There are several reasons why managing lease expirations in Multifamily Investments is extremely important to maintain your asset exposer. Of course you have an obligation to your lender for absorption metrics, but you also need to keep your cash flow steady and growing while being able to track trends through seasonality shifts. I see a lot of new investor groups that do not pay attention to the end strategy of their leases and they are more eager to manage with a “heads in beds” mentality. In Multifamily, that mentality can quickly turn your asset into a volatile chase and gamble, often resulting in a hemorrhage of money on up front concessions which sends the rest of the submarket into a downward spin.
It is also very important to choose a Property Management company that manages correctly for your desired business plan. Always make sure that their software is up to date and able to track trends, set parameters and have a future data driven eye on your exit strategies, short and long term. Having a “heads for beds” mentality is often seen in hotel management, 100% HUD housing (section 8), and some student shared housing or long term senior living environments.
Not only is it important to manage how many people are exiting your asset monthly, you also need to manage how many people are entering your asset monthly. It may sound odd to some, however, in the eye of an investor, you are obligated to maintain the promised rent growth, vacancy percentages and capital expenditure matrixes on a monthly and quarterly basis for your lender. If you are not maintaining, managing and controlling your numbers to meet your promised %’s for absorption, you will lose control of your asset.
This type of management control needs to be implemented from day one of your acquisition. It typically takes a year to gain full control of your lease expiration matrix and thresholds. There is not a plug and play of how many move-ins should be welcomed per month and how many move outs should be predicted. This is heavily determined by your market, seasonality shifts, demographic and business plan. There are also the uncontrollable breaks that need to be considered and assumed. Having a seasoned Asset Manager can quickly set the expectation of your properties acquisition and disposition plans. Your Asset Manager should be involved in your underwriting, acquisition and business plan origination to reduce 3rd party and 4th party risk.
Below are some other high profile reasons why lease expiration management is crucial:
- Tenant Retention: When a lease is about to expire, it provides an opportunity for property owners and managers to engage with tenants about renewing their lease. Retaining existing tenants is generally more cost-effective than acquiring new ones. By proactively managing lease expirations, property owners can improve tenant retention rates, reducing turnover costs and ensuring a stable income stream.
- Stable Cash Flow: Managing lease expirations strategically helps maintain a steady cash flow. If multiple leases expire around the same time and tenants decide to leave, it could result in significant income gaps, causing financial strain. Spreading lease expirations throughout the year helps mitigate this risk and provides a more predictable revenue stream.
- Budgeting and Planning: Knowing when leases will expire allows property owners to plan ahead and allocate resources more effectively. They can budget for potential renovations or upgrades needed between tenants, ensuring the property remains attractive and competitive in the rental market.
- Market Conditions: The rental market is subject to fluctuations, and rental rates can vary depending on the demand and supply of housing in the area. By aligning lease expirations strategically, property owners can adjust rental rates more frequently to match current market conditions, maximizing rental income.
- Renovation and Maintenance Opportunities: When a lease is up for renewal, property owners can assess the condition of the unit and plan for any necessary renovations or maintenance work. This ensures that the property is well-maintained and can attract new tenants or retain existing ones by providing a high-quality living environment.
- Risk Management: Proper lease expiration management reduces risk by avoiding situations where a significant portion of the property’s units become vacant simultaneously. This risk mitigation is particularly crucial during economic downturns or unexpected events that can impact rental demand.
- Compliance and Legal Considerations: Managing lease expirations effectively helps property owners stay compliant with local and state laws regarding lease renewals, tenant notifications, and eviction procedures. This reduces the likelihood of facing legal issues related to lease agreements and tenant rights.
- Capitalizing on Market Opportunities: Strategic lease expiration management allows property owners to take advantage of market opportunities. For example, if the market experiences an upswing in rental rates, having leases expire around that time enables property owners to adjust rents accordingly and capitalize on the favorable market conditions.
In summary, lease expiration management is essential in multifamily investments to optimize cash flow, maintain lender expectations, tenant retention, plan for maintenance and renovations, adapt to market conditions, and mitigate risks. By taking a proactive approach to move in management, lease renewals and expirations, property owners can maximize the return on their investment and create a successful and sustainable multifamily rental property.