SS283: How to Turn Around a Struggling Apartment Building

SS283: How to Turn Around a Struggling Apartment Building

Turning around a distressed multifamily asset requires a blend of aggressive operational auditing and strategic capital improvements. In this episode, Charles discusses the best practices for successfully repositioning a multifamily property.

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Talking Points:

  • Acquiring a struggling property can be a headache, but what can make the process manageable is knowing what is wrong with the property before putting in an offer and closing.
    • The challenges associated with a struggling property present some of the best value-add opportunities in multifamily investing.
    • In most scenarios, a struggling property is the result of poor management, but we are going to need to diagnose the problems more specifically in order to fix them.
  • 1. Diagnosing the real problems. Why is the property struggling? It could be a combination of these factors.
    • Poor management
    • Bad tenant base
    • Deferred maintenance
    • Subpar lease enforcement
    • You can usually identify the cause of a struggling property by reviewing the financials and rent roll and by walking the property and speaking with some tenants, if you are able to speak to them before your inspection. Sometimes owners ask buyers not to bother tenants before going under contract, and for good reason: sellers don’t want to create any issues with current tenants, especially if the potential buyer doesn’t move forward.
  • 2.  Cleaning up the tenant base. Once we have closed on a property, we want to identify problem tenants and minimize these issues going forward. We do that by:
    • Changing property management. If a property is struggling, we want to switch the property management first. 
    • Enforcing the lease. Start issuing notices for non-payment and lease violations immediately. Make sure to be consistent across the entire property.
    • Cash for keys. In some cases, offering a small incentive for a non-paying tenant to leave peacefully is cheaper and faster than a long legal eviction battle.
    • Tighten tenant screening. Raising the barrier to entry (credit scores, income verification) might slow down leasing initially, but it minimizes bad debt and unit turnover. 
      • Set up property management software with a tenant portal to streamline communication between tenants and management. This will allow you to provide better service, improving the overall tenant experience.
      • If you want to learn more about effective tenant screening, you can check out episode SS203.
  • 3. Addressing Deferred Maintenance. At the same time, as we clean up the tenant base, we want to address all deferred maintenance items. Create a list of major to minor issues and start addressing them.
    • Start with the main systems. HVAC, plumbing, and roofing issues.
    • Continue with other deferred maintenance.
  • 4. Value Renovations. Once the main issues with the property have been addressed, your management has been changed, and tenant screening has been tightened, we can start working on our value-add business plan.
    • Start executing your value-add business plan. As units turn over, renovate them and start testing the market with the updated units at the new rental rate to see whether your pro forma was correct.
    • Start the common area upgrades. This is where you can start updating hallways, lobbies, parking lots, landscaping, signage, lighting, painting, etc.
    • An important note would be that you do not want to replace items marked as deferred maintenance that are going to be replaced with upgraded units soon.
    • We also rarely renovate every unit as they turn. Maybe renovate a portion of them and see the market’s appetite before continuing. Only in really hot markets with rent increases and strong demand for newer units do we want to get aggressive about the number of units we’re renovating.
  • Turning around a struggling apartment building isn’t easy—but it’s one of the most rewarding strategies in multifamily investing. If you follow a structured approach—diagnosing the problems, stabilizing operations, upgrading the property and tenants, and renovating strategically—you can unlock significant value.

 

Transcript:

Charles:
What if the real problem with a struggling apartment building isn’t what you think? I’ve renovated hundreds of multifamily units and the biggest mistakes always come down to a few key issues. Most struggling apartment deals don’t fail, they’re just mismanaged. Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re discussing how to turn around a struggling multifamily property. Let’s get started. Acquiring a struggling property can be a headache, but what can make the process manageable is knowing what is wrong with the property before putting in an offer and closing. The challenges associated with a struggling property present some of the best value add opportunities in multifamily investing. In most scenarios, a struggling property is a result of poor management, but we are going to need to diagnose the problems more specifically in order to fix them. So number one, diagnosing the real problems. Why is a property struggling?

Charles:
And it can be a combination of these factors. Poor management, bad tenant base, deferred maintenance, subpar lease enforcement. And you can usually identify the cause of a struggling property by reviewing the financials and the rent roll and by walking the property and speaking with some tenants if you’re able to speak to them before your inspection. Sometimes owners ask buyers not to bother tenants before going under contract and for good reason sellers don’t wanna create any issues with current tenants, especially if the potential buyer doesn’t move forward. Number two is cleaning up the tenant base. So once we’ve closed on the property, we wanna identify problem tenants and minimize these issues going forward. And we do that by changing property management. If property struggling, we wanna switch the property management first. Enforcing the lease. Start issuing notices for non-payment and lease violations immediately. Make sure to be consistent across the entire property.

Charles:
Cash for keys. In some cases, offering a small incentive for non-paying tenants to leave peacefully is cheaper and faster than a long legal eviction battle. You can also use this with other tenants, maybe problem tenants, maybe tenants that are complaining, letting them out of their lease, offering cash for keys. You can use it for, uh, many different tenant situations. Tighten tenant screening. So raising the barrier to entry, credit scores, income verification. It might slow down leasing initially, but it minimizes bad debt and unit turnover. And this is something really important because this takes many months, maybe even years to really see this change come to light because you’re not gonna have maybe tenants move in and they don’t go bad usually for say five, six, seven, eight months. So you’re not gona really know until you see the bottom line in like a year that that tightening of the tenant screening has really worked.

Charles:
Set up property management software with a tenant portal to streamline communication between tenants and management. This will allow you to provide better service, improving the overall tenant experience. And if you wanna learn more about effective tenant screening, you can check out episode SS203, that’s SS203. Number three is addressing deferred maintenance. At the same time as we clean up the tenant base, we want to address all deferred maintenance items. Create a list of major to minor issues and start addressing them. Start with the main systems, HVAC, plumbing, and roofing issues, and then continue with other deferred maintenance. Number four is value renovations. Once the main issues with the property have been addressed, your management has been changed and tenant screening has been tightened, we can start working on our value-add business plan. Start executing your value-ad business plan. As units turn over, renovate them and start testing the market with updated units at new rental rates to see whether your proforma was correct.

Charles:
Start the common area upgrades. This is where you can start updating hallways, lobbies, parking lots, landscaping, signage, lighting, painting, et cetera. An important note will be that you do not wanna replace items marked as deferred maintenance that are going to be replaced with upgraded units soon. We also rarely renovate every unit as they turn. Maybe renovate a portion of them and see the market’s appetite before continuing. Only in really hot markets with rent increases and strong demand for newer units do we wanna get aggressive about the number of units we’re renovating. Turning around a struggling apartment building isn’t easy, but it’s one of the most rewarding strategies in multifamily investing. If you follow a structured aproach, diagnosing the problems, stabilizing operations, upgrading the property and tenants, and renovating strategically, you can unlock significant value. I hope you enjoyed. Please remember to rate, review, subscribe, send a comments and potential show topics at globalinvestorspodcast.com.

Charles:
If you’re interested in actively investing in real estate, please check out our mentoring programs at syndicationsuperstars.com, that is syndicationsuperstars.com. Look forward to another episode next week. See you soon.

Links Mentioned In The Episode:

  • SS203: Insider Tips for Effective Tenant Screening

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