How to Increase the Net Operating Income (NOI) of a Multifamily Property

NOI – the unicorn we’re all chasing.

As you may know, increasing the Net Operating Income (NOI) of any commercial property will not only increase your cash flow but also increase the value of your property since the value is determined primarily through NOI and Capitalization Rates (quick refresher on how to calculate the value of the commercial property).

We obviously have no direct control over cap rates, so we’re left chasing NOI.

There are literally countless different ways to increase the income on your multifamily property, and it would be impossible to list everything. But I’ve put together a list of 29 ways to increase Net Operating Income (NOI), from the super simple to the creative.

There are three basic categories where you can squeeze some extra income: maximizing current revenue streams, decreasing costs, and finding new sources of revenue.

Increase NOI by getting the most out of your current income streams

1. Bring your rent up to market rates. There are many ways to determine if you are at the market rates (comparing to other properties, getting input from professionals, market surveys, etc.), but the best way is to look at your vacancy. If your property consistently runs well below the market vacancy rates, your rents are probably too low.
2. Adjust your fees. It’s important to check your fee schedule against your actual costs consistently and against your competition. You don’t want to eat costs that the resident should be paying, but you should also look at the competition to see how their fees compare.
3. Consider remodels that let you charge a premium. A solid interior renovation package usually charges you a premium for non-renovated units. Also, it would be best if you considered adding amenities to the unit, such as a dishwasher or washer/dryer hookups. Occupants are much more likely to choose an apartment with these upgrades, which increases demand for your units which translates into higher rents.
4. Laundry. Are you giving free washers and dryers in your apartments? It’s time to consider putting a coin-op facility in your building, charging a fee for the laundry machines, or increasing rent. People are willing to pay for the ability to do laundry in their apartments, so you should charge for it.

Reducing Costs Can Dramatically Impact Your Net Operating Income

1. Reduce (or eliminate) rent concessions. Many owners have higher rents but then offer a bunch of concessions to get people to sign. This is problematic for two reasons:
   •  People decide to tour the property based on the advertised rent. So, high rents with many concessions mean fewer people will show up to tour the property (meaning higher vacancy).
   • Most of the time, you don’t need a rent concession to close the deal. It means you’re just giving away money. Instead, use a discount during negotiation to close the deal only once you’ve determined they are a perfect applicant and you’re positive they will walk away.
2. Control bad debt. Evictions, sudden move-outs, and damage can all lead to uncollected debt. Chances are, you’ll never collect from the people who cause these issues, so it’s just best to avoid them in the first place. You can avoid these issues by implementing a stronger tenant screening process which will weed out more of the bad guys.
3. Reduce water usage. Water is one of the biggest expense categories for most properties. Reducing this will dramatically affect your NOI.
   • Install low-flow toilets, showerheads, and aerators. This can reduce the residents' water consumption by 30% or more.
   • Install sensors for your irrigation system. Have you ever seen someone watering their lawn during a rainstorm? Well, let’s avoid this.
   • Convert some landscaping to xeriscape. Landscaping with water conservation in mind can reduce water consumption dramatically.
4. Requote your insurance. According to Kimberley Stallings, a multifamily insurance expert and owner of Heritage Risk Advisors, you should get your insurance requoted every few years. Carriers are always changing their appetites and filling their capacities; simply auto-renewing your policy may cause you to miss out on premium savings and coverage enhancements.
5. Challenge your property taxes. Many municipalities over-assess properties hoping the owners won’t challenge their assessment…and many people never challenge. Instead, it would be best if you made it a habit to contest every assessment yearly (unless they reduce your assessment).
6. Save on electricity. Install energy-efficient fixtures and bulbs; LED lighting can easily use 80% less energy than standard lighting. Light sensors and motion sensors can also reduce your energy consumption.
7. Consider adding recycling. This usually costs nothing (or next to nothing) to implement, but it can significantly reduce the amount of waste your residents generate. Less waste means smaller dumpsters or fewer pickups, which translate into savings for you.
8. Get new bids on services. You’ll often get comfortable working with one contractor or company providing a service for you. Although loyalty is important in any business, the cost of those services is even more important. Consider rebidding every service you receive, including HVAC, plumbing, electrical, trash, locksmith, etc. You can use your bids to negotiate down your preferred vendor or switch and try a new one.
9. Reduce tenant turnovers. Offer an incentive to the resident when they show their intent to move out. Calculate the cost of a turnover to you and make sure the incentive costs less than the turnover cost. Also, according to Denise Supplee, the Director of Operations at Spark Rental, you can offer longer leases at a lower rate. Even though you may earn a little less, it can be offset by having less turnover.
10. Reduce turnover time. Systematize your turnover process to reduce the time between tenants significantly. Having an inspection and repair process could reduce turnover time significantly. Don’t forget to let tenants move in early and pro-rate the rent to reduce your vacancy further.
11. Reduce turnover costs. According to Josh Rosenthal at Movin. Space, a site that offers free move-in inspection documents for tenants, unclaimed damages at move-out are a major source of lost revenue. By having a well-documented walk-through process at move-in and move-out, you can avoid conflicts and disagreements on what damage the tenant caused.

