How To Increase The Income On Your Multifamily Property
Fifteen Ways To Increase Revenue
The way to increase the value of a multifamily property is to either increase the income or decrease the expenses, which will affect the Net Operating Income (NOI). The NOI, gross operating income less operating expenses, is a key metric when analyzing the value of a multifamily property. For the purposes of this article, I would like to focus upon the top line of the investment, revenue, and how to grow the revenue of the asset.
At Jake & Gino, we focus on our three- legged framework: Buy Right Finance Right & Manage Right®. This article will be focusing on strategies to improve the manage right portion of the framework.
1. Add additional units
On one of our most recent purchases, a forty eight-unit complex, one of the buildings on the property was an over sized office. We decided to split up the office and rehab it into a two-bedroom unit, and a studio unit, while maintaining space for some storage for the residents and a storage area for the maintenance crew. We relocated the office to a property that we managed nearby. Total cost for the renovation came in at around $40,000.
We were able to lease out these two units for an additional $1,400 per month. That equated to an additional $16,800 in rental income for the year. At a seven cap, the value of the asset increased by $240,000 ($16,800/. 07). Not a bad ROI (Return on Investment), investing $40,000, and creating $240,000 in value!
We are in the process of building additional units throughout our entire portfolio from space that was deemed “useless” from previous owners. Maybe it’s time to assess your portfolio to see if you can add additional units. One of our favorite strategies is to convert units that are being utilized as storage units back into apartments. It’s a lot cheaper to go out and buy a shed to store your supplies.
2. Laundry Revenue
When you think of laundry, you don’t think of excitement. But you should!! Laundry is a vital service that can attract and retain quality tenants while adding revenue to the bottom line. We currently use the company Caldwell and Gregory for our laundry operations, and we split the revenue with them in exchange for them maintaining and servicing the machines.
An amenity that is in demand is washer/dryer hookups in each apartment unit. Washer/dryer hookups will allow the landlords to charge an additional $50 to $75 per month in rent, depending on the market and the competition. It may behoove you to perform a cost analysis on installing washer/dryer hookups in your units. Not only will you be generating additional income, you will be providing an amenity that is becoming increasingly popular.
When we purchased our first property, there were four garages that were filled with crap (that’s an understatement). We decided to empty out the garages, place locks on the doors and rent them out as storage units. We generated an additional $200 per month while providing an amenity to the renter. If the property has space and there is a demand for storage, companies such as Trachte offer prefabricated and portable storage units. They range in cost and size to fit any budget.
Join AAOA for Free!
All types of rental property owners welcome
4. Late Fees
Every operator should be charging late fees to tenants who pay after a specified date in the lease. The reason is two-fold. The tenant will not want to incur a fee and additional income will be generated. Once a tenant pays the fee once, he or she will most likely not repeat that mistake. We charge a ten percent late fee to all rent that is received after the fifth of the month.
If you are analyzing a deal, and notice an inordinate amount of late fees, this may be a sign that the resident base is having trouble paying the rent, and you may be assuming a difficult resident base. As always, trust but verify. Ask the owners why the late fee income is unusually large.
5. Utility bill back
Ration Utility Billing (RUBS) is a program that allows the operator to bill back the tenants for the usage of water, sewer, electric, gas, cable and garbage. To learn more about RUBS, visit Real Page. This one strategy has added millions of dollars in value to our portfolio alone.
Every landlord needs to process background checks and evaluate all potential tenants. You are giving control of your asset to a potential problem. Every tenant needs to be screened, and you should charge the market rate. In our market, we are currently charging $50 per applicant. You may be able to purchase these reports at a discount and earn revenue while protecting your asset. The company we use charges us $16 per report.
7. Move in fees
We have acquired properties that utilize security deposits, but we decided to jettison security deposits and replace them with non-refundable move in fees. Our feeling is that security deposits can create an uneasy feeling between the owner and tenant (when am I going to get my money back), and we wanted to avoid this uneasiness. Plus, we wanted to collect the fee and retain it. In our market, move in fees range anywhere from $300 to $500. In some markets, this also creates a low barrier to entry for tenants.
