Purchasing Rental Properties With Existing Tenants

LINK TYPE FOR ENTRY VIEWPurchasing a rental property with existing tenants sounds like a no-brainer: After all, the issue of locating tenants in the first place is solved, right? Maybe, but there's more to it than that.

You must understand what you're getting into before diving headfirst into a tenant-occupied rental property purchase, especially if you're new to commercial real estate investing and being a landlord.

Here is what you need to know when purchasing an apartment with tenants.

Existing Tenant Leases Are Still Legal

A lease is a legal agreement that exists between tenants and landlords. It doesn't disappear when the building is sold.

If you buy the apartment, the leases remain attached to the rental property. Therefore, you cannot raise the rent, change any terms, or evict the tenants just because you purchased the apartment. There are hurdles you must go through if you wish to break the current leases.

Exceptions to & Tactics for Breaking Existing Leases

There are two exceptions when you can break the leases. You can provide written notice to end a tenancy if the term of your rental agreement specifies that the owner may terminate the contract at any point.  Or, if you're purchasing the apartment as a foreclosure, then you can give the tenants proper notice before ending their tenancy.

If you don't want the tenants because you'd prefer to start from scratch, you could submit an offer to the owner contingent on the tenants vacating when the apartment sells. This requires the seller to break the leases before the property is sold.

You cannot raise the rent or evict tenants without going through legal channels. So, if you want to change anything about the arrangement, such as raising the rent or kicking someone out, you'll have to go through the courts.

Existing Tenants: The Good and the Bad

"Existing tenants" means all people were already living in the building before it was purchased.

Buying an investment property with tenants already living there may be ideal. This means instant cash flow, no time to look for the right tenants to live in your apartment, and if the tenants have been living in the house for an extended period, you have a limited chance of the apartment becoming vacant soon.

Screening & Vetting Tenants, Both Existing & Otherwise

Tenant Screenings are essential for protecting your investments. Poorly screened tenants can cause havoc by not paying their bills, causing damage to your properties, and dragging out evictions. However, when you inherit an existing tenant, you're stuck relying on the previous landlords' tenant screenings, which may be lacking in quality.

The buyer could have accepted anyone (regardless of qualifications), or he might have had a long-time tenant who refused to pay rent on time or even not at all.

Landlords beware: they may be trying to sell their property to offload their tenant problem onto an unsuspecting buyer.

Other Roadblocks With Existing Tenants

You may encounter other obstacles when dealing with existing renters. For instance, you might find that the current residents are dream renters, but they're not prepared to continue living there under a new owner.

A move from one rental unit to another may cause some disruption for a tenant. However, if your new tenants have been living in their previous rental unit for a long time, they may feel at home.

If the previous landlord wasn't raising the rent annually, or if they weren't performing regular seasonal inspections, you might find that your new tenant doesn't wish to move.

How to Deal With Existing Tenants When Buying a Rental Property

There are three main ways to handle existing tenants when buying a property:

1. Pay them off. If you decide to pay the current owner to remove the tenants, you'll most likely have to pay them the total amount owed plus any additional costs associated with removing them.
2. Let them stay. If you decide to keep the tenants, you'll have to find a way to work around the fact that they aren't technically breaking the lease.
3. Convince the tenants to agree to a new lease that allows you to raise the rent or add more terms to the agreement.

Tasks to Perform Before You Finalize the Purchase

Before you close on a rental property that is occupied, you must perform several tasks to ensure the process goes smoothly.

To begin with, introduce yourself to your new tenants by writing them an introductory email. This will help them get used to living with you and establish an excellent tenant-landowner relationship.

Furthermore, it will allow you to add important information, such as where rent payments must be made and how tenants may request repairs.

Protecting Yourself as a Landlord

Since you will assume the responsibility of the previous owner, it is vital that you fully protect yourself by instructing them to sign an estoppel letter and transfer their security deposit to you.

An estoppel clause lets your future tenants specify which existing leases they want to continue under. It usually covers rent, utilities, parking spaces, etc., but not everything.