Find new sources of revenue to maximize the value of your multifamily property.

1. Utility reimbursement or RUBS. This is the biggest and easiest item to generate new revenue. If you operate as an all-bills-paid property, it’s time to join the trend and start charging back utilities. Not only will it generate more revenue, but it will cause the residents to conserve more which is good for you and the environment.
2. Leasing washers/dryers. A lot of people don’t want to use a laundromat but can’t afford to buy a washer and dryer. Offer to rent them to the resident.
3. On-site storage. A lot of people have a lot of things and nowhere to store them. Consider adding some storage units to the site if space permits. Residents will love the convenience, and so will your bottom line.
4. Reserved parking. Heath Silverman, CEO of Stessa, suggests finding value in buildings with unmarked parking areas. You can “immediately divide the lot as efficiently as possible, draw lines, number spaces, institute parking rules, and start charging for spots when it makes sense.” If there is ample space for parking, consider allowing some to pay for reserved parking right in front of their door to increase your NOI.
5. Covered parking. Similar to reserved parking, you’ll provide overhead cover for their vehicles, protecting it from rain, hail, and the sun.
6. Cell tower leases. If you’re in the right place, you may be able to lease a rooftop or part of your land to provide a cell tower. A telecommunications lease is not as crazy as it sounds to increase NOI.
7. Add a billboard. If you’re on a heavily trafficked road, you may want to consider adding a billboard. If you don’t want to install the infrastructure yourself, companies out there will lease the land from you and take care of the rest.
8. Vending machines. A vending machine business may be willing to pay you to install food or drink vending machines on your property.
9. Valet trash. You could offer to collect trash from the resident’s doorstep for a monthly fee.
10. Short-term or furnished rentals. Mark Kenney, a multifamily syndicator and founder of Think Multifamily, suggests renting your model unit or other furnished units daily to the resident’s friends and family. He’s recently implemented a trial program at one of his properties. He said, “These short-term rentals are very low risk since it’s limited to the friends/family of current residents, but it can significantly impact your bottom line.” You could expand upon this idea in several ways, so get creative.
11. Pet rent. It’s pretty standard in most places to charge for pets. If you’re not doing it, check your competition and consider implementing it.

Get creative and find new ways to increase your NOI

As you can see, there are dozens of easy ways to increase your NOI. It may not be realistic for you to implement every single line item in this list, but there is no reason why you shouldn’t pick a few and put them into place immediately.

The best thing you should do is estimate all the different revenue streams and different ways to decrease expenses and punch them into your deal calculator.

Then you’ll get a good handle on how the changes affect your overall NOI.

 

Source: How to Increase the Net Operating Income (NOI) of a Multifamily Property

https://www.creconsult.net/market-trends/how-to-increase-the-net-operating-income-noi-of-a-multifamily-property/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

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Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Chicago apartment rents cooling off? Compared to previous years, according to a new report by Apartment List

Multifamily rents cooling off at last? Compared to previous years, according to a new report by Apartment List.

While prices remain up 5.5% year-over-year, they fall behind the Illinois average of 6.6% and outpace the U.S. average of 4%.

This 5.5% growth increase seems high, but it’s significantly slower compared to what the city experienced at the same point about a year ago: 15.5% from January to December 2021.

Not to mention, Chicago rents decreased 1.1% in the past month, compared to the national rate of -0.8%. This ranks No. 69 among the 100 largest metros in the U.S., based on the report. Surprisingly, Paradise, Nevada ranked No. 1 for month-to-month rent growth (2.3%) and New York City ranked No. 100. (-3.0%).

