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Our overall business strategy is to purchase Class B multifamily properties and do value-add upgrades and renovations to the units and, if needed, to the property as well. By doing these value-add renovations we are able to increase rents, often at 20% and above. This increase adds significant income to our bottom line. At times we also push rent increases without renovations in order to offer rents that are competitive in the marketplace.
The problem with increasing rents, however, is that not every property is positioned to deal with rent increases successfully. It happens when a property is located in a low-income area, or when management is not strong enough to bring in the right tenants who can pay for the higher rents. My experience owning and managing multifamily properties across the U.S. has taught me that there are other ways to boost income without increasing rents. I’ve found some unique ways to boost our NOI (Net Operating Income) in addition to pushing rents. It required some out-of-the-box thinking and implementing some unique strategies, but those strategies have been successful.
There are 3 unique strategies in particular that have proven to be successful and I’d like to share them in detail with you. Certainly, these aren’t the only ways to boost your NOI, but they are working for us. Hopefully, they’ll work for you as well.
Strategy #1: Renegotiate Service Contracts
When you first put out services for bid to service providers, such as valet trash, landscaping, or roofing, they are often willing to do whatever is necessary to earn your business. This may include adding on additional services at no additional cost, or offering you a very competitive price. Over time, the “honeymoon” is over, and service may start to deteriorate, the additional services that were offered at the beginning are either stopped or you’re asked to start paying for them.
One example is renegotiating with landscape companies. Some of them are great, but others begin to cut corners, that initial love and attention provided to the property is gone and they are less motivated to provide better service. This is the ideal time to sit down and review all of your ongoing service contracts and renegotiate your service contractors.
Our property management team calls several commercial landscape companies and have them provide bids for work that is similar to our existing contract. We were able to receive better or additional services at a better price. However, we don’t stop with the landscape company, as this is something we do with every ongoing service provider on a regular basis. That includes painters, plumbers, HVAC repair services, electricians – any and all service providers that are used on an ongoing basis.
You may be surprised at how much money can be saved each month by renegotiating contracts with existing providers or changing providers completely. Cutting expenses is one-way people increase the NOI, so don’t be shy when it comes to asking a provider for discounts on their ongoing services.
Strategy #2: Increase Fees
While tenants may push back on a rent increase, small fee increases are a completely different story. When a prospective tenant sits in the leasing office, they’ll receive a sheet of paper with projected rent and various fees that are part of the rental agreement. These include application fees, pet fees, administration fees, and utility fees among others.
We have learned pretty quickly that if you take over a property, adding a small fee is usually not a problem. As an example, take renter’s insurance fees. If a tenant is used to paying $12 per month, and you increase it to $15 per month, the tenant isn’t likely to balk at that number. And while an increase of $3 seems small, when you multiply that number by 12-months, across 500 units, that small $3 increase turns into $18,000, which goes directly to your bottom line.
Trash fees are another example. If you bump up the trash fee from $4 per month to $7, no tenant is going to say, “I’m not going to rent at this property.” In most cases they won’t give it a second thought. Before increasing fees, we always check the market for comparable properties to see what they’re charging for each fee. At times we’ve found we were below market and increased our fees accordingly.
Another option is to add new fees. If your property has some unique amenities, consider adding an additional fee to the lease. For example, if you have Amazon lockers on premise, charge a small fee. If you have washers and dryers available in the units, charge a fee. You could also charge a fee for covered parking, if it’s available. Let your imagination run wild, and you’ll find other fees to consider adding.
Strategy #3: Look for Trend Anomalies and Adjust your Operational Behaviors
This strategy is a bit harder to explain, but it can be as equally effective as the other strategies I’ve outlined. We look for anomalies or changes found in our expenses, as well as our income. We go over the monthly financials, line-by-line, looking for any type of increases or decreases in our expenses. It isn’t important as to the amount we’re finding; what is important, and what we’re really looking for, is the why behind the changes that we find.
On the expense side, for example, we noticed that the water utility bill on one of properties had been slowly increasing month over month. It was a trend that we spotted, and nobody could explain the reason behind it. We weren’t watering our lawns more, there were no new units coming online, and we hadn’t changed anything with the property’s pool. Nonetheless, there certainly was a slow increase in our water bills each month.
The only explanation we could come up with was that there was a leak somewhere on our property, which is exactly what we found. One of the pipes in the utility area had corroded and a small leak had developed. That was the cause of the slow but certain increase in water usage, which was reflected on our statement.
Trash service was another item that showed a higher amount when compared to our other properties in the area. We discovered that comparables aren’t limited to competitive properties, but rather are worth comparing against our own properties in the same market area.
What we found was that the property in question had six compactors, which accounted for the excessive cost we found. We talked with the trash services provider and determined that we could easily eliminate 3 of the compactors, saving a considerable amount of money each and every month.
On the income side, we noticed a substantial increase in occupancy. It was a trend that was noted, but of course it wasn’t a problem. The point was we wanted to try to find out the “why” behind the increase – to determine what was driving the much higher occupancy. Were we doing something different from what we were doing at other properties, something that we would be able to duplicate so occupancy levels at other properties would increase in similar amounts? For example, was it the advertising media being used, spending levels, or concessions?
Doing a deep dive into “why” there’s an anomaly or a trend can help with both reducing expenses or increasing income. Once we find one, we adjust our behavior accordingly so that we can make appropriate adjustments or duplicate the reasons behind positive trends. Doing so is also one of the keys to increased profitability.
Summary
While our business plan is designed to purchase Class B properties and implement value-add renovations as a means to increase rents and income, we’ve found other strategies to use as a way to increase our Net Operating Income (NOI). The top 3 strategies involve some out-of-the-box thinking but we’ve found that they are easy to implement
The first strategy is to review all ongoing service contracts and renegotiate the terms and the costs. This could apply to landscaping services, painters, electricians, HVAC service providers and others. We get competitive bids from similar companies and compare them to what we are currently paying. If they are lower, we renegotiate our contract. If that isn’t possible, it’s time to change providers.
The second strategy is to increase fees. Unlike rent increases, which may often result in tenant pushback, fee increases are usually minimal. Another option is to add new fees. If our property has Amazon lockers, for example, we start charging a monthly fee for that amenity. We also offer tenants covered parking, if available, for an additional fee. We get creative, and always find ways to add new fees to current and future tenants that boost our NOI.
Another strategy is constantly reviewing our financials and looking for anomalies or trends that indicate a problem. We scour our financials to look for anomalies and trends, and always find unique ways to boost our NOI.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She 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 $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie 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.