Filling a Multifamily Development With Tenants - EP23

build-to-rent lease up market research multifamily tenants Feb 17, 2022

You've waited a long time for your new construction multifamily investment to finish. Your certificates of occupancy have finally arrived. Now it's time to fill each unit with tenants and get your property cash flowing. What's the best way to go about it?

In this episode, the B2R hosts discuss lease-up, property management, incentives, rental income, and more as they reflect on current and past projects.

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Steve Olson: Steve Olson here with Sherida Zenger. Recording another episode for you as we continue to go through lease up in a whole bunch of different projects in a whole bunch of different states.  

We have some things that we're thinking about that we wanted to share with you. 

It can be an interesting process because this is where it's stressful. You've done nothing but spend money up until this point. And wow are you ready to have some revenue coming in! You probably got a construction loan, you put money down, you've paid taxes, you've paid a bunch of fees and now these units are looking like they're completed.  

You're almost to the finish line, but not quite yet.  

What do you usually see once leasing starts? 

What are things you hear from investors? 

Sherida Zenger: If you're at the beginning of a project and they usually start advertising about it, I would say 30 to 60 days before completion. And obviously, they're keeping in touch with the builder saying, Hey, when do you expect this to be completed?  

So they're going to start advertising but I think it's sometimes it's a slow ramp-up and other times it's not like in Arizona, for example. Right now our village on Greenway project, I was meeting with property management and they already have quite a few people that have shown interest in that project. 

It depends on how much marketing they've done, but I think that people it's going to take a little bit of time. To get people in those units. It depends on when the season is another thing that he showed me was that their most, they had the most interest in Arizona in October. So think about it like it's well, it started to rise. 

September-ish and then October was the peak.  

Part of that is nobody's going to go looking for a place to rent in July in Arizona. Right. Our leasing season in Utah starts picking up usually in the spring because the weather gets a little bit nicer. No one wants to go look at homes or rental properties and try to lease something up with snow and rank couches through the snow. 

So again, Aware of what that is. If you could try to have your construction ending at a right time, that would be perfect. We, we can't ever figure that out. That won't work for us just because there are delays and things that are out of our control. And we do this in phasing, right? We're not trying to get something a whole project was done at the same time, but you have to be patient and you have to know, Hey, they may get just the rents that they got that are based on the proforma. 

And sometimes if it's a crappy rental season, they may have to do some kind of an incentive to get somebody in the door. I mean, I know they've offered. You know, $100 off your first month's rent or half off of your first month's rent. Again, it depends on the market. They kind of fill it out and see what they can do or can't do I know for me personally, like in Idaho, I was one of the first ones done in our project and my units got leased up. 

That was great. I think I had one lease signed the first month in one lease signed the second month. So I didn't, there wasn't any, you know, Panic by any means. But now I'm getting ready for renewals to come up. And I, when I was talking to property management, they said, Hey, plan on your Lisa's going up between two and $300 a month, each unit, which is huge. 

They're also looking saying when we're doing renewals, we're going to try to get top dollar. So I think they're going to try and get top dollar at the beginning, but I think the biggest gripe or concern is how long is it going to take? And we don't know, we don't have a crystal ball. 

We tell people to plan on six months. You know, we talked in the last episode kind of about having a reserve account that you set aside and you say, Hey, this is going to cover my HOA, my insurance, and my mortgage. So I plan for that, but being a little bit flexible and just know, Hey, it's not going to get leased up right away. 

And I'm talking to in a bigger project, one of our projects that multiple people own in, right. Again, I think if you go back to the apartment like you were saying, It doesn't really matter. I mean, if you sign 15 leases in a week, that's great. Cause everyone gets a little portion of that or a share or there's one owner, or if you own just a single unit, a duplex, or something that may be a little bit different. 

Steve Olson: I mean, you'd still need a plan for something, but it's really useful on the front end before any of this has happened. Is to look at the city records and how many units are planned. What else is coming?  

Put yourself in the shoes of a tenant 12 months from now, what exists currently on the market? 

What's the vacancy rate? Like I think that the general consensus that is if your vacancy is 5% or lower, the market wants more units. Yep. Right. It's begging for it. That is commonly referred to as absorption rate. How many units are absorbed? So there's the normal market where we have no new units on the market. 

How many units are turning over and absorbing? And then if you have demand above and beyond that, that signal. This market needs and you should build here. So if you blew it on that and we have before, and you built market, you built units in a market with a higher vacancy rate or where the absorption was just mediocre or not the right product or not there. 

We've done that one for sure. Then, then you're going to have a rockier lease-up. You're going to have more aggressive incentives. It's going to just take longer. It's going to be more pain. But if you attracted right, and you brought a product that's really in demand in a market where there's negative absorption where well positive rather you'd have more people wanting units than existing. 

You could probably expect a pretty quick lease-up and actually, you and I need to talk about this later today, I just got back some financial models. My underwriter on a couple of properties in Arizona. And one thing that we're projecting in the very front end of these things is our lease-up rate. So when it's done and, and so we've got like 80 doors. 