You may be asking “What happens if the tenant damages my property?” Our solution is to have the tenant purchase Sure Deposit, in addition to the move-in fee. Sure Deposit is a risk management tool that enhances traditional security deposits by offering surety bonds to residents. Most tenants do leave their apartments in decent shape, and we use part of the move in fee to turn the apartment for the next tenant.
The nice thing about utilizing move-in fees is that they hit the income statement as income on day one! We can use these fees to offset some of our turn costs with the unit.
8. Renter’s Insurance
Some property owners require tenants to carry renter’s insurance. If a tenant’s property gets damaged, the landlord’s policy does not cover any of the tenant’s contents. We do not require tenants to own renter’s insurance, but our software company Appfolio offers renter insurance for $9 per unit. As the operator, you can turn around and charge the tenant a very competitive $15 per month. Kill two birds with one stone! Protect your asset and make a few bucks.
9. Short-term rentals
We had a few requests by tenants at our properties that inquired about short-term leases, anywhere from three to six months in duration. At first, we decided against it. But, we noticed that these requests were becoming more frequent and we could charge a sizable premium in rent for a short-term lease, sometimes in excess of 10% of a yearly lease for a short-term lease.
The end result has been terrific for the company. We were able to fill a need for the tenant base, along with generating additional income. When the market is asking for something, it is the job of an entrepreneur to listen and to try and provide the solution.
10. Rent amenities
If your property has a clubhouse that is underutilized, consider renting it out to tenants for functions. Does your fitness center sit empty most of the day? Rent it out to yoga teachers and personal trainers. Tenants will love the service, instructors will earn money and you will maximize the amenities on the property. The use of these amenities will also begin to create a more pleasant atmosphere within your property.
Parking has becoming more of a luxury in many of the expanding cities throughout the U.S. If there is a demand for parking in your market, rent out spaces to individuals. On our four-plex that we owned in New York, we rented out spaces for $50 per month. I wish I had more parking!!
When we assumed control of one of our assets, the owners had just signed an exclusive cable contract with a provider for $50,000. Guess who got the money? The money transferred over to us at closing. Although the contract lasts seven years, the company paid the bonus up front. If you purchase a property with an existing contract, ask the seller to pro-rata the fee and credit it to you at closing. You are obligated to abide by the terms in the contract. Why shouldn’t you be entitled to the remaining value on that contract? If your property does not have any type of contract, try to negotiate with a cable provider in your market.
You may not see a surge in revenue from installing vending machines, but they do provide a service for the tenants. Locate vending machines in common areas, such as the pool, clubhouse, laundry rooms and the office.
14. Pet Fee
Knoxville, TN is known as one of the pet friendliest cities in the U.S. If we decided against renting to pet owners, we would be eliminating around 50% of our potential prospects. We even constructed a dog park on one of our properties to accommodate the pet owners. In our market, we collect a $125 non-refundable pet fee PER animal, along with a $25 per month charge. We turned a potential problem into a win-win for us and for the pet owners.
15. Built-in increase
When our leases renew, we assess the market and implement a rent increase that is in line with market rents. Our increases have averaged around two to three percent per year over the past few years, which equates to around $15 per month. Why is this so important? First, it ensures that our rents are always priced to the market. Secondly, it is a hedge against inflation, and will allow you to offset increases in operating expenses. Finally, $15 per month on over 1000 units equates to big money ($180 per unit per year * 1000 units = $180,000 per year).
Rents have climbed dramatically over the past several years, and many of the mom and pops have not kept up. We don’t want to become another mom and pop.
We have focused solely on increasing rents, and have yet to discuss expenses. I would like to address something that Jake calls refers to as the “expense creep”. What is it? Jake’s simplified definition is those teeny weeny expenses creeping up each year until you wake up and notice they aren’t that small taken collectively. How do you guard against expense creep?
Let your vendors and service providers know that you will be reviewing their services at the end of each year. You need to keep them honest and competitive. Who should you include in your review?
- Software providers
- Cell Phone/Internet Services
- Trash removal
- Pest control
- Property management
- Carpet and flooring
- Painters (Try every month)
- Home Depot/Lowes/HD Supply
For every dollar of expenses saved, that is one dollar that goes straight to NOI.
Source: Jake and Gino