10 Ways to Improve NOI at Multifamily Apartment Buildings

Introduction

Savvy real estate investors are always looking for ways to increase the returns associated with multifamily investors. This is true whether someone has owned the property for decades. Or whether they are looking to acquire an asset and need to justify the purchase price. There are many value-add strategies investors can consider. However, those looking simply to boost net operating income can begin by making modest improvements and operational adjustments that instantly add value to the property.

This article looks at ten ways to improve NOI at multifamily apartment buildings.

What is NOI in Commercial Real Estate?

Net operating income, generally referred to as NOI among real estate investors, is the total income a property owner collects after operating expenses and other costs have been deducted.

Note, however, that debt service is not included as part of the NOI calculation. Neither are capital expenditures, depreciation, and amortization. NOI is focused exclusively on gross operating income less operating expenses.

Why NOI is Important for Multifamily Investors

NOI is especially important to multifamily investors as they compare potential investment opportunities. One of the primary ways investors evaluate properties is by looking at their going-in cap rates. The higher the cap rate, the more profitable property is said to be. One of the key inputs to the cap rate calculation is NOI. Typically, the higher the NOI, the higher the property value on a cap rate basis.

There are several implications for this. For example, an investor looking at a property with a low cap rate may want to consider whether certain improvements could be made to increase the property’s NOI, either in the short term or long term. This creates a delta between a going-in cap rate and an exit cap rate. However, investors will want to determine how much those improvements will cost. As well as if those costs are justified based on the resulting cap rate (i.e., property value).

Net operating income (NOI) among real estate investors refers to
the total income a property owner collects after
operating expenses, and other costs have been deducted.

Moreover, an existing owner can utilize various strategies to improve the NOI at their multifamily buildings. Doing so should generate additional cash flow that can be distributed to investors during the hold period. It will also increase the property’s value, benefiting all parties upon refinancing or selling the asset.

10 Ways to Improve NOI at Multifamily Properties

1. Increase Base Rents

The obvious way to increase the NOI at a multifamily property is by increasing the rent charged for each individual unit. This strategy is typically deployed upon lease renewal or unit turnover.

Landlords will want to be sure that the rent increases are at least keeping pace with the inflation rate. Generally, this is measured by an increase in the Consumer Price Index (CPI). In recent years, the CPI only increased by 2-3 percent per year. More recently, inflation has skyrocketed to upwards of 6.5 percent yearly. Increasing rents by this amount may seem unpalatable to some. To combat tenants’ sticker shock upon lease renewal. The landlords should consider adding language to their lease agreements that stipulate that lease renewal rates will be indexed, at a minimum, to any increases in the CPI.

In an inflationary environment, the costs associated with owning and operating a multifamily property will increase (think utilities, property maintenance/management, etc.), which is why rent increases are important to not only cover these costs but also to increase NOI.

This is also why it is so important for prospective buyers and/or existing owners to have a strong grasp of the local market. Longtime owners often have a low-cost basis and, therefore, are not pressured to increase rents significantly. A prospective investor will want to look at the current rent roll and assess whether the rents are on par with market rates, and if not, should consider rent increases upon taking ownership of the property. Bringing them to market rate will automatically improve NOI.

2. Evaluate Fees

Another way to boost NOI at multifamily properties is by increasing revenue associated with fees charged back to the tenants. This includes application fees, credit reporting, and late fees.

Many tenants also have pets, so landlords should consider charging pet fees every month. This strategy is decidedly different from simply charging pet owners an additional security deposit. Fees can be pocketed by the owner, whereas security deposits must be held in escrow and returned to the renter if there is no obvious damage caused by the said pet(s) at the end of the lease term. Landlords who do not currently accept pets today should consider whether allowing pets for an additional fee would make sense given their property type, layout, demographics, and insurance policies.

3. Consider Utility Income

Utility income can be a tremendous source of income for multifamily apartment owners. If an owner has not done so, they should consider individually metering each unit. Doing so will allow the owner to shift the cost of utilities onto renters. Renters would be expected to put each utility bill in their own name and then will pay those bills accordingly. This may require landlords to adjust the base rent downwards initially, but the landlord will immediately start saving on utility costs.

An alternative approach is to implement what’s often referred to as a “RUBS” system – or “ratio utility billing system.” Rather than submetering each unit, the landlord instead bills tenants for their pro-rata share of the building’s utilities based on several factors such as unit square footage, number of people living in the unit, or some combination thereof. Utilities billed back to tenants include heat, hot water, gas, electricity, and trash removal.

Let’s say, for example, that a RUBS system allows the owner of a 20-unit apartment building to earn an additional $30 per month per unit. This generates $600 per month or an additional $7,200 per year. That additional revenue will surely boost NOI if costs remain the same.

A RUBS strategy is arguably more affordable for owners since they do not have to incur the costs of metering each unit. Moreover, it can increase NOI at an apartment building without increasing rent. One drawback, however, is that tenants must agree to the RUBS billing system as part of their lease agreement, which means it can generally only be implemented upon unit turnover when new tenants sign a new lease agreement. Existing tenants would need to agree via a lease addendum, which can be a hurdle for some landlords to overcome.

RUBS billing is not allowed in every city and town. Some municipalities have banned the practice, which is considered unfair to tenants. Landlords will want to check local regulations before proceeding with this approach.

4. Add On-Site Storage

On-site storage, usually in the form of storage closets with locks. It can be another great source of income for multifamily owners. Storage solutions can be added to any underutilized space, such as basements and/or desolate common areas. Owners can also explore adding an outbuilding – essentially, a new auxiliary structure designed specifically for tenant storage. Individual lockers can then be rented out to tenants for an additional monthly fee.

