Maximizing Value in a Strong Multifamily Rental Market
1. Maximize in-place income: know your submarket asking rents.
Pull up Padmapper.com, enter the address, select the # of bedroom and enter the rent for $50 above and $50 below your asking rents. Check out the number of other rentals in the market. Play with the rent amount, + or -, to see if you are low, about right, or high for your SF, finish level, amenities, utilities, etc. Click to the other listings to study them, paying attention to the pictures to compare apples to apples. If attracting new Section 8 tenants, check for the maximum allowed by law. If you already have Section 8 tenants, you are likely stuck with small % increases, unless you can prove unit improvements justify the increase.
2. At renewal or upon a vacancy, start charging add-ons: Pets, Parking, Storage, etc.
It is now common to charge pet rent, notably dogs and cats, separate from an added security deposit. If you have off street parking or garages, and have given these away in years past, start charging rent. Owners from East St. Paul to Uptown all charge and collect rent for parking. Surface parking fees are less likely outside of the inner cities or inner ring suburbs. Even storage, charge something, even minimal. It is better to charge something, even $10/month, than give it away free and find yourself with a storage closet full of garbage after a tenant vacates. All income, no matter how small, attributes to added value at the time of sale or refinance.
3. Consider passing through non-separately metered utilities to the tenants.
Owners from small to large are passing through expenses to tenants making their leases more like “net” leases than standard “gross” leases. Owners have to be careful of Minnesota State Statutes in order to provide tenants with the proper notice and historical operating bills. Owners need to also make sure their lease spells out the charges. Typically, there is a specific utility addendum. Two commonly passed through utilities are gas heat and water (1 boiler and 1 gas meter). Another option for water, other than separate meters, is sub metering. Water meters can be added to each source of water for each unit–sink, toilet, and shower to truly track and pass through to tenants, their water use. Typically, owners hold back 10-20% of the costs to the landlord and divvy up the rest by total number of units or rented square feet of unit divided by the gross rented square feet.
4. No more discounts for “Safe” “On-Time” legacy (long term) tenants.
Some owners like to keep “sure things” for the on-time payment loyalty. Well, even $20 less per month equates to $3,000 in value at an 8-capitalization rate. No special favors. The only potential exception is perhaps a single-family home with one tenant.
5. Select minor improvements to trade or ask for higher rent.
Updating any one high touch element like kitchen appliances, flooring, cabinets, shower/tub, carpet, are perceived positively by tenants. Instead of sending a blank letter asking for higher rent and waiting it out, propose to your tenant that you will be updating their unit in order to justify the rent increase. Given the perceived value, tenants may be more inclined to stay and sign than re-shop the market. Bigger picture, these minor improvements allow owners to keep up with the market–condition and value. When it comes to valuation, even if you have a strong rent roll, if your units are outdated, many buyers are going to discount your property for the money they believe they will need to pay to “keep” the rents.
6. Take care of TLC projects.
When it comes to obtaining the highest value in the market down the road, including attracting new buyers, a property must have few to no significant deferred maintenance items. In other words, the more little things that need to be attended to, the buyer pool becomes limited to those more contractor-like who look for large returns. So in these good times, take the time to repair or replace minor items like: building exterior blemishes (stucco/paint/tuck pointing), old water heaters, old landscaping, old thru-wall air conditioners, outdated common area paint or carpet, etc.
7. Cycle out tenants who don’t pay on time.
When times are bad, owners take what rents they can get, even if late. When times are good, patience should be short for tenants who continue to pay late. In these stronger markets, owners are better off evicting the late paying resident then re-tenanting the unit to a better credit/quality tenant. This will help with cash flow, but also lead to higher year-end rents reviewed by prospective buyers.
8. Look for efficiencies in expenses.
Just as greater operating income positively impacts value, so does decreased operating expenses. Options range from increased energy efficiency with outdoor temperature controls to boilers, replacing standard showerheads with low-flow showerheads, and re-bidding out all your existing vendor contracts. Investors typically input their own management and maintenance fees, but if owners/sellers can demonstrate low in-place historical expenses, their case is stronger for higher value.
9. Review the condition and life expectancy of major capital items.
If two or three major capital items are very old and near the end of their useful life: roof, windows, boiler, parking surfaces, pick one to update. Replacing some or all of the windows or the boiler may lead to decreased expenses and contribute to added paper value. On the other hand, replacing a crumbling parking lot or leaking roof may not add to paper value, but in their current state, they appear as added financial risk to buyers. Investors typically run conservative numbers on capital risk, and they will typically budget more than actual cost to replace, so if an owner does not want to replace, he or she must be prepared to have a buyer to decrease their purchase price by most of the cost of that capital item. There simply is no way around it.
10. Schedule rental “open houses” to create scarcity.
Instead of advertising a unit for rent, advertise a Rental Open House from noon to 3 on Saturday and book it every 30 minutes for 3 main reasons:
1) Tenants see others coming and going and are incentivized to act. In this market, it is not unheard of for tenants to offer more than the other tenant to get the unit they want. 2) In this scenario, owners bypass answering questions for people whom never tour. In this case, potential tenants tour first, and ask questions second. During this time, owners, caretakers, or lease agents, can get a good feel of the range of options–the ones that ask lots of tough questions will stick out from those who seem really happy and easy going. 3) At the end of the tour, prospective tenants are advised of multiple showings and they will need to make a final decision by the end of the weekend (Sunday). This alerts the tenant they need to decide immediately.