Archive for credit losses
Apartment & Multifamily investment requires excellent control of expenses to maximize cash flow. But, vacancy and credit loss are two items that need just as much attention, though they’re on the income side of the financial sheet.
It can be a lot easier to negotiate a better deal on landscaping services than to analyze and attack multiple issues that make up vacancy and credit losses. That’s because there can be marketing factors, as well as management failures in the interview and tenant selection processes.
Vacancy Costs in Apartment & Multifamily Investment
Vacancy costs are comprised of more than just units that aren’t rented at the time. There’s also the costs involved in rehab of the units between tenants. So, turnover is a part of vacancy loss. These two items comprise the marketing and tenant relations side of the vacancy loss picture.
How is the marketing working for the project? Has ownership been keeping up with changes in demographics that influence available tenant prospects? Is the marketing plan being regularly reviewed with new market information?
Are the advertising media being used still as effective as when they were first put into play? What could be done differently to generate interest and get empty units occupied? Does the math tell ownership that rent cuts would be better for cash flow than retaining empty units? Or, possibly a free rent promotion could fill the units, cutting vacancy loss.
Credit Loss in Apartment & Multifamily Investment
This is on the expense side, but credit loss many times begins with the interview and selection process. If vacancy loss is a problem, it can contribute to credit loss later if ownership relaxes their tenant selection criteria in order to fill units.
Sometimes, the dislike of taking appropriate eviction action can delay the turnover of a unit, increasing credit losses.
Are there adequate credit check and references follow-up practices? Are they being followed? Sometimes, if legally allowed, increasing deposit requirements for marginal tenants can help in this regard.
If some tenants are having rent payment problems that are temporary, can they pay with a credit card? If they can get over a rough patch with credit, it may keep an otherwise good tenant and cut credit losses.
Vacancy and credit losses are damaging to apartment & multifamily cash flow, so they should be attacked and resolved at every opportunity.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartment & multifamily , cash flow , credit loss , credit losses , expenses , Karen Hanover , vacancy , vacancy and credit losses , vacancy loss
Apartments and multifamily investment can be one of the most profitable niches in real estate investment. With tax advantages, large cash flows, economies of scale, and a steady demand for rental units, apartments and multifamily investments make great portfolio additions.
One of these benefits, large cash flows, is the draw for astute investors. With 100 units cash flowing $250 each per month after expenses, it’s easy to see how that $25,000/month would be enticing.
Of course, there are unexpected expenses that can crimp our cash flow. There are repairs and unexpected maintenance items. We should be budgeting for those, but it isn’t always possible to foresee a broken pipe and flooded unit.
But, even with these unexpected problems, huge cash flow from apartments and multifamily investment keep the interest in this niche quite active.
Of greater concern are the two profit-killers, credit losses and vacancy rates. It’s one thing to have a negative expense, but quite another to have the income disappear on the front end.
The good news is that 100 units makes three or four vacancies or non-paying renters much less of a problem. But, any cessation of income on the front end must be addressed quickly and the rental income stream repaired.
Credit Losses Require Fast Action
When tenants stop paying rent, it could be a protest for some perceived wrong or a problem you can address. Doing so quickly can get that income stream going again with minimal damage. But, when the rent stops without any reason, it’s important to know the legal aspects of collections and possible eviction.
Take the appropriate actions on the very first day you can legally. Don’t wait, as every day is a lost day of income. Deliver all required notices on time, and take all legal action at the first opportunity. Sometimes just the first notice delivery will get the tenant back into compliance, but take the action.
Vacancy – Keeping It to a Minimum
A vacant unit generates no income. As soon as notice of move-out is given, marketing for a new tenant should begin. A waiting list would be the best solution, but fast action can create a waiting list of one, and that’s all that’s needed to re-occupy that unit. Get the cleanup and refurbish maintenance done as soon as the previous tenant moves out.
Vacancy and credit losses are part of the business of apartments and multifamily investment. But, taking the right action quickly will minimize the damage.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartments & multifamily investment , cash flow , credit losses , Karen Hanover , vacancy
