Hey, Small Axe community! It’s your boy, Nico. This blog is dedicated to helping you use your small axe to build a personal empire. Today, I’m sharing some real, raw behind-the-scenes info that will help you build your own multifamily portfolio. So if you find value in this, please share it with someone who could benefit and leave a review—let’s grow this thing together!
Prime Leasing Season and Market Changes
As I record this, it’s August 15th, 2024—prime leasing season. Typically, the beginning of summer brings an uptick in leasing activity. However, our portfolio of 70 units in Florida hasn’t experienced this expected surge. Leasing has become increasingly difficult, with units remaining vacant for 30, 45, even 60 days or more, unlike a few years ago when vacancies were quickly filled within a few days to two weeks.
The New Reality of Higher Vacancy Rates
In today’s environment, pushing for “market rents” can mean prolonged vacancies. When underwriting deals, it’s crucial to consider a higher vacancy rate because extended vacancies severely impact your income. For instance, if a unit renting at $1,300/month remains vacant for two months, you lose $2,600 annually per unit. Multiply that by multiple vacant units, and the financial impact becomes stark.
Analyzing Deals in the New Market
Recently, for an eight-unit property listed at $1.1 million, my analysis came in significantly lower at $600,000 due to the need to account for higher vacancies, delinquencies, and higher expenses overall – like insurance, etc. It’s crucial to adjust expectations—whether keeping rents flat or accepting minimal increases—based on the actual market conditions, not just what online tools like Rentometer suggest. For example, rents listed might be $1,500, but if only $1,300 is practically achievable TODAY, plan accordingly. You can’t get $1,500 tomorrow, you need to burn off that loss to lease.
Effective Leasing and Marketing Strategies
While keeping rents flat, we’re still seeing a significant amount of traction through Facebook Marketplace ads. However, finding qualified tenants remains challenging; if only one out of ten prospects qualify, you must efficiently weed out unqualified applicants to lease units quickly.
Detailed Underwriting: Realistic vs. Broker Expectations
It’s essential to build a realistic rental growth plan into your underwriting. For instance, even if you aim for $1,500 in year-one average rents, you may need to burn off a significant loss-to-lease, gradually increasing rents by $50-$100 annually. Unlike aggressive broker projections, this conservative approach accounts for actual market dynamics and ensures long-term sustainability.
Value Add: Practical Real Estate Investments
Our experiences with value add projects offer essential insights. Here are some case studies:
- First Property: Purchased at $128,500 per door, this property faced challenges with the tenant class, and unexpected AC maintenance costs but turned out well due to strategic handling – routine maintenance helps out.
- Ten-Unit Property: Bought for $82,500 per door, it’s our best-performing asset, thanks to steady section 8 income.
- Sixteen-Unit Property: Acquired at $95,000 per door with exceptional financing. Despite initial hurdles, it’s on a positive trajectory.
The Importance of Insurance and Maintenance Plans
One often overlooked yet significant expense is insurance. Our 44-unit property originally had a $750 per door annual cost, which nearly doubled within a year. Properly accounting for these fluctuating costs is vital. Implementing a preventive maintenance plan, especially for critical components like air conditioning, can also mitigate unexpected expenses and maintain property value.
Key Takeaways for Aspiring Investors
- Higher Vacancy Rates: Anticipate units sitting vacant longer.
- Flat or Declining Rents: Be realistic about rent growth.
- Higher Delinquencies: Factor in potential non-payment and associated costs.
- Increased Turnover Costs: Adjust for higher maintenance and tenant turnover expenses.
- Accurate Insurance Costs: Underestimate insurance at your peril.
Final Thoughts
The challenges are real, but they are not insurmountable. Remain diligent, stay informed, and most importantly, keep sharpening your axes. Real estate success is about resilience, adaptability, and smart strategy. Keep looking for deals, keep networking, and ensure your underwriting is reflective of current market realities. Together, we can crush it!
Thank you so much for reading. If you got value from this, share it and leave a review. Let’s get out there, let’s keep grinding, and let’s keep our axes sharp. Love you guys!
Nico
