Multifamily owners walk a tight rope when it comes to managing an adequate rate of return on their respective apartment investments.  To conquer the balancing act between maintaining positive cash flow and mitigating operating expenses is one that requires foresight, financial prowess, and tactful execution to successfully navigate across the proverbial tight rope of profitability. One primary component that requires the utmost consideration is implementation of appropriate apartment rental rates.

According to the “Out of Reach 2012” study conducted by the National Low Income Housing Coalition, New Jersey ranks as a Top 5 least affordable state in the country for 2-Bed apartment rentals based on housing wage.  To put things in perspective, the national average housing wage is approximately $16.32; The Garden State mean is $25.04 (approx. +34% over the national average).

The report depicts the correlation between “Affordable Housing” versus “Free Market” rental rates per unit type as they pertain to average hourly minimum wages.  Broken down by metropolitans and counties nationwide, the study tallies the amount of household earnings necessary to afford different size apartment rental unit types against fair market rental rates per jurisdiction.  For further information, statistics, and access to the full study, visit www.nlihc.org

Perpetual decrease in vacancy rates (current average per NJ metro region @ 3.8% /Northern, 3.0%/Central, & 5.5%/ Southern according to REIS reports) indicates demand for apartment rentals has strengthened. High demand, low vacancy, and shrinking inventory can only lead to increased rental rates.  Albeit very encouraging to Owners, this is where “foresight” comes into play.  When you peel the onion back, true motivation behind the increase reveals a portion of the renter pool is comprised of former homeowners victimized by the housing bubble that endured foreclosure.  Due to financial hardship, household income has been reduced, thus impacting the traditional rule of thumb of no more than thirty percent (30%) of household income should be spent on housing.  At this point, the Owner’s financial prowess must kick in to determine their respective “rental sweet spot”; one that keeps rents affordable enough to maintain high tenant retention, attracts quality rental prospects, stays competitive w/ local comparable apartment buildings, and most importantly sufficient enough to control operating expenses and create positive cash flow.

When was the last time you conduced an in-depth analysis of your rent roll? How do your rates measure up to the competition? At what frequency do you exercise your right to rental increases (free market or subsidized)? Are current conditions of your apartment units harmonious with your rental rates?  Addressing these questions and more with action (i.e…conducting due diligence on current local rental rates, previewing available rental inventory to compare condition/amenities, and appropriate upgrades – especially to kitchens/baths) represents a savvy multifamily owner’s engagement of tactful execution.

This content serves as basis food for thought that hopefully spawns initiative and or awareness amongst multifamily owners to aspects that ultimately affect your bottom line and the livelihood of others.