Apartment List also found Chicago to be No. 56 in terms of the most expensive large city in the U.S. The median rent is currently $1,277 for a one-bedroom apartment and $1,386 for a two-bedroom, citywide. Across all bedroom sizes, the median is $1,375. The median rent across the nation as a whole is $1,153 for a one-bedroom, $1,321 for a two-bedroom and $1,344 overall. This means the median rent in Chicago is 2,3% higher than the national and similar to the prices you’d find in Durham and Fayetteville, North Carolina.

Zooming out a little further to include the wider metro, Apartment List found the median rent to be $1,360, meaning the median price in Chicago is 1.1% greater than the price metro wide. But Chicago isn’t the most expensive city in the area: Naperville is currently the most expensive, with a median rent just short of $2,000. Conversely, Waukegan is the most metro’s most affordable city, boasting a median rent of $1,262.

Source: Chicago apartment rents cooling off? Compared to previous years, according to a new report by Apartment List

https://www.creconsult.net/market-trends/chicago-apartment-rents-cooling-off-compared-to-previous-years-according-to-a-new-report-by-apartment-list/

How to Implement a RUBS Program at Multifamily Properties

Introduction

Record inflation means that nearly all consumer products cost more today than they did a year or two ago. Utility costs are no different. For example, electricity prices nationwide have jumped 7.5% since last year – and they’re expected to continue climbing.

Utility costs represent a major expense for landlords. This is especially true at multifamily apartment buildings where base rent often includes utility costs. When landlords must incur these costs, the cash flow impacts can be substantial.

In this article, we will look at what’s known as RUBS -or a ratio utility billing system. Implementing a RUBS program is a common way owners pass utility costs on to their renters.

What is a Ratio Utility Billing System (RUBS)?

Many properties are originally built with only one set of utility meters. The one set of meters measures electricity, gas, and water usage for the entire building.

A RUBS program is a way of allocating utility costs to tenants without submetering each unit.

In a single-metered apartment building, the landlord covers all utility costs and charges a premium rent to recover those costs. Instead, an owner can submeter the property so that each unit has its utility meters.

However, submetering can be costly and, in many cases, inefficient. Instead, owners may consider implementing a Ratio Utility Billing System – or RUBS.

A RUBS program is a way of allocating utility costs to tenants without submetering each unit. Instead, each tenant pays a certain portion of each month’s utility bills using some pre-set formula.

How to Calculate RUBS Payments

RUBS considers several factors, such as unit square footage, number of bathrooms, presence of washers/dryers, and unit occupancy. (The more sophisticated RUBS programs even submeter irrigation to pass those water and sewer costs on to tenants!

It’s important to understand that no one RUBS formula is used to account for total utility usage. Instead, each utility generally has its formula.

The gas bill may vary depending on whether the unit has a gas fireplace, gas stove, gas heat, or gas dryer.

Electricity bills include the number and type of light fixtures, electric stoves, electric heating, and electric washers and dryers.

Here is a simple example. In a 20-unit apartment building, Unit 101 might be assigned a RUBS ratio of 4% if the total water bill for the property is $1800 that month. The tenant would be responsible for $72 toward that cost ($1800 x 0.04).

Unit 202 might be larger and, therefore, may have a RUBS ratio of 5.75%. In that case, the tenants would be responsible for $103.50 toward that cost ($1800 x 0.0575).

Similar calculations would then be made for each of the monthly utility costs.

Top Reasons to Implement RUBS System at Multifamily Properties

1. Increase Revenue

Any operational cost that is passed through to tenants is essentially saving owners money. At a 300-unit apartment building, for example, the annual water and sewer savings can top upwards of $70,000.

A RUBS program is a very effective way for owners to preserve their cash flow and increase their net operating income.

Let’s say utilities represent 20% of an owner’s operational costs. Depending on the size of the property, that 20% can translate into thousands of dollars in savings.

A RUBS program is a very effective way
for owners to preserve their cash flow and
increase their net operating income.

Of course, landlords who implement a RUBS scheme may have to adjust their rents accordingly. Owners should factor this in and be sure there is a sufficient delta to justify using RUBS.

2. Avoid Costly Submetering

Ideally, the properties would be sub-metered at the time of construction. Unfortunately, this often isn’t the case. Owners who want to pass through utility costs to tenants can either submeter each unit or utilize a RUBS program.