In some cases, landlords run the storage area like a separate business. Tenants may be given first priority to rent the storage lockers, perhaps at a discount. Then the remaining storage lockers can be rented to the general public. This strategy is most applicable when the storage area is located in an auxiliary building vs. within the apartment complex.

5. Increase Laundry Income

This may seem like a no-brainer and a concept most landlords will have already explored rather than providing free in-unit laundry facilities. Consider adding coin-operated laundry in a common area made available for all tenants’ use. In situations where in-unit laundry can be accommodated, landlords should charge a premium for those units.

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Another strategy is to “rent” the washing machine and dryer made available to units when provided in-unit for a small fee (e.g., $10 per month). Tenants can defer these costs if they decide to supply their own washer and dryer.

(Note: if a tenant supplies their units, be sure to require professional installation to prevent any leaks, etc., that may occur if not installed properly.)

6. Maximize Parking Revenue

Most multifamily properties have limited parking, particularly those in dense urban areas. Multifamily owners will want to charge a premium for that parking, especially if parking is underground or covered. In some markets, a single parking space can rent for $100 or more per month. Tenants appreciate this flexibility: those with no vehicle are not paying a premium for parking they will not use, and those with more than one vehicle can rent more than one space if they so choose.

At a 50-unit apartment complex, spaces that rent for $100 per month will generate an additional $5,000 per month in rent – not an insignificant number, especially for owners looking to increase NOI at their rental properties.

An increasingly popular way of maximizing parking revenue is by adding EV charging stations. With gas prices on the rise, more people will be looking to purchase hybrid and all-electric vehicles. Adding an EV charging station is a forward-looking strategy for those looking to appeal to renters with electric vehicles.

7. Convert Select Units to Short-Term Rentals

A more management-intensive way of generating additional NOI at rental properties is converting one or two units into short-term rentals. Short-term rentals tend to generate more income, on a per-night basis, than traditional rentals.

However, there are some special considerations to keep in mind with this approach. First, these units must be fully furnished for short-term rentals. The landlord will also incur the costs of all utilities. Someone will need to be available to turn the unit over between stays, whether an on-site property manager or a third-party cleaning service. These costs should be factored in when considering how much additional revenue can be made using a short-term rental approach. Finally, be sure the local municipality allows short-term rentals. Some cities and towns have restrictions on properties listed on Airbnb, VRBO, and other short-term rental platforms.

In addition to the income-generating strategies noted above, there are also several cost-saving strategies that multifamily landlords should consider:

8. Reduce Turnover Time

“Turnover time” refers to how long a unit sits vacant between tenants. Turnover time generally depends on how quickly an owner can make a unit “rent ready” and ready to show to prospective tenants, as well as how quickly the landlord can sign new leases for those apartments.

Reduce Turnover Time refers to how long a
the unit sits vacant between tenants.

Landlords should conduct market research to understand how long it takes to rent-ready units in their market. Do units tend to turn over quickly, or should landlords expect some downtime between leases? What factors impact a unit’s ability to be re-leased? In some markets, particularly in college towns. Units turn over on August 31st, and tenants move in the following day, September 1st. In markets like this, landlords benefit from a little downtime. However, they must be able to move quickly to make any necessary repairs and clean units before the new tenants move in.

Multifamily owners should examine their processes for making units rent-ready. The less time a unit sits vacant, the lower the costs will be associated with that vacancy.

9. Reduce the Number of Turnovers

Related to the point above, multifamily owners should look for ways to limit the total number of turnovers they experience each year. This can be accomplished by carefully screening tenants (higher-quality tenants tend to stay longer) and offering multi-year leases instead of the standard one-year or month-to-month lease. Tenant turnover costs are one of the most frequently overlooked costs that landlords will incur. Therefore, reducing the frequency of turnovers is an excellent way of improving NOI at rental properties.

10. Rebid Vendor Contracts

A final way to increase NOI at multifamily properties is by rebidding vendor contracts. Many owners purchase apartment buildings with existing contracts in place. They assume the prior owner negotiated the best rate and kept the existing vendors in place for simplicity's sake. However, it’s worth revisiting those contracts and potentially rebidding the work from time to time. A modest 10% reduction in trash removal, landscaping, insurance premiums, and other costs can add up to thousands of dollars over the course of the year. It is important to ensure you get the best rates and terms on all contracts if you want to maximize NOI.

Conclusion

Finding new sources of income is incredibly important for landlords looking to increase NOI at their apartment buildings. There are endless ways to do so; the biggest limitation is an owner’s creativity. Identifying cost savings can be more difficult, as some costs are fixed (e.g., property taxes) or otherwise have little variability.

Net operating income is especially important to
multifamily investors as they
compare potential investment opportunities.

Given the importance of NOI to a property’s value, it benefits every multifamily owner or investor to consider the many ways of increasing NOI at apartment buildings. In the short term, this will generate additional cash flow that can be passed on to investors. In the longer term, this will enhance a property’s value. Essentially making it more attractive to potential buyers when it comes time to dispose of the asset.

Are you interested in increasing the value of your multifamily property? Contact us today to learn more about the strategies that boost NOI and increase the resale value of your property. 

Source: 10 Ways to Improve NOI at Multifamily Apartment Buildings

https://www.creconsult.net/market-trends/10-ways-to-improve-noi-at-multifamily-apartment-buildings/

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:

Request Valuation

 

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/

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