Multifamily Myths: Why Investors Think Vacancy & Unpaid Rent Will Never Be an Issue

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Many single family landlords have it easy. Their tenants tend to stay for a while. They are oftentimes more stable. Some of them even take good care of the home that they are renting. It can sometimes make landlording look pretty easy. I’ve experienced this myself—many of my SFR tenants have been in their homes for years.

As you move up to the world of multifamily, you might start out with similar perks but perhaps to a somewhat lesser degree. If you own a duplex or four-plex, it’s not uncommon to have long term tenants and a fairly manageable property, evidenced by the numerous successfully self-managed small multifamily properties.

Large apartment complex owners, on the other hand, live in a different world. The tenant dynamics are much more complex, and you can find yourself managing personalities of both tenants and employees in addition to property. That’s one of the reasons why self-managed apartment complexes frequently underperform.

There Will Always Be Apartment Demand: Myth or Reality?

One of the theoretical perks of owning apartments over other asset classes is that “people always need a place to live,” so thus it must be a safer investment. I’ve even heard it said that if the economy takes a turn for the worse, tenants might stop paying their other bills but they won’t stop paying the rent, and there is always demand to fill your units. But is this myth or reality?

Related: Multifamily Myths: Why Newbies Think Multifamily is Easy to Buy & Finance

During the foreclosure crises of 2007-2010, it wasn’t uncommon at all for homeowners to stop paying their mortgage, and instead many were diverting their income to pay down other debt. It was the first time in history that we have witnessed a large number of people prioritize consumer debt over housing. Many apartment renters stopped paying too, and this had a big effect on many apartment owners, myself included.

When the economy weakened, many tenants lost their jobs and stopped paying rent. Many simply waited to get evicted and then moved to the next complex that didn’t screen properly. When occupancy suffers, apartment owners can be tempted to relax their qualifying standards. They also tend to offer concessions such as a free month of rent to attract tenants. These practices are the perfect recipe to attract “concession hoppers”—folks who would rent a unit to get their free month, then skip out and move to another complex offering free rent, but not until racking up another month of unpaid rent and creating a big pain (and big losses) for the owner.

Feeling the Impact of the Market

A much under-appreciated fact is that a large apartment complex will feel the impact of the broader market. Job growth will drive occupancy, and contractions in the job market will ultimately be felt by apartment owners in reduced or negative rent growth and increasing vacancy, concession and credit losses.

It’s important that when you are underwriting a potential acquisition that you project conservatively, so that you don’t have to have a perfect economy every year to hit your numbers. Doing so gives you a margin of safety when the economy moves against you, which is likely to happen at some point during your hold period. It’s better to be prepared than surprised.

The Results of Development

Development is another impact to your bottom line. If there is a 10% increase in apartment supply as a result of a run of construction, you might feel the pinch. When analyzing a property, you also need to analyze the market and what is in the development pipeline. Everybody might need a place to live, but if there are more places to live than there are people to live in them, you’ll have a problem. If there is development in your market, pay attention to the absorption rate—how many units are being leased relative to how many are being built. If absorption rates are declining and construction is not, consider this the yellow light before the red. Time to hit the brakes.

Related: Multifamily Myths: 5 Reasons Investors Think Multifamily is Easy to Value

So it is true that everybody needs a place to live, but this does not always directly translate to consistent income at your apartment complex. When the going gets tough, people double up, move in with family, or move out of the area in favor of a better local economy or job market. If the economy suffers, you are likely to suffer. If occupancy in the broad market drops, your occupancy will drop, and you might be forced to drop rents or offer concessions (or both) to attract tenants.

The bottom line is that the fundamentals for multifamily are very good in a lot of markets. Done correctly, I think that multifamily is one of the best investment vehicles that exists today. But that doesn’t mean that it is a sure thing. Underwrite carefully and conservatively, pay attention to the broader economic climate and market statistics in the submarket and don’t fall into the trap of feeling invincible just because everybody needs a place to live. Happy investing!

