In multifamily real estate syndication, demands drive occupancy, and occupancy drives rental growth. An equation to know as a Passive Investor is that occupancy growth + rental growth = income growth. As the property's income increases, the property's value also increases. Income growth is key to your bottom line as a passive investor who invests for cash flow.
Here are some tips that Multifamily Syndicators use to improve the Cash Flow for Passive Investors:
1) Every multifamily property has an Asset Manager. The asset manager must frequently communicate with the property manager to ensure the business plan is executed according to plan. Since the economy changes from time to time, asset managers must review the business plan created before and adjusted during acquisition. Keen oversight of the business plan by the Asset Manager ensures the property operates at or is moving toward its highest and best use.
2) Manage expenses carefully. There's no need to cut corners, but neither should you be spending unnecessarily. Evaluate your expenses and see where you can reduce costs without compromising quality or service. Over at H Squared Capital, we are committed to providing our residents with clean, safe, and affordable housing with our "March to 1,000 Doors" to positively impact 1,000 families' living conditions.
3) Increase rents gradually. You don't want to price current and prospective residents out of the market. Modest rent increases over time can significantly improve the bottom line. The property manager and asset manager should continuously research the area's rent to identify what is feasible. A drastic rent increase could significantly increase the vacancy of a multifamily apartment complex. This has a rippling effect on the management of this asset. Each time the tenants move out, there's one additional unit that is not providing income; also, that is one additional unit that capital will be used to prepare for the next resident. The caveat is that if this was a part of the business plan, it could be very beneficial as it could increase the speed at which the business plan is executed.
4) Keep vacancy rates low. There are two types of vacancies, physical vacancy and economic vacancy.
Physical vacancy calculation (expressed in percentage) factors how many units or not leased.
Physical vacancy rate = Total number of units/number of vacant units
Economic vacancy (expressed in percentage) is the income not realized when your property is not operating at its full potential. To calculate an economic vacancy percentage, follow these steps: Subtract your actual rental income from your gross rent potential Divide that number by the gross rent potential. The more paying occupied unit we have, the more income the property will generate. Staying on top of maintenance and repairs makes the units attractive to potential residents. If vacancy approaches the break-even point of underwriting, the Operators will consider offering incentives (such as one-month free rent) to attract residents during slow periods.
-Economic vacancy = (Gross rent potential – actual rental income) / gross rent potential
5) Improve the quality of your tenants. High-quality tenants are less likely to cause problems. Improving the quality of your tenants is essential because the quality of tenants we attract in apartment complexes creates the culture within the community. In addition, one of the reasons why we invest in multifamily properties is to preserve our capital. To attract better tenants, screen applicants carefully. Property Managers screen potential residents by looking at their employment stability, individual and household income, credit score, and rental history.
Conclusion
Though increasing rent gradually, keeping vacancy rates low, and improving the quality of tenants are all important methods for increasing income in a multifamily apartment complex, additional steps should be taken to maximize profits. First is managing expenses carefully, which includes reducing costs without compromising quality or service. Second, asset managers must review their business plan created before and adjusted during acquisition to ensure that the property is operating at or moving towards its highest and best use. By following these five tips, multifamily apartment complexes can provide more cash flow for passive investors while maintaining high-quality standards for residents.
If this article piqued your interest in investing in real estate, then congratulations:
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For more information on getting involved in a value-add multifamily syndication deal, don't hesitate to contact me at Hutch@HSquaredCapital.com or Dr. Heath Jones at Heath@HSquaredCapital.com. You can also visit our website at www.HSquaredCapital.com. We'd be happy to answer any of your questions and help get you started on the path to financial success through multifamily investing!