5 Major Challenges of Managing Apartments as a Property Investor

 

Having one or more investments in multi-family real estate can keep you on the path to building generational wealth and having more freedom and opportunity in the future.

 

You may think that a good location, well-maintained units, attractive common areas, and the right amenities are what will keep your occupancy rates high and the property value of your apartment building up.

 

The truth is, it’s not enough.

 

Instead, success with investing in apartment buildings hinges on smart property management.

 

Apartment building management done well can be the difference between a profitable investment and a negative cash-flow mistake.

 

The question now becomes: how do you manage an apartment complex?

 

As an investor, you must decide if you’ll hire an outside property management company or self-manage the property.

 

Consider the following when evaluating your options for apartment building management:

  • Size and age of the property
  • Location of property
  • Your own individual interests
  • Your time-management skills
  • How you value your time

1. Hiring Apartment Building Management

 

Intelligent hiring is one of the most important business decisions an investment property owner can make.

 

If you choose to hire a property management company, finding one that fits your needs for managing apartments is only the first step.

 

Multi-family real estate investors should also look for a company that adequately trains its employees and communicates in the way that works best for you as the investment property owner. Would you like an app to add to your phone? Or do you prefer email communications? Perhaps a phone call works best for when the apartment management company needs to reach you.

 

Apartment complex management staff will be working directly with your tenants to help them through:

 

  • the process of leasing
  • making payments, and
  • maintenance issues.

Having staff that is well trained could make or break the experience. Optimal client service is paramount when it comes to keeping your tenants happy and revenue coming inconsistently.

Small Apartments

Managing Small Apartment Buildings

 

Small apartment buildings of 20 units or less are often managed by an investor who is handy, enjoys dealing directly with tenants, and has the time to embrace this apartment building management role.

 

Property management is a job that takes commitment and a specific skill set.

 

What are the duties of an apartment manager?

 

Apartment managers are responsible for handling the day-to-day activities of an apartment complex or multiple apartment complexes. Often those responsibilities include:

 

  • Handling complaints, comments, and requests from tenants
  • Collecting rent payments
  • Depositing money
  • Contacting tenants who haven’t made their rent payments
  • Scheduling appoints and showing apartments to prospective tenants
  • Maintaining the apartment complex

 

If you do choose to hire a professional property manager, it’s important to understand that you could pay a much higher price per unit on smaller apartment buildings than for a larger apartment building.

 

Why? Because the cost of the property manager is not spread over a large number of units, so you don’t realize the economies of scale you do with larger properties.

 

In addition, smaller apartment buildings result in fewer tenant issues and maintenance responsibilities.

large apartment buildings

Managing Large Apartment Buildings

 

On the other hand, if you’re a real estate investor with large apartment buildings or one who is continuing to build a portfolio, consider hiring an outside management company.

 

A large apartment building requires more time and resources to manage. They will have a greater number of tenants who will need responses to their questions or concerns and there are a greater number of units that will need to be leased.

 

Owning multiple buildings will add to the complexity of management.

 

When you hire a reputable property management company you may end up making more money long term, due to the increased day-to-day care of the property. With a property manager handling the damages and repairs as they occur, your apartment building will stay in great shape.

 

When you hire a good property management company you should expect:

 

  • To gain your time back as you will be relinquishing many of the responsibilities you’ve handled in the past over to the property manager.

 

  • The expertise of the property management company when it comes to screening tenants and filling vacancies.

 

  • Someone who is knowledgeable about tenant and landlord laws and rights, including state and federal discrimination laws, etc.

 

How do you manage multiple rental properties?

 

The location of your investment properties can affect your decision on how to manage them.

 

If the investment portfolio is generally located in one specific area but, also has one or two properties in other locations, it may make more sense to contract out the management of these properties. The travel time involved in overseeing buildings not located near each other may not be worth it.

2. Maximizing Value of an Apartment Complex

 

CCIM Institute (CCIM), leading experts in commercial investment real estate, has done a fine job addressing these issues in its article, “Maximize Apartment Value Through Strategic Management”.  According to Stephen H. Scholder at CCIM, when looking to maximize the value of a multi-family property, a management company must remain focused on:

 

  • Effective Gross Income (“EGI”) by maintaining high occupancy while moving rents to market
  • Disciplined operating expenses with strict payroll and contract services
  • Net Operating Income (“NOI”) growth through efficient and market-driven property management

 

Let’s review each of these.

 

Effective Gross Income

 

To keep up with the cost of inflation and optimize investing in apartment buildings, you should periodically review the assets’ individual rents compared to the maximum market rents for the area.

 

Aim to find that balance between a high occupancy rate and getting your assets rents in line with market rents in the area.

 

Incremental increases in rent are expected. Slowly migrating a tenant’s rent at renewal will have the real estate investment asset performing at its best in no time.

Disciplined Operating Expenses

 

As noted above, strict payroll and contract services are the keys to having disciplined operating expenses. To do this, identify and outline all expected expenses associated with your investment asset. It may make sense to add an expense line for unexpected expenses that may come up during a given year.

