Updated: Mar 7
There’s no doubt that this is a volatile time for passive investors and sponsors who are considering purchasing multifamily real estate. The COVID-19 pandemic has impacted just about every facet of our lives, including jobs, businesses, and of course real estate investments – and that includes multifamily properties.
Despite all of the dire predictions from the media, the multifamily real estate market has not collapsed, tenants are still paying their monthly rents in a timely manner and property owners aren’t lining up to file for bankruptcy protection. The truth is that while occupancy rates did decline over the past several months, the amount was minor, going from 96% to 92% or 93%. It’s really a negligible drop, and vacancy rates have been holding steady through June.
As founder and CEO of Blue Lake Capital, I currently have over $100M in assets under management. Due to the pandemic, we’ve had to make some changes in how we operate and fortunately we’re doing well. From my point of view as a sponsor I see investors making mistakes that could jeopardize their investments, so I wanted to point out the top 5 mistakes and discuss how to avoid them.
Mistake #1: Stopping Renovation
When the pandemic hit, every investor and sponsor was worried about whether or not their tenants would still be able to pay their rent. It’s understandable, because many people suddenly became unemployed. So, sponsors stopped renovation, and shifted the focus to keeping the units full. Logic dictated that trying to increase rent through renovation at that time didn’t make sense. Like many others, we put our renovation on pause as well.
Instead of simply stopping renovation in the long term, we looked at our business plan and decided to adjust to “Renovation on Demand.” When a new tenant came in to lease an apartment, we would offer them the option of choosing our “classic units” at the current rent, or the option of choosing a renovated unit at a higher rent. The difference between the current rent for a “classic unit” and a renovated unit is called the “premium,” which could add 10% to 30% to the current rent. Surprisingly, 70% of new tenants opted to go with the renovated units. These were at a 10% - 29% premium over regular rents.
Instead of simply stopping renovation and giving up the chance to increase overall monthly income, sponsors may consider adjusting to a different business model as we did. By avoiding the mistake of stopping renovation, the sponsor remains open to making more money.
Mistake #2: Lowering Rents
The logic behind lowering rents makes sense – property owners want to keep their rents low in order to attract and retain tenants, and they accomplish this by lowering rents. It was a strategy to avoid high vacancy rates during the beginning of the pandemic, which I totally understand. However, it might have been a good decision early on, back in April or May, but not in June when collections were stable.
Every market and every property are different, yet based on my experience operating in the markets where I have units, which includes Texas, Georgia and Florida, there is no real need to lower the rents at this point. What makes sense in one market doesn’t necessarily make sense in another market. The key is to maintain high rent collections.
Currently, occupancy rates are stable, at 95% on average, and with some very few exceptions. tenants continue to pay rents on time. Lowering rents means giving up income, and if it isn’t necessary then it doesn’t make any sense to do that. If occupancy rates fall or collections are a problem, then it may be worth reconsidering. Otherwise, it’s a mistake you can avoid.