Submetering is complicated and can be capital-intensive. Each submeter can cost upwards of $750 to install. In older buildings, especially those with several pipes feeding a single unit, retrofitting to the submeter may be extremely expensive.

Submetering can also disrupt tenants simply because their utilities must be turned off during installation. Tenant satisfaction is always an important consideration.

3. More Stable Cash Flow

Fluctuating utility prices can disrupt an owner’s original cash flow projections. For example, a 10% increase in electricity costs will quickly eat away at revenue if the owner incurs those costs.

Of course, multifamily owners can increase rent to accommodate higher utility costs. However, most tenants are on year-long leases, meaning landlords must wait until the lease expires to increase rents.

A tenant may opt not to renew their lease if rent increases are significant. Unit turnover can also cut into the cash flow of an owner.

A RUBS program ensures more stable cash flow from month to month and year to year.

4. Easier to Market Units for Rent

Some people will only look for apartments listed within a certain price range. Multifamily owners utilizing RUBS can charge lower base rent, attracting a larger audience. They can then turn around and boost revenue on the back end by passing utility costs on to their tenants.

5. Forced Appreciation

Because commercial values are largely based on net income. It is the properties with higher NOI that are considered more valuable. RUBS can increase multifamily NOI and in doing so, creates forced appreciation based on a simple cap-rate calculation.

Why RUBS is a Good Hedge Against Inflation

Economists often debate whether rising energy prices contribute to inflation or vice versa, whether rising inflation causes energy prices to surge. In any event, both are currently on the rise.

One way to offset higher utility costs is by implementing a RUBS strategy. With this strategy, utility costs become a variable expense, meaning that when costs go up, someone else pays the difference.

A RUBS system allows multifamily owners to pass these higher costs on to tenants, thereby saving money. Owners who have low fixed costs tend to profit as inflation rises. Owners can increase rent to account for inflation without incurring the expense of rising utilities.

How to Implement a RUBS Program at a Multifamily Building

Owners should start by assessing their property. Determining whether the current setup, a RUBS program, or submetering units would be the most cost-effective. Assuming RUBS is the solution, owners should begin reaching out to their utility providers to make this change.

Implementing a RUBS program is also a great time to have the utility company do an energy assessment of the building. This helps the owner uncover ways to improve the property’s energy efficiency. Subsequent improvements (e.g., installing low-flow toilets or ductless heating) will lower utility costs for the tenants.

It is important to give tenants notice that this change is coming. The best practice is to give tenants six months’ notice if possible. The notice should explain the new policy, its rationale, and how utility costs will be calculated and allocated. Clear communication is essential.

Implementing a RUBS program is also a great time to have the utility company do an energy assessment of the building.

Any new lease should include information on how RUBS will be used to charge tenants. It should also explain how tenants can pay their utility bills each month. This helps to prevent surprises or disputes down the road.

On the operational side. All building, unit, and resident information must be uploaded into the property’s billing system.

They should verify that all the information provided to tenants is accurate between notice to tenants and actually “switching on” RUBS. Property managers are typically the best source of this information.

Once the transition has occurred, owners should utilize their property management software to send tenants copies of their utility bills accordingly.

Additional Considerations for Using RUBS at Multifamily Apartments

• Not all states look upon RUBS favorably.Before implementing a RUBS program, ensure that it is authorized at the local and government level. For instance, it is prohibited in Delaware and Miami. However, California considers RUBS payments a form of rent. Therefore, in rent-controlled communities, charging for RUBS can put owners above the allowable rent increase. In such situations, multifamily owners may be better off submetering the property instead of utilizing a RUBS system.

• RUBS may not be generally accepted in the marketplaceSome nuances to multifamily investments can vary from one market to another. In some regions, for example, the Northeast. Heat, water, and sewer charges are almost always included in the rent at 5+ unit apartment buildings. Owners should carefully consider whether to proceed with a RUBS strategy in markets like these. At a minimum, check to see what local competition is doing before moving forward.

• You may incur some pushback from existing tenants.The transition to a RUBS program is sometimes difficult. Existing tenants often push back on these costs if their base rent remains unchanged. Tenants may see their utilities as something they’ve been receiving for “free” which would now equate to a major cost. Some may request a rent reduction at the outset. Others may opt to leave the property entirely. As a result, a RUBS program is most easily implemented during a change in ownership. Or after an owner has already achieved more comprehensive value-add property improvements.

