Let’s optimize returns and minimize risks! A couple weeks back i posted some top KPIs Multifamily Investment groups should be tracking depending on your asset class. I received feedback that questioned why you would change your KPI measures based on your asset class. I also received requests to dive deeper into KPIs and give examples of the list provided. I figured this is a prime time to dig deeper and really emphasize that nothing in Multifamily investments is a plug and play. Being creative and strategic as you play the cards within your business plan will undoubtably set you apart and sky rocket your returns. Let’s be honest, creating a proforma is like gambling. This is a fake analysis of how you believe your asset will perform through the years amongst the changing real estate cycles, uncontrollable market conditions and micro economic social shifts that are occurring.
Yes, I said it, multifamily investing has a lot of similarities to gambling. Both involve the potential for significant financial gain or loss. We are not speaking about rolling the dice. Dice throwing is luck, gambling and real estate investing is strategic. In real estate investing, you invest capital in a property with the expectation of generating a return, however the ROI isn’t guaranteed and can vary drastically depending on who is delivering the business plan. Similarly, in gambling, you wager money with the hope of winning a larger sum, but there’s no guarantee of success, and you could lose your entire wager. Real estate investors often use leverage by borrowing money to finance their investments, which can amplify returns but also increase risk. In gambling, players may leverage their bets in the hopes of winning big, but this also increases the potential for losses. The dealer behind the game and the “game head” or “poker Princess” can significantly make or break your profits. We are going to relate property management players to game dealers and the “game head” to Asset Managers. Asset Managers have to have their eye on everything, know the game inside and out, and track metrics for success. KPIs enable ongoing monitoring and evaluation of performance throughout the investment cycle, from acquisition to disposition. By tracking key metrics over time, you can identify emerging trends and make data-driven adjustments to optimize returns and mitigate risks.
Key Performance Indicators (KPIs) are vital metrics that help measure the success and performance of multifamily properties. The importance of KPIs for multifamily properties cannot be overstated. KPIs enable investors with the ability to evaluate financial health, operational efficiency, and overall performance of the investment. It is super important to tailor your KPI’s within the different asset classes of new development, core, core plus and value-add. Remember, you cannot recognize a shift if there is not a trend, and you will not know what is working unless you are keeping track. Different asset classes have different investment goals. For example, Class A typically focuses on maximizing rental income and maintaining high occupancy rates, while Class C properties may prioritize maximizing cash flow through cost-cutting measures and value add plays. Therefore, your KPIs should align with your specific goals and business plan to accurately measure performance.
It is important to understand that each asset class carries its own level of risk. Class A or Core assets are typically less risk compared to Class C or Value-Add, which may require more attention to operational efficiency and tenant retention. KPIs should reflect these risk profiles by emphasizing metrics relevant to each class, such as lease expirations matrix, tenant turnover or capital expenditure per unit. The market dynamics for each asset class can also vary significantly. Class A may be more sensitive to economic fluctuations on a macro and micro level, while Class C properties may offer better returns depending on the real estate cycle. KPIs should take into account these market dynamics to provide meaningful insights into property performance within its specific realm, market and class. We all know Generation Z is the future of rentals. Tenant demographics and preferences can differ across asset class as well. Class A properties may attract higher-income tenants seeking luxury amenities and convenience, while Class C properties may cater to more budget-conscious tenants. KPIs should consider tenant satisfaction levels and retention rates tailored to the specific needs of each asset class. This is increasingly important if you are shifting classes within your plan and transition from a Class C to a Class B.
Often, we are quick to set up businesses and plans, no matter the industry, and “roll the dice”, hoping for the outcome we predicted. This only takes the business so far before major losses begin to show their ugly heads. KPIs need to be set at the beginning of the transition and or acquisition. Operational strategies and challenges can also vary depending on asset class. Class A assets require more focus on property management and amenities to attract and retain tenants, while Class C assets require tighter expense management and proactive maintenance to maintain profitability. You may also have drastic capital expenditures where tracking the ROI per unit is vital. Let’s not forget about our People. Teams are only as strong as their weakest link. Just like KPIs adjusting per asset class, your people are going to be strategically chosen based on asset class experience. A property management company that only focuses on Class A assets may not have what it takes to run a Class C Value-Add.