20 doors are going to be done in 12 months, 20 doors in 14 months, what's our lease-up rate. And I think we've got like seven or eight a month targeted in there. And so we can back into that with K what's, our debt service, like what are our expenses like? And as our lease-up trajectory comes to pass here and we start getting revenue. 

We can accurately project what's often called in your sources and your uses. We can accurately. How much money do we really need to raise to operate? Cause the worst thing to do is go to investors and say, ah, we need more money. Yeah, that's terrible. Right. So, this is on a syndication project, but you can model that on the front end. 

If you take the time to see what kind of units are planned and what's coming and that's not always easy.  

Sherida Zenger: But I think you're doing it conservatively too. I think that's the other thing to be conservative. Don't be aggressive with your numbers, right? Because you'd rather under-promise and over-deliver. 

And so it's like, for me, for example, I am going to be tickled pink when I get these leases renewed. Even if the lease is a hundred dollars or $200 more a month, if he can get 300 sweet, I mean, that's amazing. Right. But I know what's going up because everywhere else is. And that's what the market is demanding right now. 

But it's one of those things that. It was something conservative. 

Steve Olson: You have a reason to think it's going to continue to at least stay level or go up because you can see the supply that's coming and what a, what an acute need there is for housing in that market. Some people have very strong opinions about how to put this into your financial models. 

Let's say you've got some units that are having a little bit of. Leasing up, do you slash the rent or do you give away free rent? And some people have diff because it, you can kind of fudge your net operating income and your internal rate of return. Because, well, if my rent is low or over a longer period of time, that's worse than if I just took it in the shorts and said here's a month and a half of free rent to try to draw people out. 

Sherida Zenger: I think you could just model that out. 

Steve Olson: What's your investor's goal. I mean, there's, I don't, I mean, people have strong opinions. Some are gonna say you, idiot, there is a right way to do it. Okay. I get that. But there's definitely a couple of schools of thought on it. Like, do you want velocity on your leasing? 

Right? Is your objective, Hey look, I'm going to take lower rent on the front end. I'm going to get this sucker leased up or is your objective? No, I want to get the highest NOI possible, but remember. You know, it's, if you're not getting rents, but you get higher rents in the future, that that's a lot of expenses that were not offset by income right upfront. 

Sherida Zenger: I think when maybe you don't want those or can't afford those, you don't, if you don't have some kind of a Katy set aside to help you pay for that, then yeah. That's going to be really hard. I know some people are like, Hey, I just want a warm body in my unit. Right. And so property management is really strict with how they're going through. 

Vetting tenants. And so I think sometimes that comes as a pinch point to people cause they say, Hey, well, how many applications do you have? And if we say, oh, their property management had a hundred applications, but they only approved, you know, 25 of them or whatever. Well, why not the others? Well, a couple of reasons, one, they could have a hundred applications, but if Steve, you, and I were applying to live in a unit together, right. 

We would be two applications. So that number really, you probably want to cut it in half, but anyone that's over the age of 18 is going to have to do that. But again, they, if they don't qualify, they don't qualify you. The worst thing you want is for a tenant to come in and trust your unit. And I'm dealing with that right now on one of my owners up in Idaho, tenants moved in, they were there probably six months and then they vacated early. 

They left in December and left and the unit was thrashed. And they had a deposit. So obviously their deposit will kick in and they'll use all of that. And then property management is going to pursue them for the rest of the damages. Like they're having to replace all the carpet in this unit that literally is six months old brand new unit right now, just so you know again and I know they did a good job with vetting them and I don't know what the circumstances were. 

And so it'd be interesting. I think we probably, I probably need to make a call and just say, Hey, were there any red flags? Was there something that you saw? Obviously, they got through all of their screens. But be cautious of that too. Like, don't just put a warm body in your unit so you can have money. Cause it may cost you more than we're dealing with that.  

Steve Olson: A big headache on that in Texas right now on, and this is like the last episode we did about CCNRs. This was one that got away from us and you have a couple of different cooks in the kitchen, so to speak. And that's the problem is when you're trying to qualify good tenants and do a good job leasing up, but somebody else is letting in riff-raff it makes it that much harder to do. 

Sherida Zenger: Again, that's why we like one management company in our projects. They cause they follow one rule. If you're managing and I managing, we may have different, you know, barrier to enter. And that's why we're getting issues in Texas right now.  

Steve Olson: Yep, absolutely. So a good management company is going to help you determine the right amount of deposits and credit scores and qualifications. 

And sometimes you might need to tweak some of those depending on your level of risk and what you're willing to that lease-up process. You gotta be patient, but you can model it on the front end. We recommend that you get with brokers and property managers and, and look at average days on market. 

You're obviously gonna greatly surpass that stuff when you go through initial stabilization on a new construction because even if you've got a good absorption rate that is going to make your project do well, it takes time for the market to digest those new units. Well, you're dumping a bunch of inventory in one location. 

Sherida Zenger: And hoping that that absorbs really quick. Well, it's not going to be overnight. I mean, it's not going to be in 30 days. And again, back to the kind of with parts of our projects, being under construction that may deter some tenants from not wanting to move in. You know, we wish we could have our clubhouse and everything is done at the beginning, but we haven't, we have not figured that piece out yet.

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