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• If tenants refuse to pay their RUBS bill, you may have little recourseTypically, if a tenant does not pay their utility bills, their utilities can be turned off. This only works when a tenant has their own separately metered utilities.

  The owner cannot simply turn off service at a RUBS property since service powers the entire building. If tenants don’t pay their RUBS bills, owners may have no recourse other than eviction (another costly prospect).

• RUBS doesn’t result in any significant energy savingsContrary to popular belief, the RUBS system does not generate substantial energy savings. Tenants are charged their pro-rata share of the utilities regardless of how they consume. As a result, RUBS does not encourage water or energy conservation the way that submetering does. There may be some impact at the margins, but owners should not expect a big drop-off in total consumption.

Conclusion

RUBS utility billing can help multifamily property owners add value to their buildings. Mainly by passing on a portion of their operational costs to tenants.

This increases the owner’s NOI and enhances the property’s value. It’s a cost-effective solution that all owners should explore.

 

Source: How to Implement a RUBS System at Multifamily Properties

https://www.creconsult.net/market-trends/how-to-implement-a-rubs-program-at-multifamily-properties/

1120 E Ogden

Retail / Office Space For Lease | 3,674 SF | $20/SF NNN
1120 E Ogden Ave, Suite 101 | Naperville, IL 60563
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/?wpo_all_pages_cache_purged=1

9301 Golf

Golf Sumac Medical Offices For Lease | 998 - 2,853 SF | $28/SF MG
9301 West Golf Rd | Des Plaines, IL 60016
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441
https://www.creconsult.net/golf-sumac-professional-building-medical-office-space-for-lease-9301-golf-rd-des-plaines-il-60016/

Earn MiCP Designation (Masters in Commercial Property) with eXp Realty

Are you a Realtor interested in joining eXp Realty, but would like to do both Residential and Commercial transactions? Now you can!

Earn a MiCP® Designation (Masters in Commercial Property) with eXp Realty to gain the knowledge and certification to promote your knowledge to your clients.

This is an Exclusive Offer: Only available to eXp Realty Worldwide and Commercial U.S. Agents.

Commercial real estate is a far different animal from residential real estate. But a rare opportunity – at huge savings – is now available to learn about commercial real estate and even receive certification.

The eXp Commercial Learning Center covers the basics of commercial real estate. This course includes online, on-demand training so you can go at your own pace and on your own time.

The cost is $249, a fraction of this curriculum’s value of $6,500

Instructor: Clifford Bogart, eXp Commercial Designated Managing Broker. Mr. Bogart is a Certified Commercial Investment Member (CCIM) and an instructor at CCIM. He is also a Counselors of Real Estate (CRE) member. These two prestigious designations define Clifford as an expert at a rigorous level of commercial real estate.

Anyone who completes the training can be tested and, upon successful completion, be awarded the MiCP® Designation (Master in Commercial Property). The cost to be certified is an additional $95. So for a total cost of $344, you will get CRE training AND certification for a few hundred dollars compared to thousands that it would normally cost.

eXp Commercial’s own senior instructors will teach the fundamentals of starting and building a successful career in commercial real estate. Topics include:

• Overview of Commercial Real Estate
• Property Types, Characteristics, and Transaction Opportunities
• Leasing Process: Tenant Representation Process & Documents
• Sales Process: Step-by-step Process and Documents
• Evaluating Investment Property: Underwriting and Risk Analysis

Bonus Course: Systems for Success (SFS) 10.0

As a bonus, the Systems for Success (SFS) 10.0 course will also be offered by a leading commercial real estate expert whose name we’re not allowed to reveal here. But, this person is a highly regarded and sought-after commercial real estate expert who will deliver information on business development, finance, team best practices, technology, professional development, and commercial real estate fundamentals. With more than 100 educational videos, interactive workbooks, and corresponding slideshows, this course covers topics including:

• Laying the Prospecting Foundation
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• Winning Assignments Through Whiteboarding
• Presentations that Win
• Negotiating to Win
• And much, much more!

Commercial real estate contains a wide spectrum of types of CRE, including office space (standalone and high-rise opportunities), retail space, land, multi-family, and more. This is a phenomenal opportunity at huge savings for anyone who wants to break into commercial real estate.

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https://www.creconsult.net/market-trends/earn-micp-designation-masters-in-commercial-property-with-exp-realty/