As a multifamily operator, before you can make day to day decisions you have to ask yourself this one question. What are the Multifamily investment objectives?
Every multifamily deal is structured in a unique way for investors.
Many times, operators make generalized decisions based on general investment objectives rather than taking into consideration the property-specific investment objectives.
So how does this happen?
Well, we are constantly training the people who are driving the returns and investors need to know that.
Think about this, the Multifamily Regional Manager is a key position within the organization as that person is the wedge between the investment objectives and the onsite teams who drive the returns. The Regional Manager’s ability to hire the right people so the asset can be leased faster is crucial to meeting the property-specific investment objectives.
Think about the Multifamily maintenance team. If they are “thinking like the owner” they are literally taking ownership over their property. They will notice the crack in the sidewalk or the flickering bulb in the hallway and take steps to fix it without having to be told.
This is all important.
So how do you train someone to think like an owner and why are there such varying cultures between properties?
Picture this, Sally learns how to make decisions based on the company objectives and does a great job. She gets a promotion and a team of her own to train based on her understanding of how the company operates and what they want.
Sally is so great she eventually gets recruited by a different company, but Sally is bringing with her a framework she’s developed over the last however many years based on her prior work experience. And that framework was fantastic…for that prior company.
But is it fantastic for her new position? Is her new company looking at the exact same investment objectives and facing the exact same challenges?
It is clear to see that Sally will now have to learn a new operating system within the new organization and, most likely, meld the two together to become indispensable.
If you take an Apple user and sit them down at a PC, what happens? Ask them to do something simple and they get stuck.
With only two operating systems we can still find ourselves lost if not using our familiar system.
This is why uber works and scales so well. One system for drivers.
Running a business, there are very few companies that have their own operating system. A thinking process that guides everything they do.
So what does this mean for Investors? It means that there can be a wide gap between investment objectives and decisions operators make.
Now that deals are packaged and structured with complex funds and syndications, you are seeing the founder based investors exit the market.
These founder-based Multifamily Investors had a brand and legacy of how they operate.
Deals are put together very differently today: Investors have the money eyes. Operators have the real estate eyes.
Successful Multifamily investing requires you to blend the money eyes with the real estate eyes.
Asset Managers and passive investors might have been sold a hands off approach to the benefits of investing multifamily.
This means that you don’t have property inspections taking place with that founder based investor walking the property and giving you a punch list on the leaning gutter.
You have some investors that see the property like a builder. They see cracks in the asphalt, and gutters while others might have zero eye for detail and notice the personality of the greetings from the leasing team.
Either way, these expectations can be unclear.
So what is it the Multifamily Investors really want?
First you have to ask them. What they are counting on from operators is a plan to achieve stated NOI projections.
So how do we do this?
For years, we have helped owners achieve NOI growth by understanding supply and demand fundamentals. This understanding allowed us to keep growing rents.
Solid rent growth is healthy for markets.
The problem with Multifamily deals today is they promise high returns of 18% IRR from a Multifamily asset that produces 4% cash flow with the promise of a refinance or exit.
That is the only way to their return, a refinance or exit.
And as a Multifamily syndicator, that is the only way to make the big dollars.
I don’t see people talking about the renter customer and their ability or desire to pay.
Who builds a sustainable business not knowing their customer?
There are investors coming over from public markets in a flight to safety in housing.
Some Multifamily syndicators just tie up a deal, invest capital to improve the deal, raise rents, then refinance or exit.
I get it. People have results with this.
Here is what people are not thinking about.
This process, completed over and over every 18 months with a broker fee, loan fee, fund fees, acquisition fees, disposition fees, and all the rest, only makes the next investor’s job even harder.
But, they hope the renter will just pay the higher rent. Until they just can’t.
Here’s the problem.
If this continues and we continue to expect investment programs to achieve their goal only when you increase rents on the customer. Then at some point the looming affordability problem places investment capital in Multifamily at risk.
Regulation will enter and the money will go to other places like technology that is making life better for people.
Most Multifamily Investors have a wealth creation plan.
Jeff Bezos (one of the wealthiest people on the planet by the way) plans his future knowing the customer of the future will desire lower costs for things and a seamless experience to get it.
In Multifamily, the syndicator’s plan is to get the customer to pay more.
Think about that. Is it sustainable?
The auto industry found ways to structure deals so people can enjoy better and safer cars and the product has at least evolved.
What is Multifamily doing to protect their investments and customers?
Start looking at technology to operate better. Think in first-principle.
We have to change the perception with the media and local communities to get projects approved. And when these projects are approved we have to look at building housing affordably first.
So what do you do as an operator, sponsor, innovator and you want to serve this industry at the highest level?
We need to always focus on the customer. We need to take on the burden of value engineering communities. Negotiate with suppliers on the best ways to get the costs of running an apartment community down.
If you are an operator and you can get your investors to their return without depending on double digit rent increases – then you are a true operator and business leader.
It’s your obligation and duty to know how to run a profitable business.
Your friends and trade associations and even the media can’t help you. They are too connected to what has been. They will circle the same information that validates their education and past decisions like supply and demand fundamentals.
This is why you will see increased regulation. They are fighting the problem the wrong way without any consideration of the brand.
The pandemic is a brand. The big bad wealthy landlord is a brand. It’s a brand that will hurt investments if not handled properly.
I can tell you the world that has been shaken by this pandemic and it’s not going back to what it was.
Supply and demand will not be the data that helps you guide solid investment decisions. You need to understand the shifting world we are living in.
Work has changed for people. The lie of the American dream of home ownership is slipping and placing strong demand on renting.
The build to rent is going to shake up supply and customer expectations.
Investors are only going to talk IRR and Cash on Cash returns. It’s up to you as an operator to educate the future investors of the world they are investing in. It goes beyond the math and the transaction.
You need to see that the car steering wheel is going away. We may not understand it, but that doesn’t mean it won’t happen.
Elon Musk believes that in the future people will not be allowed to drive 2 ton ramming machines.
We need to look forward.
It’s also an opportunity to protect the wealth of investors.
Get involved in your community and see what is happening.
Share these observations and insights and you start to look different from all the other syndicators talking about the same deal points.
Smart apartment investors look forward. The investors you are working for now may not know that they don’t know. So just because they are not asking, they are counting on you.
Multifamily Clients helps take your knowledge and broadcasts it to the world to build a new level of trust with your ideal audience. And ultimately, we use our platform to help clients make an impact and remain relevant in this ever-changing industry. This is more than a PR statement, we are an accelerator to trust and expertise. We support our clients who are already winning, win even more with our media-driven growth strategies.