In multifamily acquisitions, the best time to think about your exit strategy is before the acquisition. The same rule applies to determining or establishing an average annual turnover. What better time to look at turnover than before buying the deal?
Your objective when reviewing turnover is to identify the source: is turnover "natural" or attributed to other causes? What are these "other causes," and can these factors be addressed post-closing? This discussion is under multifamily acquisitions because the best time to ascertain the state of turnover, or renewals, is pre-purchase.
The benefits of identifying the source of turnover are that it places you in a position to attack the biggest offender once you own the deal. These are broad "brush stroke" methods for taking a look at turnover. These methods fall short of performing a 100% lease file review.
The following are five places to look for the causes or reasoning behind turnover. Note that the national average in multifamily is fifty percent turnover per year. Identifying the cause of turnover is no witch hunt. Finding and blaming a person or entity doesn't solve the problem.
The Rent Roll. Look at year-over-year changes in occupancy on a unit-by-unit basis. How many families remain on the rent roll from the prior year. What "percentage change" does this simple review suggest?
Existing Leases. Are existing leases in order? Do they auto-renew to a month-to-month (bad), or is a newly signed annual lease renewal required (good)? Are the lease renewals in good order?
The Market. In large cities with significant competition, the market can create turnover based on competitive factors. It's a free country. People can move if they want to. Many a tenant has moved to save $600 a year in rent even though the move may have cost three times that amount.
In a recent news story, a retail shop in New York closed because of complaints about the constant smell of bacon. So now we know; a market can change for reasons like jobs leaving town, higher crime, newer competition, or bacon. Who knew?
Management Expertise. What is your assessment of the existing management and maintenance regimen? Are they engaged? Do they have a renewal schedule that is 30, 60, or 90 days ahead of lease expiration? Is management pro-active? Can they tell you annual turnover for the last quarter or year?
Property Dynamics. Are there certain things about the asset that just will not or cannot be changed? Does it sit on a loud, well-traveled road? Do sixty logging trucks drive by every day at five a.m.? Is it next to an active fire station that uses sirens at all hours of the day and night?
The best thing about assessing turnover before you purchase a property is the thinking time. This allows for addressing how to remedy high turnover. This is a very good use of your brainpower; to create a plan of action ready for immediate implementation.