more than 30 percent because of findings from an energy audit. The audit made several recommendations including, insulating the roof cavity on the building.
2. Track Comparable Sales
Although we are still hovering near the all-time lows with respect to the 10-year treasury, consider that for every 1 percent rise in interest rates it takes somewhere in the neighborhood of an 8 percent increase in Net Operating Income to remain at par as far as your property value is concerned. The sale comps are helpful establish the market trends and determine what similar unit-mix properties are trading for per square foot, per unit and by yield. Also, important are rent studies. You need to know the rental rates, occupancy levels and amenities offered by your competitors. This is helpful to determine if there is an opportunity to add value to your property by making modest improvements as units turnover and push rents.
3. KeepYour Service Providers Honest
Just because you’ve had the same is insurance agent for years doesn’t mean you’re getting the best value. At a capitalization rate of 8 percent for every $100 per month you are overpaying for any service reduces the value of your property by $15,000. Often times the scavenger service company, for instance, is aware that there is a new kid on the block that will beat their prices by 25 percent just to earn your business. Do you think they are going to call you to tell you that? Sometimes, they will reduce your price by a nominal amount just because, you called and asked if they’d consider it, just to keep you from calling that competitor or reaching out to your neighbor and finding he’s getting two pickups per week for roughly the same price you’re paying for one.
Owners are advised to check-in with an active commercial broker or appraiser every 12 to 18 months to vet the value of the portfolio. Talk to a property tax attorney or service to determine if a property tax appeal is warranted. Sometimes these guys are so sure they can save money for you that they will provide the service on a contingency basis where they get paid only a percentage of the savings. Landlords, have to be able to adapt to this very fluid real estate cycle and adjust to the slew of headwinds coming our way.
Anthony Hardy is a senior associate at Marcus & Millichap with 20 years of experience helping clients create and preserve wealth through the timely acquisition and disposition of multifamily properties.