Investing in multifamily properties remains to be a highly lucrative option for many people. Especially if the market experiences rising rent, it’s easy to create positive cash flow and distribute large equity shares among your investors.
However, extra caution is required when you intend on raising the rent on your multifamily assets. Sure enough, raising rent can be done in the following market scenarios:
- There is increased activity in the local economy
- Construction is picking up
- New tax policies and tax adjustments
- Positive job growth and household incomes
- Increase in purchasing power
We can find these scenarios at play when oversupply is gradually absorbed by an increase in renter demand. In fact, I always encourage people to invest in the second phase of a Buyer’s Market since it’s where the net operating income or NOI really picks up. This is a scenario which people in my sector call a “millionaire’s market.”
Raising the rent of your multifamily asset can be tempting as you focus more on leveraging a high rent regime to generate the most revenue. Still, it’s important to approach this properly as jacking the rates way up high can turn off potential tenants and convince current tenants to move out in search of cheaper tenements. This, in turn, would increase the vacancy rate and affect your bottom line. For sure, a vacant unit gives a two-punch combo to your cash flow: loss of income and an increase in maintenance and utility costs.
So, what’s the right way to take advantage of a high rent situation?
1. Take care of your tenants
One rule that has always worked for me is taking action on the needs of tenants (or what I would like to call “residents”). You would want to make sure that you have at least 90% vacancy to get really great cash flow. To achieve that, it’s important to always take good care of your tenants and listen to their needs.
You can do this by actually doing regular inspections and maintenance of the property. It’s important that you get to identify every issue no matter how small. Even if it’s a leaky faucet, you should move right away towards fixing it. This will make a very good impression on your tenants. Not only are you maintaining the value of the property, but you are also showing your tenants that you’re taking care of them. This will definitely give them a good reason to stay.
2. Get a great property manager
Property management, for me, should be implemented with a focus on keeping tenants happy. For this, it’s important to get a property management company that has the skills and competencies needed for driving towards that goal. We call the members of this special team Community Managers.
You will always have the option of finding a third-party property manager to help you out, but for greater control, I would suggest setting up your own property management company to really get things going, definitely after acquiring a few assets.
3. Consider value plays
If you intend to increase the NOI of your property, a safer method is to include value-adding components. The RUBS are also a huge part in raising income. The tenants are billed for the portion of the utilities like water, trash, sewer, and pest control. This would open up new income streams that would result in higher revenue without the need to raise the rent.
Value-adding components would include coin-operated laundry services, parking fees, valet services, and garbage pick-up. These will keep your revenue growth on track and make more conservative decisions as to raising the rent of your asset.
Raising rent is a great strategy for increasing the operating income of your assets. You only need to be careful when raising the rent or you’ll risk getting a high vacancy rate.