Let’s start with a simple definition of stable to set the stage:
Stable– not changing or fluctuating.
From the very simplest level, we can apply this definition to whether we will be successful as a multifamily investor….stable is good and unstable is career ending. To this point, if your property manager does not understand this on the most fundamental level, you’re doomed.
A real life example
We recently took on a client with a large portfolio of scattered site single family homes mixed in with a variety of small and medium multi-family and mixed-use assets across several counties. The former owner acquired these properties over a great deal of time with a well-defined acquisition and operating principle…for him, it was about buying at a discount, deferring repairs, and keeping occupancy high by establishing low deposits and rents at well below market levels.
The irony of stability is that it can exist in one property or group of properties based on an operating strategy but be incredibly elusive with the same properties and a different strategy. And even more perplexing is that stability can exist in one property and not another with the same operating strategy…this one is more complex, but it does happen.
In this example, the portfolio existed in harmony on many levels as low-income housing with extreme deferred maintenance. It had sky high occupancy, content (not happy) tenants, rock bottom rents and satisfied housing authorities and local governments. In short, it just worked for everyone.
The very acquisition of the portfolio by our client constituted a massive change and became the starting point for ensuing instability and chaos. When we started our intake, it was clear that the portfolio was entering a tailspin. The interim manager was a retail residential real estate agent with no property management background whose first order of business was to double rents, issue directives to the housing authorities, change operations and communication styles, and focus solely on short-term profitability by selling properties. The tenants rebelled in a big way and the instability that was ensuing would soon collapse the portfolio without proper intervention.
A few key elements of achieving and sustaining stability.
1. Stability is operationally based- without an operating plan that aligns with asset class, tenant class, location, and property condition, long-term stability will remain impossible. In the example above, tenants paid cash in person or called in credit cards over the phone to pay rent before the portfolio sold. And believe it or not, the former owner was allowing back rent to be settled by taking tenants tax returns. These options were eliminated by the interim manager, which meant rent was not paid, delinquency accumulated, tenants defaulted, and mass evictions ensued…causing turnover costs to skyrocket while operating dollars were being rapidly eroded…not a good formula for success. I would equate this to being slowly dragged into a pond by a large alligator with a firm grip on your leg. The solution was to implement a retail cash payment system with a company called Pay Near Me…they partner with retail locations like Walgreens and CVS to accept cash payments from tenants- they simply scan a barcode, give the cashier their payment, they get a receipt, and the cash is credited directly to their account. With a little tenant outreach and training, this proved to be a viable solution to control the hemorrhaging. We also mandated that everyone with a checking account setup auto-pay…we called them and set up the account over the phone one at a time. For those that outright refused, we permitted paying with a cashiers check, but implemented a $25 check processing fee. Eventually, we were able to get around 85% of residents to pay directly from their online resident portal.
2. Stability is a mentality rooted in human interactions- The management of a physical structure is simple with a little bit of knowhow and good systems…the difficult part of property management is the people. People have different methods of communicating and oftentimes their expectations won’t align with the manager, causing a potential fallout. In management, there is a give-and-take…offering concessions if you will. In times of change or even in times of stability, tenants need a platform to voice their concerns and opinions. Keeping folks stable in their homes for the long-term is the most important fundamental characteristic of any good property management company. To promote, achieve, and maintain stability, this must be a proactive approach. Property managers must have staff dedicated to the well-being of the tenants we house and be ready with solutions at the first sign of instability. In the example above, it meant that tenants had to be met on their own terms and given multiple communication channels that were monitored in real time. And their extended support networks needed to be understood. Once tenants feel like they have a voice, cooperation is achievable for the long-term. In the example above, the tenants found an outlet by contacting code enforcement to report everything down to scratches on the wall or dented appliances…they were really pissed. We took the avenue of holding many in-person meetings with the local housing authorities and city leaders to ensure that we were willing to address any issues the tenants had as quickly as possible. Many of the tenants did not have cell phones or an internet connected device and communicating basic information was a challenge. They would literally pick up the phone and call when they wanted something…handling calls from hundreds of angry tenants crashed our phone systems. We were able to do some in person outreach and training, as well as locate relatives and friends of tenants that were good with modern technology. We also secured as many outlets as possible for rental assistance and connected everyone to the resource in the event they were unable to pay their rent. The long lists of code violations were worked on every day until they vanished, and we ended up collecting around $70,000 in rental assistance the first year we managed the portfolio.
3. Stability is a state of being, not a constant- True stability is not achievable…being as close to truly stable as possible should be the goal…and this is different for every property. One of the things that must be very clear from inception is expectations from the owners or stability may never be achieved….do you expect 100% occupancy at market rents?…95% occupancy?…3-week turnovers?…operating expenses to be a certain percentage of income?…something else? The foundation of stability is a formula and it’s based on realistic but aggressive expectations that should be benchmarked and reviewed regularly. 100% occupancy may come in waves, but it won’t be the constant. In the example above, the owners were meeting with the interim manager 2x/week….the problem was there was no plan, no agenda for the calls, no minutes and actions items were not being captured…which ultimately meant there was no way to measure results or review accountability. One of the best approaches to stability is to set and review goals, expectations and performance at predefined intervals; i.e. meaning your manager should be accountable and deliver information to inform decision making daily…weekly…monthly, or quarterly….or whatever frequency makes the most sense. Parameters should be set with upper and lower limits of acceptable performance and transparency should be at the forefront of every response your manager provides. When properties and people operate in a state of stability it’s an absolutely surreal state of being. When instability creeps in it must be dealt with quickly with a plan that has proven outcomes that push back to stability as rapidly as possible.
I have some more thoughts on this if you would like to connect…feel free to drop me a line at Brandon@RealizePM.com and we can continue the discussion.
Brandon S. Sturgill is a multifamily investor, housing advocate, and the principal broker for Realize Multifamily Group in Columbus, Ohio.