Not only can you use KPI’s for quantitative insights into individual assets, you can also use it for investment benchmarking within industry averages. Performance benchmarking help you look at an entire portfolio in comparison to peer groups. This facilitates the identification of underperforming portfolios and assets and opportunities for performance improvement, guiding strategic asset management decisions and resource allocations. With this, all investments need reporting and transparency. What can I say, Asset Managers are accountable to their stakeholders. Transparent reporting of KPIs demonstrates accountability and provides stakeholders with visibility into the financial and operational performances. This fosters trust and confidence to invest with you again.
So, How do you choose the right KPI’s per your asset class you ask? Let’s break down some steps:
- Understand Your Investment Goals: Start by clarifying your investment objectives. Are you aiming for maximum rental income, long-term appreciation, or a balance of both? Understanding your goals will guide your selection of KPIs.
- Identify Core Metrics: Begin by identifying the core aspects of the multifamily investment that directly impact your goals. These may include occupancy rates, rental income, expenses, cash flow, property value, tenant satisfaction, and market trends.
- Consider Property-Specific Factors: Each multifamily property is unique, so consider factors such as location, size, age, amenities, and market demand. These factors will influence which KPIs are most relevant to your investment.
- Focus on Financial Performance: Financial KPIs are essential for evaluating the profitability and sustainability of your investment. Some key financial KPIs for multifamily investments include:
- Net Operating Income (NOI)
- Cash-on-Cash Return
- Gross Rent Multiplier (GRM)
- Cap Rate
- Debt Service Coverage Ratio (DSCR)
- Track Occupancy and Tenant Metrics: Occupancy rates and tenant satisfaction are critical for rental properties. Consider the following KPIs related to occupancy and tenants:
- Occupancy Rate
- Tenant Turnover Rate
- Average Length of Stay
- Rent Collection Rate
- Tenant Satisfaction Surveys
- Monitor Operational Efficiency: Efficient property management is vital for maximizing returns. Track KPIs related to operational efficiency, such as:
- Maintenance Costs
- Vacancy Losses
- Property Management Costs
- Utilities Expenses
- Stay Informed about Market Trends: Monitor market trends and indicators to assess the overall health of the multifamily real estate market. This may include:
- Market Rent Trends
- Supply and Demand Dynamics
- Economic Indicators (unemployment rate, GDP growth)
- Local Development Projects
- Use a Balanced Approach: Balance your selection of KPIs between short-term and long-term indicators, as well as financial and non-financial metrics. This will provide a comprehensive view of your investment’s performance.
- Regularly Review and Adjust: Continuously review your chosen KPIs to ensure they remain relevant to your investment goals. Adjust your metrics as necessary based on changing market conditions or investment strategies.
- Utilize Technology and Data Analytics: Leverage technology and data analytics tools to track and analyze your chosen KPIs efficiently. Software platforms designed for real estate management can streamline this process and provide valuable insights.
- Other Top KPI’s:
- Exposure
- Average Turn Days
- Lease Capture %
- NTV trend and reasons
- Work order completion time & cost
- NOI & Cash Flow trend
- Cap Ex per unit cost & timing
- Reserve thresholds
- Depreciation draws
- Demographics to include median household income
- Renewal retention & reason
- Rent Growth vs Market
- Distribution trends
- Marketing/advertising source
- Assets (replacements) per unit/building for cost seg.
- Proforma vs actuals vs lender forecast
- Payables & Timing – cash vs accrual
- Employee turnover & satisfaction
- Absorptions & average days stale
- Collections Recapture & write offs
- OAC trends & timelines to budget
- Lease Expiration trend per season
- Quality Control & unit deliverables
By following these steps and selecting the right KPIs for your multifamily investment, you can effectively monitor its performance and make informed decisions to optimize returns and achieve your investment goals. If you choose not to set KPIs, and “roll the dice”, you’ll more than likely be spotted prior to close. KPI’s play a critical role in the investment decision-making process. By providing actionable insights into financial, operational, and strategic aspects of property performance, KPIs empower investors to maximize returns, manage risks effectively, and enhance the overall value proposition of their multifamily assets and portfolios.