You must ensure the previous owner signs an agreement releasing you from any liability for damage caused by their tenant.

It will help prevent any potential legal issues from arising later down the road. If someone makes an untrue claim against you, you can use the estoppel agreement to refute it.

Always Do Your Research and Stay Diligent

Buying an investment apartment is an exciting prospect for people looking to start generating immediate cash flow from their properties.

When buying an occupied apartment, before signing any paperwork, read the lease agreement and check out the tenant qualifications the seller used to qualify current tenants.

If you agree to the rental conditions and feel comfortable with the current tenants, continue with an introduction and sign a cooperative estoppel agreement.

If the current occupants are month-to-month residents, you have more options for changing their lease and tenancy if they meet state and local law requirements.

 

Source: Purchasing Rental Properties With Existing Tenants

https://www.creconsult.net/market-trends/purchasing-rental-properties-with-existing-tenants/

Inflation and Multifamily Real Estate: What to Expect for 2023

Multifamily investors and employees are facing persistent financial pressures, including record-breaking inflation, enduring supply chain constraints, rising interest rates, and plummeting consumer confidence. These concerns leave many rental housing owners and managers wondering: what does the future hold for the multifamily industry?

While U.S. inflation has recently eased, it remains near a 40-year high, according to AP News. Consumers continue to feel their spending power strained by still higher-than-average prices on everything from gas to groceries. Many are tightening their belts as a result. Owners and operators of rental communities are justifiably concerned about the future forecast for multifamily rentals. Will 2023 be a bumpy ride?

 

Record rental growth and high occupancy may be ending.

Amid the tumult and uncertainty of the pandemic in the U.S. for the past two-plus years, the rental housing industry was buoyed by record demand for apartments and surging rental rates. The New York Times reports that according to CoStar Group, “in buildings with more than 50 units, tenants in one-bedroom apartments have been handed new leases costing about 17% more on average than they did in March 2020.”  Multi-Housing News shared that according to Yardi Matrix’s survey of 140  markets, the average U.S. asking rent rose 12.6% year-over-year through July 2022, while the national occupancy rate remained similarly strong at 96% for the fifth straight month.

Are there signs that demand for rental housing is waning? RealPage analyst Jay Parsons puts it bluntly: “A number of indicators suggest the once blazing-hot rental housing market is cooling off dramatically.” He continues, “Apartment demand has cratered from 2021’s all-time highs due to what appears to be an abrupt halt in housing formation.” Data from Yardi Matrix, as reported by Multi-Housing News, also shows a deceleration of growth. “August marks the first month since June 2020 with tepid rent growth…a trend that will likely linger by the end of the year.”

Cratering apartment demand, a halt in housing formation, and deceleration of growth – it sounds ominous. What does it mean for owners and operators of multifamily housing?

 

A return to normal

According to Multi-Housing News, “While record rent growth in 2021 was the result of record-high absorption (580,000 units), the softening in absorption—roughly half that pace in 2022—does not send negative signals but is instead falling into values representative of a typically solid year.”

RealPage’s Parsons also sees normalcy in the recent leveling out of apartment demand. According to RealPage’s analysis, leasing traffic slowed in the third quarter of 2022 (typically seasonally a strong leasing period), and effective asking rents fell month-over-month for the first time since December 2020. Despite that, Parsons says this marks a return-to-normal seasonal pricing. “To be clear, the U.S. apartment market remains on firm footing,” explains Parsons. “Apartment vacancy jumped 1.0 percentage point in 3^rd quarter but remained low at just 4.4%.”

Realtor.com’s chief economist Danielle Hale spoke to CNBC about her predictions for multifamily rents in 2023. Said Hale, “My expectation is that rent growth will slow, but we may not see it go back to what was typical before the pandemic.” Instead, she anticipates rent price growth, while not as dramatic as in 2021-2022, will likely remain elevated well into the New Year.

 

Impact on multifamily transactions, construction starts.

