As you underwrite multifamily assets, you will inevitably evaluate its rent potential, in terms of where the rents currently stand against the market and how close to market levels can they align. Of course, during due diligence, there is sufficient opportunity to evaluate this alignment and potential through property management resources and market analysis.
However, while you are on the hunt, there is one major clue that should signal a flag to all investors that rents are not at market levels. That clue is when properties are 100% occupied.
How is occupancy any indication of below rent levels? Simply put, the fact that the property is fully-rented may mean that the property is lower-priced than any other in the area for same size and fit. Many property owners place a higher value on occupancy versus market-level rents and this is what results. Of course, there are many pros to having a fully-rented property. One of which is stability and less turnover expense.
The downside is that as expenses such as taxes and insurance endlessly rise, with rent staying the same, the owners realize no real net increase to income, and on the contrary, are worse off from a cash flow perspective. Modest annual raises in rents help cover these growing expenses during this inflationary time without disrupting the resident’s welfare.
Both active and passive investors should understand this important clue and recognize the operational value-add opportunity to more efficiently mark rents to market.
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Rodney Robinson II