One key fundamental of multi-family syndications is rent growth. The appeal to investors of a new acquisition is the potential to ultimately grow rental income and, subsequently, net operating income and value. Ideally, this rental growth happens as soon as possible so that the operators are in the best position to sell sooner. However, there are constraints in doing so; the main one being that renters are currently occupying units. This leads to the two very different strategies for increasing rents in multi-family acquisitions.
1. Fully Vacate Property for Massive Renovations
This is the most aggressive, and least feasible approach for most operators. The obvious benefit in emptying the property is that massive repairs and capital improvements can be made at once, clearing the way for instant releasing with contract rents for the updated units closer to market level. However, there are many challenges in fully vacating units. The first one is that you have paying tenants in place. Vacating residents usually is not feasible for you or the tenants without some sort of incentive. Secondly, and attributed to the first reason, by emptying units you are forgoing income sources today for the potential to grow that income in the near future. This strategy is usually not practical for operators unless they have deep pockets to shoulder the debt service during this period of high vacancy.
2. Make Improvements Over Time During Each Turnover
What is most common is for operators to improve units as tenants move out, making updates and repairs during turnover and renting the improved units at higher contract rates. The apparent downside to this strategy is that you are not able to renovate all the units at once and most efficiently, but that is usually far outweighed by the benefit of continued cash flow from existing tenants and the ability to utilize capital resources over time. Also, residents would realistically be more pleased with this approach versus the disruptive approach of vacating units.
Get To Know Your Team
Each operator has its own strategy based on their goals and resources. As passive investors, it is important to understand the track record of your potential syndication team as well as their level of risk and experience with each investment.
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