Rising material costs, higher interest rates, and ongoing economic uncertainty have a big impact on the new construction of multifamily apartment communities and build-to-rent single-family homes, as well as sales of established rental housing. According to the Freddie Mac Multifamily’s 2022 Midyear Multifamily Outlook, “a steep rise in Treasury rates may push potential deals to the sidelines as borrowers wait out the volatility.”

Similarly, RealPage’s Parsons anticipates a drop in new construction starts of multifamily communities. “New apartment starts are expected to soon drop from multi-decade highs due to higher financing costs and softening fundamentals,” says Parsons.

A reduction in construction starts may keep rents and occupancies high. That’s because the U.S. is already facing a dire shortage of rental housing. A recent study commissioned by the National Multifamily Housing Council and National Apartment Association and reported in Multi-Housing News reveals that the U.S. needs to build 4.3 million new apartments by 2035 to address demand, deficit, and affordability. Put simply, demand for rental housing is outstripping supply which keeps both rents and occupancy rates high.

 

Continued optimism for rental housing as an investment and employer of choice

While rising inflation can be both disruptive and worrisome to multifamily owners, investors, and employees, the outlook for rental housing remains favorable. Real estate investment expert Adam Kaufman sees abundant reason for optimism. “Multifamily assets in particular, tend to perform well in an inflationary period,” he tells Forbes. “Economic growth fuels employment and higher wages, which in turn drives demand for housing. At the same time, the housing market, in general, faces a chronic shortage of some 5 million units. Together, those conditions give multifamily owners the ability to raise rental rates and offset higher construction, labor, insurance, taxes, and other costs, potentially allowing multifamily properties to hedge the effects of inflation.”

RealPage’s Parsons puts it even more plainly: “At the end of the day, people need a place to live. You can work from anywhere and shop from anywhere. But you need a home. That’s a long-term tailwind for housing of all types.”

Those are reassuring perspectives for multifamily professionals, whether they are building communities or building careers.

 

Source: Inflation and Multifamily Real Estate: What to Expect for 2023

https://www.creconsult.net/market-trends/inflation-and-multifamily-real-estate-what-to-expect-for-2023/

1120 E Ogden

Retail / Office Space For Lease | 3,674 SF | $20/SF NNN
1120 E Ogden Ave, Suite 101 | Naperville, IL 60563
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/?wpo_all_pages_cache_purged=1

9301 Golf

Golf Sumac Medical Offices For Lease | 998 - 2,853 SF | $28/SF MG
9301 West Golf Rd | Des Plaines, IL 60016
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441
https://www.creconsult.net/golf-sumac-professional-building-medical-office-space-for-lease-9301-golf-rd-des-plaines-il-60016/

Chicago's Multifamily Sector Boasts Healthy Occupancy Rates, Strong Rent Growth

Chicago’s multifamily sector currently enjoys strong market fundamentals highlighted by healthy occupancy rates and continued rental rate growth. The current core apartment rents average over $4 per square foot, which is higher than previous peak pricing.

After the pandemic, rental rates between late 2021 to 2022 recorded 10 to 15 percent growth, which is substantially ahead of the historical norms. Currently, the Chicago rental market is experiencing more stable rent growth in the 3 to 4 percent range.

Chicago remains one of the most affordable major markets to rent an apartment when looking at the current average effective rents as a percentage of median household income. This affordability will allow owners to continue to push rental rates in the future.

One of the major factors leading to strong operating fundamentals in the Chicago market is the lack of new supply. The supply in Chicago is currently 1 percent of the inventory, which is quite low in comparison to other markets where there could be as much as 10 to 12 percent of the inventory under construction.

In the city, there are just over 7,000 units under construction slated for delivery between 2023 and 2024. The majority of new development is located in two submarkets, which are Fulton Market and Gold Coast/Near North. In the suburbs, there are nearly 6,000 units slated for delivery through 2024. Suburban deliveries have remained consistent in recent years as investors continue to believe in the fundamentals outside of the urban core.

Spring and summer are typically the strongest leasing seasons in the Windy City and with a very limited supply of new construction in the pipeline, the market is well-positioned for continued strong rent rate growth as well as high absorption.

