by Theresa Bradley-Banta
Stable predictable cash flow. It’s the siren song of the multifamily real estate investing gurus.
The song that promises you tons of cash. A tune that will let you laugh at money worries. Lyrics that promise the leisure life—a life where you live like a king while multiple tenants pay for your investment property.
There are some tricks to avoiding shipwreck. I know this from personal experience and from the experiences of my consulting clients.
It’s true. Multifamily properties offer a definite advantage over single-family properties. If you lose a tenant in a single-family rental you’ve lost 100% of the revenue for that investment property. Multifamily properties offer stable predictable cash flow because your income comes from many tenants.
But don’t forget. The song of the siren is irresistibly sweet. Greek mythology says that if you don’t hear the song you can outwit the siren.
You can play a sweeter song, one that drowns the voice of the siren, by following these tips:
Adhere to Tight Tenant Screening Policies
Good tenants equal stable cash flow.
Establish solid tenant screening policies, put your policies in writing and make sure your team follows them to the letter. Include the following:
- All new residents must complete a tenant application.
- Your staff checks all tenant references including current landlord.
- Your prospective tenant meets income guidelines.
- Your staff pulls criminal and credit reports.
- Your staff verifies legal judgments such as court ordered evictions or payment delinquencies.
- The application includes the resident’s rental history.
Note: Have an attorney review your tenant screening policies for compliance with local landlord-tenant and fair housing laws.
Make Sure Your Lease Renewal Policies Are in Place
Establish a system for tracking pending lease expiration dates. When a tenant is up for lease renewal contact the tenant to discuss their intentions of renewing their lease. Set a schedule for contacting each tenant with a renewing lease at least 60 days before the lease expiration date.
If your tenant does not plan to renew their lease, schedule a thorough make ready inspection of the unit.
Make ready inspections will help you plan and budget for unit turn costs. It’s also an opportunity to make some improvements to the unit that might allow you to command higher rents.
And there’s always the possibility that your visit with your resident may uncover issues you can address. Your tenant may decide not to move after all.
Stagger Your Rental Unit Lease Expiration Dates
This simply means that your leases do not all renew at the same time. Monitor your pending lease expiration dates and make a plan to have tenant leases renew throughout the entire year. This will help you keep the number of vacancies at a low at any given time.
Keep in mind that you may not want any leases renewing during times of low rental activity. During the holidays most prospective residents are not looking to find new lodging. In cold weather climates, January and February see slower leasing activity.
If you’re currently stuck with a large number of units with the same lease expiration date you can address the issue as you turn units. For example, when a unit becomes available, suggest that your new tenant sign an 8-month lease today and renew for a 12-month period at their next renewal date.
Offer incentives if necessary for shortened lease terms. Give your signing tenant a discount on the first month’s rent or agree to keep the renewing 12-month lease at the same rental amount. It’s good business to invest a little money to avoid having a large number of vacancies at the same time.
Avoid Tenant Collection Issues
Collection problems are the number one killer of cash flow. When your tenants aren’t paying rent you’re not making deposits. Multifamily properties are communities. If word gets around that you’re not enforcing rent due dates and late payment fees the problem will grow.
Establish strict payment policies and discuss payment terms with each lessee so there is no confusion. Be sure to outline your policies in your lease agreement and enforce those terms.
It’s your job to rent to residents who can afford to live at your property. It’s not your responsibility to make exceptions for tenants who fall behind.
Post notices to evict as soon as a resident fails to pay rent when due. Payment plans can work to get a tenant caught up but in my experience once a tenant falls behind in payments they rarely get whole again.
Track Your Local Real Estate Market for Concessions, Rent Increases and Decreases
Smart multifamily investors stay on top of what the competition is doing and they plan for contingencies. Keep an eye on what the competition is offering in terms of rent, leasing bonuses and concessions such as free rent, waived deposit fees and utilities charges.
Spend some time on Craigslist to track the other multifamily properties in your immediate rental market. You don’t want to discover that rental prices have fallen in your market and you’ve lost residents because you were unaware of rental trends.
And if rental rates are on the rise? Good to know, isn’t it?
Know Your Renovation Costs and Ability to Pay
Major capital improvements and expensive property repairs have a way of eliminating cash flow. Planning for long-term capital expenditures allows you to stagger the improvements over time.
An Annual Operating Budget will help you with
- capital improvements planning and projections
- establishing performance targets for your property
- setting aside some of your cash flow for replacement reserves
(The linked article covers creating an Annual Operating Budget in detail.)
Multifamily properties will offer years of stable predictable cash flow—with careful planning. It’s one of the benefits of having a large number of residents paying rent for the privilege of living in your property.
For more information on getting stable cash flow from your multifamily rental properties read these related articles: