The next continuation in my series regarding multifamily income property investing risks, is tenant quality risk. All the cap rates, gross rent multipliers (GRM), net operating income, etc. figures will not help an investor who does not know about risks and risk mitigation.
A multifamily income property’s tenant quality will determine how often you’ll get paid, how timely the payments will be, how often they will turn over, and how costly it will be to maintain your property. Ultimately, tenants who either do not pay their rent or violate their lease terms in other ways need to be taken to court and perhaps evicted. Both of these course of action are very costly. Your investment property with cap rate X is determined by net operating income (NOI) over cost. If your rents go down and | or your expenses increase, your NOI declines. If your NOI declines, then your cap rate goes out the window.
In terms of tenant quality, think about the following questions to help you find risk mitigation strategies:
- How do I find quality tenants?
- What do I need to do to determine that they will pay rent and adhere to lease guidelines?
While planning your tenant quality risk mitigation strategy, you need to make sure that you do not violate fair housing laws.