What do you think about this myth? If you’re an apartment investor, what have you experienced in your market?

Be sure to leave a comment below.

About Author

Brian Burke

Brian Burke is President/CEO of Praxis Capital Inc, a vertically integrated real estate private equity investment firm. Praxis operates on multiple platforms, currently managing active syndications for the acquisition of multifamily, single family, and opportunistic residential assets in U.S. growth markets. Brian has acquired over $400 million in real estate over a 30-year real estate investment career, including over 2,500 multifamily units and more than 700 single-family homes, with the assistance of proprietary software that he wrote himself. Brian has subdivided land, built homes and constructed self-storage, but really prefers to reposition existing properties. As a recognized expert, Brian has been a frequent speaker at real estate forums and conferences and served as co-host and real estate expert on the Fox News Radio show The Best of Investing.


  1. Anthony Gayden

    That comment that you made about self managed apartment complexes under performing is interesting. I had always assumed that it would be the opposite. One of the things espoused on the forums is that no one will take as good care of your property as you.

    At about what size do you think that self managing may actually start to be detrimental to performance?

    • Brian Burke

      I think it is a common misperception that owners can run the property better than a management company. This might be true for smaller properties where the owner is experienced and has the time and inclination to closely monitor the property. But it’s far from true when an inexperienced owner buys a large apartment complex and tries to self-manage. It’s even worse when they do it from out of state or from far away.

      It’s also true that some property management companies aren’t very good and even an inexperienced owner could do a good job. But selecting best-in-class property management companies with experience in the size and class of property that you own will typically do a better job at managing it than most owners would.

      Is there a size threshold? Yes, but not a fixed amount. It depends on a lot of factors such as the investor’s experience, aptitude, distance to the property, property class, neighborhood, etc.

  2. Roy N.


    An informative blog, as always, which is timely to our own on-going hunt for a 30 – 50 unit apartment (we have only a couple of 100+ unit complexes here which are not likely to be available in the foreseeable future).

    We’ve established that our underwriting is conservative – at least sufficiently so that we are now 0 for 7 this year.

    University classes commence this week are there are more “For Rent” signs out in front of empty houses and small small multis in Universityville than usual. It’s more difficult to tell the vacancy in the larger buildings from the pavement on my morning run, but I will assume the older buildings are experiencing an increased vacancy corresponding to the rest of the neighbourhood. The main cause is the number of new units that have come on-line in the past 3-4 years (and are still coming) which how has us in an oversupply situation.

    On the macro level, Canada has “technically” entered a new recession (2 quarters of contraction) and while the impact has been less here than in the tar sands of Alberta, many companies and governments have put the brakes on capital projects. Fortunately, our local market is predominately university and government, which dampens the highs-and-lows experienced in other locations with cyclical industry.

    I’m hopeful the local market oversupply situation combined with the ‘R’-word will create buying opportunities – no impact on ask prices yet, but perhaps as early as this winter. While we may eventually get a building at a operable price, stepping into an nonperforming business in the midst of increased vacancy and n economic downturn is not without its own perils. I’ve made some adjustments to our modelling, but underwriting in a downhill market (provided it emerges) will be a new thing for us.

    Any specific tips for leveraging a gloomy economic outlook w/o being the one left holding the potato?

    • Brian Burke

      Yes, stay disciplined, don’t stretch just to get the deal. Continue to underwrite conservatively and leave a margin of safety in your vacancy factor. Keep an eye on the trends in the market for vacancy, absorption and rent growth and make sure that your underwriting is in line with what you are seeing. For example, if you are seeing vacancy tick up, be sure to increase your underwritten vacancy factors even further. If you think interest rates will rise, increase your exit cap rate. If you see declining population and job losses, wait for that to turn around and for it to work into the pricing or go to another market. If you want to buy good deals, sometimes the best deal you can do is to do no deal at all and wait for the market to come to you. Just be sure that you aren’t being overly pessimistic and mistake a good market for a bad one. It’s all in the research.