 

Changes in some operating expenses, such as increases in taxes or rate hikes in owner-paid utility costs, maybe outside of your control. Planning and accounting for the unexpected will leave you feeling well prepared instead of unhappy when unexpected expenses arise.

 

Net Operating Income

 

Many real estate investors are familiar with the strategy of increasing your assets’ overall value. In addition, you may also be interested in increasing the assets’ net operating income, your investment property’s profitability after removing the expenses.

 

Property managers should not only manage the day-to-day of the property but understand your goals. When you effectively increase the revenue and manage an apartment building to reduce inefficiencies, it’s likely your property will result in net operating growth.

 

3. Leasing Apartments

Multi-family property fundamentals differ greatly from those of other commercial properties.

 

In markets without rent control, apartment leases typically run for 12 months.

Rents are raised as often and as high as the market will bear. In addition, tenant improvement allowances are virtually nonexistent. Units in rent-controlled areas are leased “as is” – clean, carpeted, freshly painted, and ready for immediate move-in.

Leasing apartments is a relatively simple process. With no intermediaries, no complicated terms, and no negotiations, if a potential tenant walks away then another most likely won’t.

 

Apartment properties are comprised of large numbers of individual households. According to CBRE, a global leader in real estate insights, the average multi-family turnover continues to trend downward however the

 

Annual turnover is typically between 50% to 75% or even higher.

 

Trends during the pandemic have been pushed below the 50% mark according to CBRE.

 

As a result, leasing is a continuous process, and providing excellent customer service is critical to securing renewals. From an investment perspective, speed is of the essence.

The faster apartments lease, the higher the cash flow of the property.

 

Oftentimes, no matter the size of the property, the process of leasing can exhaust any extra time an investor has to manage or build a portfolio. Putting pressure on your personal time and resources.

 

4. Using Property Management Technology

 

In the past, lack of quality technology and systems was a challenge for managing apartment buildings. Paper or computer systems lacked the technology we have today. Now, there are numerous options to choose from.

 

Today, property managers and owners can minimize rework, free up more time, take tenant requests online, and show apartments over virtual tours. Rent collections can be automated, and the time spent on bookkeeping is reduced greatly.

 

What this means for real estate investors and property managers is that property management software and technology can help create efficiencies where it wasn’t possible before.

 

Greater efficiencies result in increased business growth and the opportunity for more time and energy directed towards tenant customer service, retention, and leasing.

 

5. Managing Apartment Building Tenants

 

Finding Tenants

 

Without tenants, your investment property would not thrive, but sometimes the management of tenants is a challenge in and of itself. As each real estate investment property owner knows finding good tenants is the single most important thing you can do to maximize your investment.

 

Let’s start with finding tenants.

 

The process of finding tenants for your apartment building is demanding. Once credit, eviction, and criminal history reports are pulled you still need to:

 

  • Follow up on the applicant’s references
  • Do income verifications
  • And interview potential tenants

 

You’ll want to be sure to move through this process quickly so that you don’t lose qualified tenants.

 

Tenant Repairs and Complaints

 

Once you’ve found tenants, who have moved into the unit there will likely come a time where a repair or complaint arises. If you have hired a property management company to manage the apartment building, they will be able to handle this entire process, but if you are managing the property yourself remember that you need to respond in a timely manner.

 

Tenants who are paying their rent on time will not want to wait long for issues to be resolved.

 

For those maintenance issues having trusted contractors on hand to perform emergency repairs, replace big-ticket items, and do upkeep and freshen up the units between tenants will help keep your business running smoothly.

 

Tenant Evictions

 

If you’re in the property investment business for any length of time you should expect to have to evict a tenant at some point.

 

Evictions are a legal process and can be challenging for all involved. No one wants to go through an eviction process and to avoid being sued you must take care to do each step properly. It’s best to consult a lawyer if the need for evicting a tenant arises.

 

Eviction is one of the built-in risks of investing in real estate. Expecting that you’ll need to deal with this challenge and having a plan in place to do so will help to minimize the disruption.

 

 

Apartment Building Management Simplified

 

There are several challenges when managing apartment buildings as a property investor. However, when managed carefully most challenges can be overcome using:

 

  • thoughtful hiring of a property management company
  • incorporating technology and
  • preparing a plan for how you’ll respond to tenant concerns, complaints, and maintenance.

 

To optimize the value of your multi-family apartment building look for ways to increase your revenue which should include being disciplined about maintaining low operating expenses.

 

Understand what potential tenants in your market are expecting in a rental unit and identify ways to meet their expectations. Remember, it’s normal for tenant turnover to occur, but having a continual process in place to find new tenants will put you in the best position to maximize your real estate investment.

 

What else are you wondering about managing apartment buildings?

Share your questions or comments with us below!

Northeast Private Client Group is focused is on assisting investors, owners, and syndicators of mid-market multi-family real estate properties between $1M – $50M in the Northeast and Southeast regions. We represent sellers exclusively with their best interest in mind.

We establish a trusted relationship by providing knowledge and guidance to help our clients achieve their individual goals for maximizing value and return on the sale of their real estate investment. Contact us today to learn more.

 

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Editors Note: This post was originally published in February 2014 and has been completely revamped and updated for accuracy and comprehensiveness.