Updated: Jan 9
When you own a multifamily property, many times things go along quite smoothly. Tenants pay their rents; your property manager is on top of all the issues relating to the property, including maintenance, repairs, tenant issues or problems and more. Occasionally, however, problems come up and catch you by surprise.
When it comes to your multifamily property, the last thing you want to hit you are surprises. By knowing the warning sings of potential problems, you can proactively address those problems and act accordingly, rather than reactively when they hit you by surprise. I’ve put together some of the top warning signs that show your property may be in trouble, and ways you can act to avoid those problems.
Warning Sign #1: Dramatic Changes in Occupancy
The “health” of multifamily properties is usually measured by two benchmarks: occupancy levels and vacancy rates. Occupancy levels describe how many units are rented, and is expressed as a percentage of the ultimate goal of 100%. An occupancy rate of 95% means that 95% of the available units are rented.
Vacancy rates describe how many units are vacant in a multifamily property. A vacancy rate of 5% means that 95% of the units are available. Every market and submarket has different occupancy and vacancy levels. The average occupancy in the U.S. today is around 93%, which means that 7 out of 100 apartments are empty and not generating income for you.
If you suddenly find you’ve gone from a 95% occupancy rate to an 77% occupancy rate, you’re looking at a major warning sign of potential problems. Yes, I know, 77% sounds like a high number, but it’s still a significant decrease from a 95% occupancy. There might be a good reason for it, but this is not something you want to ignore. Along with the changes in occupancy, there also may be extensive rent concessions (discounts to lure new tenants) to fill vacant units, as well as a significant showing of bad debt (rents that have not been paid by tenants). If a significant number of tenants’ checks are bouncing, it may be that a major area employer closed their facilities or laid off a lot of workers. That spells trouble for multifamily properties.
How to avoid falling occupancy?’
The first step is to have weekly phone conversations or meeting with the property manager to discuss falling occupancy rates proactively, before they get out of hand. Monitor the numbers and address the warning signs as soon as they become apparent.
One way to lower the vacancy rate is by using concessions, such as “one-month free rent” for tenants who sign a one-year or longer lease. The problem with concessions is when they get to be excessive; you’re cutting right into the cash flow and income. If you have 10% of your apartments on concession, that’s a significant amount of money you’re giving away. Put a limit on how many units you’re willing to offer on concessions, and stick to it. Use concessions with caution; high concessions can hurt your bottom line.
Vacancy rates fluctuate monthly, but usually only on a small percentage basis. If they jump, you need to determine the cause. It could be one tenant is causing all types of problems, and if that’s the case, correct the problem or start the eviction process. If the vacancy change is due to a problem with the building’s maintenance or equipment, get it repaired or replaced - fast. Nothing is worse than a lot of tenants leaving and bad-mouthing your property.
Warning Sign # 2: Your Property Manager is no Longer Engaged