Updated: Jan 9
As with any business, the more you can reduce your overhead and expenses, the better your cash flow and ultimately your profitability. It’s the same with multifamily properties; by reducing expenses you can increase your cash flow, and ultimately sell the property at a price higher than competing properties.
A Look at Property Expenses
Net Operating Income (NOI) is directly impacted by the property’s expenses, which is why reducing those expenses is extremely important. Net Operating Expenses is a term used with properties that generate income. It’s calculated by taking the total revenue from the property (rents and additional sources of income such as laundry facility, fees, reserved parking, etc) and then subtracting the operating expenses (such as property tax, marketing, repairs and maintenance, etc). The lower the expenses, the higher the NOI. It’s simple math, and it pays to take advantage of every opportunity to increase the NOI.
Across the country, according to a study by the National Apartment Association, NOI grew for apartments with 50 or more units in 2017 by 5.8%, up 2% over 2016.
Why Reducing Expenses is Crucial
Buyers and sellers use cap rate as a benchmark to determine the value of the property. If there are two identical buildings in the same area, then they will both have similar cap rate, which is determined by supply and demand. Now, if one of thise buildings have a higher NOI, then it will be sold for more money than the nearby building with a lower NOI.
Strategies to Cut Expenses
Strategy #1 Preventative Maintenance
As with all facets of operating an income-producing entity, it pays to have a strategy in place that helps reduce expenses. For example, instead of simply budgeting for maintenance and repairs, it would be better to implement a preventative maintenance program for the property. This approach not only helps reduce operating expenses, it helps to prolong the life of the property - especially when it comes to major mechanical systems.
Strategy #2 In-House Maintenance Team
Bringing a good portion of those repair and maintenance services in-house is a smart way to cut expenses. The cost of some types of equipment, such as a pressure washer, for example, would help to eliminate an outside service that is used by most apartment complexes. Since you have personnel available anyway, your overall expenses for that one item will go down to zero. It’s the same for many other areas of repair and maintenance as well.
Strategy #3 Technology Driven Services
Another strategy being employed is a shift wo web-based property management. Tenants simply go online to put in a service request, receive an acknowledgement via text or email, and then sequence the repair to be completed. This eliminates significant wait times, which tend to alienate tenants and increase tenant turnover.
All repairs and maintenance requests can be tracked by software. This can help owners monitor whether their property is being managed efficiently or not. The software can also monitor whether the repair needs to be billed to the tenant, in the case of damage or other tenant-induced problem.
Strategy #4 Fight the Property Tax Bill
According to CCIM Institute, an additional strategy to consider relates to the biggest expense category: taxes. Just because a property has been assessed taxes based on its valuation doesn’t mean you don’t have any recourse. Many properties are starting to appeal their tax bills, using companies that do the appeal process and work on a percentage basis or a fixed fee. Let’s say a property is over assessed by one million dollars, an appeal could result in a savings of $25,000 or more in taxes. The tax appeal analyst would receive 20% to 30% of that amount.
Tactics to Cut Expenses
Tactic # 1: Go Green
There are so many ways to reduce expenses it often just takes a walk around the complex to note where savings can be realized. Just replacing outdoor lighting with LED bulbs can add up to a significant amount over the year, while changing plants to ones less dependent on water can help reduce your water utility bill.
Landscaping is another area that can help boost savings. Switching to artificial grass in some areas can reduce the monthly landscaping costs while also helping to reduce water bills. Do competitive price comparisons with area landscape companies in order to find a more competitive bid.
One area where you can really reduce expenses is by going green. Many Millennials are now becoming a significant portion of the renter market, and the National Real Estate Investor reports that they prefer and are willing to pay more for a green lifestyle. Green features help to attract this key demographic and help retain them as tenants.
Tactic # 2: Save on Water Bills
Expense reduction can be achieved by implementing water reduction measures. You can start by installing tamper-proof shower regulators. It’s widely known that tenants like to switch out low-flow shower heads with their own. This could mean that the older 4-gallon per minute shower heads are being used, and your water bill is escalating. The solution is to put on tamper-proof regulators that are hidden from the tenant and use a special locking device.
Since bathrooms and sink faucets use about 16% of the water, making sure that efficient faucets are installed can save a considerable amount of money. Just install tamper-resistant aerators and the faucets will meet the Federal Plumbing Standards of 2.5 gallons per minute in the kitchen and 2.2 gallons per minute in the bath faucet.
Monitor for leaks - wirelessly. One statistic is that 1 in 5 toilets leak at any given time, which can waste up to 250 gallons of water each day. That adds up to 108,000 gallons per year, or $24,00 per year for a 100-punit building. That’s a significant amount of money. The new “toilet scrooge” is a wireless electronic monitoring device that lets landlords monitor toilets for leaks. It’s unobtrusive and mounts at the toilet base.
Tactic # 3: Use Energy Efficient Technology
There’s no question that energy efficient appliances save money. For example, it costs $200 a year to run a 10-year old refrigerator, compared to an Energy Star one that costs only $40 a year. The savings can be an enticement to prospective tenants when they learn about the potential savings, not to mention helping to retain tenants over the long term.
Another option is to install new technology to help tenants save money (or the property owners if they’re the ones paying the utility bills). The Nest digital thermostat is an excellent example of how you can reduce heating and cooling costs, which can be substantial regardless of the climate the property is located in.
There is a myriad of ways to reduce expenses at a multifamily property, and it all starts by looking at expense reports that show where the biggest amount of money is being spent. Whatever tactic you use, be sure you take a hard look at the work you outsource, and make sure you get competitive bids on from all vendors you use, regardless of category. It may cost a few dollars in the short term to make required upgrades or changes, but you’ll capture extensive savings in the long term if you do
About the author
Ellie is the founder of Blue Lake Capital, a real estate company specializing is
multifamily investing throughout the United States. She is also the host of a
weekly podcast called "That REllie Happened?! Unbelievable Real Estate
Stories with Ellie", a podcast that brings the true stories behind the deals,
from the most successful real estate investors around the globe. Ellie started
her career as a commercial real estate lawyer, leading real estate transactions
for one of Israel’s leading development companies. Later, as a property
manager for Israel’s largest energy company, she oversaw properties worth
over $100,000,000. Additionally, Ellie is an experienced entrepreneur who
helped build and scale companies by improving their business operations. She
holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com