CEO of Snappt and President of Berlind Properties.
In the dynamic world of multifamily real estate, the spotlight on risk management has never been brighter. With unpredictable rent fluctuations, rising vacancies, the specter of fraud and legal intricacies, property owners and managers find themselves at a crossroads.
The key to staying ahead is adopting a comprehensive risk management plan. What are the central risks to their business, and how can they mitigate them? This involves more than just having insurance policies in place; it also means implementing strategies to help identify and manage potential risks. By taking proactive steps, multifamily real estate owners and managers can protect their assets and business interests to promote long-term success.
The State Of The Multifamily Market
It’s no secret that the housing market has experienced massive fluctuations over the past few years. Research by CBRE found that the multifamily market is stabilizing, which might help ease the minds of buyers, sellers and property managers nationwide. Multifamily construction has been increasing as well, with 960,000 units under construction in March 2023, according to a report by the Joint Center for Housing Studies of Harvard University. While the uptick in available housing units is usually a great sign, “the vacancy rate for professionally managed apartments has more than doubled from a record low of 2.5 percent in 2022 to 5.2 percent in early 2023,” the report also said.
Meanwhile, rent prices are not as high as in summer 2022, but they continue to rise monthly in most metro areas and show no signs of crashing.
Risks In The Industry
Fraud
When it becomes too difficult for tenants to secure housing, some turn to more deceptive methods to get their way. Document fraud has become an easy way for applicants to get approved for units they otherwise would not qualify for. A simple change of a number and their monthly income goes from $1,200 to $12,000. The worst part? Not all property managers have realized that this is happening.
Based on my company’s internal data, we’ve found that a tenant who submits a manipulated document is more likely to cause bad debt or eviction. This can cause significant trouble and financial loss for property managers. A few evictions a year can quickly damage a property manager’s cash flow and reputation.
Legal
From eviction moratoriums to changing rent control laws, staying informed and compliant with the latest changes should be at the forefront of every property manager’s agenda.
Fair housing laws remain one of property managers’ most important sets of regulations, especially with respect to potential discrimination. There were 25,501 complaints of rental discrimination filed in 2021 alone. If tenants detect any hint of discrimination, they could contact their lawyer. Even the slightest misstep during the screening process can result in a costly lawsuit and headaches.
Vacancies
The national vacancy rate inched up to 5% in the second quarter of 2023, which is forcing property managers to examine their leasing strategies. Tenants are the primary source of income, so when you have a high number of vacant units, your cash flow will decrease.
Property managers who maintain high occupancy rates are better positioned to attract and retain tenants. When you struggle to fill your units, you might feel pressured to accept lower-quality tenants, which can lead to issues like late payments, property damage or evictions. Vacancies can also affect your ability to receive loans. In my experience, some financial institutions won’t even consider a loan for your real estate endeavors unless you have an occupancy rate higher than 70%.
Lastly, economic downturns or crises, such as those experienced during the Covid-19 pandemic, can exacerbate vacancy issues. While a crisis might not be a regular occurrence, it’s still essential to have a plan in place in the event one happens.
Strategies To Manage These Risks
Fraud prevention: Develop a thorough screening process.
Stopping pesky fraudsters from getting into your property starts with a robust tenant screening process. Your screening process needs to be thorough, fair and compliant with fair housing laws. Include steps such as credit checks, background checks (where legal), rental history and income verification. Property managers can also explore tech solutions to help with fraud prevention and identity verification. (Full disclosure: My company provides these types of solutions, as do others.)
Legal protection: Ensure you and your team understand laws pertaining to your property.
I can’t emphasize enough how important it is to stay on top of local, state and federal laws regarding your property. Not only does this protect you from potential legal disputes, but it also ensures your property is fair and helps protect your reputation. Educate your team on relevant laws, too. They’ll be tasked with enforcing them and might have to field questions from inquiring tenants.
When new laws affect the entire country, such as the eviction moratoriums that went into effect during the pandemic, it’s crucial to consult your attorney and figure out a plan. Ensure your team understands any new regulations, how to implement them and what to do if a problem arises.
Vacancy: Prioritize tenants’ happiness.
Whether a unit is vacant for five days or five weeks, a vacancy costs you money. In my experience, vacancies are best solved by implementing effective tenant retention strategies. The happier your tenants are, the less likely they are to pack up and move. Keep tenants happy and engaged by hosting events at the property. This might be a small perk like “bagel Wednesdays” or a semi-annual blowout like a casino night, complete with themed drinks and costumes.
Maintaining the property is another easy way to keep tenants around. Keep up with routine maintenance inspections, provide pest control services and maintain any landscaping.
In today’s market, those who prioritize risk management will weather the storm, thrive and stand out from the competition. Addressing rising vacancies through tenant retention strategies, fortifying your defenses against fraud with thorough screening processes and staying vigilant in the face of ever-changing legal landscapes is the key to success for your business in the dynamic multifamily industry.
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