Investment sales activity in 2022 was $3.2 billion, with the majority occurring during the first half of the year, before the Federal Reserve’s rate increases really took hold and caused a lack of stability in the capital markets.

Among the key transactions to take place last year include the sale of The Elle, formerly known as Alta Roosevelt, in the South Loop to Waterton Associates. The property sold for $170 million, which is approximately $343 per unit or $341 per square foot. The transaction closed in November 2022 and was the largest transaction to take place in the downtown market.

In the suburbs, Ellyn Crossing in Glendale Heights sold to Turner Impact Capital. This 1,155-unit residence sold for $137 million, which is $118,615 per unit and $193 per square foot, and was among the largest transactions to occur in the suburbs last year.

In terms of investment activity, many of the large institutions remain on the sidelines thereby creating a great opportunity for the private capital to acquire assets in the Chicago market. In fact, downtown acquisitions by private investors have continued to increase year-over-year demonstrating their desire to transact with yield premiums and significant discount to replacement cost.

Looking forward

There is plenty of liquidity in the financing markets for multifamily. Agencies continue to provide liquidity during this choppiness in the capital markets, committing $150 billion in dry powder for 2023 volumes. Buyers today are actively seeking neutral leverage and will not settle for negative leverage. Therefore, they are very focused on their going-in cap rate.

Based on what is currently on the market, 2023 is on par with or well-positioned to exceed the activity recorded in 2022. Buyers and sellers are both capitulating, and as both move toward a middle ground, we expect the second half of the year to have even more transactions.

Today is a great time to be an investor and an operator in the Chicago market as the fundamentals have never been better, and pricing is at an above-average yield today with a significant discount to replacement costs.

 

Source: Chicago’s Multifamily Sector Boasts Healthy Occupancy Rates, Strong Rent Growth

https://www.creconsult.net/market-trends/chicagos-multifamily-sector-boasts-healthy-occupancy-rates-strong-rent-growth/

Multifamily Rent Roll Curation - Next Steps in Portfolio Management

Real estate investors typically diversify their geographic footprint to reduce their overall portfolio risk profile. But what if investors dug deeper and proactively diversified their property-level rent roll to minimize risk exposure for a given asset? Multifamily owners could soften the impact of market downturns on their portfolio and potentially take a more bullish approach to other risk levers in the portfolio, such as leverage or geographic concentration if high conviction opportunities presented themselves.

Portfolio Theory

"A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies." - Harry Markowitz.

Portfolio Theory is a framework for investing. It states that if you combine assets with low or negative correlations, you reduce the overall risk of your portfolio. An example could be oil company stocks and airline stocks, which typically move in opposite directions as the price of oil changes (since oil is a significant expense for airlines).

 

Potential Multifamily Applications

Multifamily risks are likely higher than many investors realize. This asset class benefits from government-subsidized financing, which encourages higher leverage due to the lower interest rates. High leverage increases the risk profile of the investment, and when combined with higher pricing from the surge in investor interest in multifamily properties in recent years, the financial risk profile of multifamily is increasing.

Tenant rent roll curation can lower risk at the individual property level. For example, in an economic downturn, your property performance could be higher than the overall market or submarket (lowering your property's beta) because you, the owner, have proactively selected tenants that collectively reduce your risk profile. Your rents may still fall, but at lower rates than the submarket.

Additionally, the proactive tenant curation model can offer valuable insights into the risk profile of your tenant base, allowing for more accurate forecasting and portfolio-level risk assessments.

How It Works

Let's consider a multifamily property in Las Vegas.

Las Vegas was one of the most impacted markets during the Great Recession of the late 2000s. The employment loss was significant, and investors suffered from lower rents and decreasing values.

However, not all employment sectors fared equally.

Source: Bureau of Labor Statistics

The Education and Health sector (defined by the BLS) performed much stronger than the broader employment trend. The Education and Health segment never reached year-over-year negative job losses as the industry was insulated from the broader economic trends of the day. This sector comprised 10.7% of the Las Vegas employee market as of June 2022.