        • Brian Burke

          Agreed, it can be somewhat elusive. I use expensive data services, and they are quite helpful in the space I operate in–100-400 unit apartment complexes. They are far less helpful in the small Multifamily and single-family space. In that arena, I’d prefer to use “on the street” info — call property manager’s that manage the type of property you are studying, in the market that you are studying, and ask them what they see in their portfolio.

  3. Ben Leybovich


    As you and I have discussed before, in the Mid-West we see both, at best an anemic economic circumstance, and exuberant development…the place is contracting population-wise, and yet more and more units coming on line. Furthermore, if you look at the premium at which existing stock sells, you’ll notice very, very little discount against places like Houston…

    It’s difficult to see how an economic case could be made for any place in Mid-West relative to TX, but the sale Cap Rates would indicate that investors are very happy with very little discount. Brian – This environment is very interesting…

    • Brian Burke

      Yes, it certainly is interesting. I haven’t studied the Midwest relative to population migration patterns and job growth so I’m not an expert on that particular market, but I do agree that intuitively I wouldn’t think it compares to TX. Seems to me, however, in the deals I have looked at and the brokers I have talked to that the cap rate expectations in that market are about 1% higher than what I’m seeing in TX. And rightfully so, I’d imagine. Nevertheless, that doesn’t seem to be offsetting the negatives that you describe, if in fact those negatives are real and not imagined (which I can’t say for sure).

  4. Carl Ghiselli

    We’ve noticed that some long term tenants still know the rules, and even after 2, 3, 4 years of being a great tenant, when it’s time for them to move, they work hardest to avoid paying rent and stay until we have to go through the eviction process – essentially costing us an arm and a leg – destroying any value that we had built up. This is especially true with 1-2 unit properties.

    Any thoughts on how to avoid this problem, and figure out how to get people to move out on time, and without us having to go through the eviction process?

    • Brian Burke

      Carl, I wish there were a magic formula to solve this problem. Many would say better screening, larger deposits, etc etc. But in my experience even if you do those things you will still see even the best tenants try to stiff you at the end of the tenancy. I think the only self defense is suing them in small claims or eviction court and obtaining a judgment which will follow them around for ten years, or until they pay you, whichever is sooner. A few months ago I had someone walk in my office with over $1,500 in money orders to pay off a judgment from a long time ago that I long since forgot about…but they wanted to buy a house or a car or something and they couldn’t do whatever it was until the judgment was satisfied. I probably have dozens of judgments like that out there and this is the first time someone actually paid one.

      Unfortunately this solution doesn’t prevent it from happening, and in the long run it’s costly, and ultimately this type of stuff is a cost of doing business. That’s one of the reasons I wrote this article, there are a lot of costs of doing business that people tend to forget about or simply ignore in the underwriting stage. These costs are real and need to be factored in!

  5. Peter Mckernan


    This is a great article that brings to light a lot of issues that could arise with apartment investing. Nothing is a for sure thing; however, with local and global market knowledge along with calculated risk they can be a great investing vehicle. I believe that the biggest risk is the cost of new construction/permits for units. If these costs become close to the price of current units sold, that is a big problem. This can severely hinder the potential growth of your apartment investment due to the fact the new construction will be planning for nicer facilities and amenities than any current apartment complex within that market.

    Thank you for sharing Brian!

    • Brian Burke

      Very true, Peter. Supply is always an important concern. Watching construction/absorption ratios can say a lot about a market, at least on the short-term horizon. Construction is especially concerning for Class A buildings because that’s direct competition. It’s less of a direct competitor to class B & C units that tend to sell at a significant discount to replacement cost. But that doesn’t mean that the effects of overbuilding won’t eventually reach the B & C units…

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