Tenant turnover is not just a healthy part of apartment building repositioning strategies, it is a critical component! Caution must be taken as you estimate your turnover rate within your proforma.
The Value-Add or Repositioning Process
When you consider rental housing or long-term rental properties, your main objective is to generate revenue from tenants with as few issues as possible while generating a positive return on investment. This would be considered a stabilized state within the cycle of an apartment building reposition project.
The “value-add” strategy, also known as ‘repositioning’, is the process by which an underperforming apartment building is acquired, effort is undertaken to improve its operations and its financials (“repositioning”), and is operated in a more stabilized state than it was previously. The diagram below outlines the process that we undertake to reposition apartment buildings by improving its operational and financial performance.
A significant component of the repositioning process is ‘turning-over’ units that are generating rents that are below market average and re-renting them at rates that are closer to or above average rents for the area.
When acquiring apartment buildings with tenants, we are looking for properties that house tenants that have a higher probability of transitioning homes in the short-term. As tenants move out, we start our renovation process to improve each unit, enabling the building to attract higher paying tenants, and in turn, increasing the value of the building.
To see how apartment buildings are valued, watch our webinar The Magical Multiplying Effects of NOI.
A Conservative Estimate of Turnover
Estimating the turnover rate (the number of units you will be able to renovate and re-rent) is a number that has a significant impact on the total ROI of the project. We have seen many investors assume a 100% turnover rate over the course of a five-year project. We believe that this is a very aggressive target, and therefore, would caution against incorporating such higher rates into a proforma. Our underwriting is a little more conservative, using turnover rates between 50% and 75% over the course of 5 years.
Watch our discussion on this very topic...
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About the author:
Mark Baltazar, Co-Founder of Peak Multifamily Investments
With 18 years of experience in business strategy and corporate consulting on the global stage, Mark brings a wealth of business management and operational expertise to real estate investing. Winner of the Real Estate Investment Network’s Top Player Award in 2017, Mark continues to build strong momentum in growing his real estate portfolio.
His strong analytical background enables him to bring a strategic rigour to portfolio expansion and the assessment of investment opportunities.
With five years of real estate investing experience across various strategies, Mark oversees Peak’s capital raising, client acquisition, partner relations, educational content development while ensuring the company delivers on its promise of helping others build generational wealth through apartment building investing.