Property in Las Vegas (a highly cyclical market) with a high proportion of tenants from stable employment sectors should have improved performance compared to comparable properties with tenants from more volatile sectors.

Great. I’ll buy a property next to a medical center.

The Great Recession was one of the most severe recessions in recent times (before Covid-19) and could be a helpful benchmark in the absence of a global pandemic.

Yes, you can invest in an asset adjacent to a medical center where investors can benefit from these strong and stable employment trends. But market participants already know this - thus, the price will likely command a premium. Intuitively, many investors assume that medical or educational employers (like universities or hospitals) are anchor employers that offer growth opportunities and stabilize the surrounding job market.

Yes, you can acquire it, but you'll pay a premium for the luxury of tenants with stable employment bases.

There Is Another Solution – Remote Work

The Covid-19 pandemic has offered employers (and employees) an experiment in remote work. Millions of people are no longer geographically tied to their employers. From a real estate perspective, they have become free agents.

The distribution of these remote workers is still shifting as employees assess their options. According to McKinsey, an estimated 35% of employees can work from home five days a week, which offers the possibility of migration to a better lifestyle or financial opportunities.

Since remote workers are not tied to their geography, they can tap into the national remote labor market, which is much larger. Although data on the topic seems sparse (since it’s a new phenomenon), it seems possible that skilled remote workers could benefit from lower overall unemployment rates since their employment pool is deeper and more liquid.

We are likely at the beginning of an unprecedented sorting wave as the population assesses their options across national and international borders. Multifamily investors can take advantage of this process by targeting remote workers directly. They can use remote workers as the portfolio management tool to curate their rent roll and position it for success according to their goals.

How To Do It?

Organize your property to appeal to the target audience. Remote workers likely value the basic amenities, such as high-speed and reliable internet access, as well as community-focused amenities, such as expansive WeWork-style common areas, since they don’t have physical meetings with colleagues.

A disproportionate investment in amenities that appeal to the target audience is a solid signal to the target market that they are sought-after.

Additionally, financial incentives can be tailored to the target audience. For example, multifamily owners have long used tools such as preferred employer discounts to entice residents to rent their units. Unfortunately, these discounts are usually expensive (3% of gross rent) and lack precision (targeting only the largest employers in the area). Instead of ongoing discounts, upfront cash incentives can be used as a lower-cost option.

Much more can be done to attract and retain these targeted residents, and these ideas need to be crafted into a distinct marketing strategy.

The Potential Impact

The above example, based on Indeed.com job listing data (for Pre-Covid and May 2022), illustrates the potential diversification benefits of remote worker hubs at multifamily properties. The nationalization of the tenant risk profile from (9.4% to 40%) should reduce the overall risk exposure – possible without reducing the property’s Net Operating Income.

However, investors would not need to immediately target this proportion of units to the strategy to experience benefits. Instead, a step-by-step approach could be implemented with a handful of units being tested until the strategy has been proven.

The addition of high-income tenants who don’t rely on the local labor market can be used to bolster valuations. Additional monetization opportunities could be researched to capture a higher wallet share of the target tenant base.

Summary

Portfolio management can move from macro to micro through the proactive use of job category targeting across individual property rent rolls and overall diversification benefits from lower reliance on local labor markets. This curation can unlock significant additional value above and beyond the expected return from a multifamily property in that location (your beta).

We are in the early innings of remote worker sorting across the country. It will present opportunities for investors and workers to create more win-win dynamics as new needs are recognized and satisfied in the market.

 

Source: Multifamily Rent Roll Curation – Next Steps in Portfolio Management

https://www.creconsult.net/market-trends/multifamily-rent-roll-curation-next-steps-in-portfolio-management/

If You're Hesitant To Hire A Broker For Your Multifamily Property Read This

Multifamily brokers frequently hear this comment from apartment property owners: “I don’t want to list, but you can bring me a buyer.” Their reasons sometimes include previous bad experiences, fear of getting “tied up” in a formal agreement, tenants finding out the building is for sale and making anxious calls to management, thinking the commission will be halved, or not really being interested in selling. Whatever the reluctance, the reality is that if an investor wants or needs to sell, the best thing they can do is hire a broker. Let’s address a few of those common objections first.

If you had a previous bad experience, more than likely, you hired the wrong broker. The specific agent you hire or the firm they work for should have experience in both the geographic market and transaction size — ask for their track record. While you’re at it, ask for references from clients, and make sure at least one is for a listing that did not sell. These simple steps will give you insight into whether you’re working with a pro.

As for getting “tied up” or having anxious tenants because the building is selling, a professional broker typically allows you a cancellation right for the listing. If there are deadlines you need to meet, make sure your broker understands. And while no broker can guarantee tenants won’t find out the building is being sold, experienced brokers can modify marketing by limiting showings to only vacant units, specific hours for low visibility, limiting digital footprint tenants might see, etc., to reduce the probability of tenants finding out.

That said, the best course is simply to announce to tenants that the building has been listed for sale, explain the sale may not be successful, and assure them that their lease runs with the building, not the owner, and is their protection during the lease term against rent increases or being forced to move.

These are certainly not the only reasons clients are reluctant to list but whatever is yours, talk to your broker about your real concerns. A seasoned broker will most likely have previously faced a similar challenge and should be able to address your concern. But this only addresses your concerns about why you shouldn't hire a broker — it doesn’t explain why you should.

The first benefit is understanding the value of your property. A professional, qualified broker who specializes in your asset or area will be able to give you a price range to expect so that you can decide whether selling makes sense. If you move forward, this specialist will also have databases of the most qualified, active investors in the market and have relationships and influence with them. The ultimate buyer of your property will more than likely come from one of these relationships. But a broker won’t rely exclusively on these relationships. A good broker will also create a professional marketing plan with appropriate amounts of promotion across email, mail, websites, and listing services.

All this leads to the most important part of hiring a broker: competition. Trying to sell your building by letting a broker “bring you a buyer” is like having an auction for a painting, and one person shows up to bid. If the building is priced correctly, a professional marketing plan will create a competitive environment for investors so that the process itself determines not what the market wants to bid but what the market is willing to bid.

Larger portfolio owners might be reluctant to list with a specific broker because they have relationships with numerous brokers or firms in the market, and they don’t want to offend anyone by choosing a competitor. Instead, they tell every relationship to “bring me a buyer.” If this is you, think a few more steps down the chain of events.

First, this may only create chaos. You not only have brokers racing each other to bring clients, but each is advocating to you why their buyer is the best so that they can get the commission. Then you ultimately have to pick one buyer/broker anyway and disappoint the others after they’ve put work in. Alternatively, a listing agreement assures a commission for the listing agent if the property sells; therefore, there is no incentive to advocate for any one specific buyer.

An additional benefit of listing a property with a broker comes after a sale contract is signed. Any number of unexpected or challenging issues can arise during the escrow period of a sale. A seasoned broker has probably experienced something similar before. This person will also quarterback the entire process of due diligence, appraisal, and loan approval.

The most important benefit of exclusively listing your property with a broker is representation. You will have a hired gun with a fiduciary obligation to advocate for your best position in a deal. A professional broker will be ethical, transparent, and fair but will also be your personal fighter in the arena of marketing, negotiation, and escrow management.

This short list does not address every objection an owner would have for not listing, nor every benefit you receive from hiring a professional broker, but hopefully, it gives you a few things to consider. If you want to maximize your price and minimize your anxiety with the selling process, hire a broker. The benefits far outweigh the cost.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

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eXp Commercial Chicago Multifamily Brokerage focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.

We don’t just market properties; we make a market for each property we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites for maximum exposure combined with an orchestrated competitive bidding process that yields higher sales prices for your property.

 

 

https://www.creconsult.net/market-trends/if-youre-hesitant-to-hire-a-broker-for-your-multifamily-property-read-this/