Net Operating Income (NOI) is one of the most important performance metrics in commercial real estate and asset management. It directly impacts a property’s valuation and cap rate. It also affects the value of your multifamily portfolio as a whole.
NOI is the name of the game when it comes to Asset Management. The goal – to increase NOI while keeping costs low. There are three general ways to accomplish this:
- Optimize Revenue
- Streamline Expenses
- Administrative Efficiency
Asset management has been compared to steering a huge freight liner. It’s large, awkward, and you have to plan ahead when navigating. The steps you take early on can change your course in the future for better or for worse depending on how good your decision making process really is.
Here’s 10 ways to boost NOI and start setting your course for clear, blue waters today:
- Capital Improvements
Increasing rent is certainly a great way to increase NOI. However, it’s not often something that can be done without providing some kind of upfront value that justifies the increase.
Here’s a really good video by Reed Goosens, a multifamily operator and managing partner for Wildhorn Capital. Reed goes in depth about several ways to increase NOI, but I specifically like the way he underlines the importance of communicating with tenants to develop improvements he knows they want.
In his short video, Reed talks about building a daycare center at one of their properties as a service for tenants and an additional revenue stream for the asset.
Other possible improvements include:
- A Common Area that can even be rented out for special occasions
- A Gym
- A Cafe
- Covered Parking
- Washers and Dryers in select units
- Ancillary Revenue Streams
Aside from rent, there are additional ways to increase the amount of revenue an asset is generating. Some common ancillary revenue streams include:
- Onsite Laundry (bonus points for a small arcade area)
- Soft Drink Machines
- Pet Rent
- A Curbside Trash Collection Service
Here’s an article from Multifamily Insiders that takes a deeper dive into the creative ways that asset managers have added ancillary income streams that increased NOI.
- Bill Back Utilities (RUBS)
Here’s an article on a Ratio Utility Billing Systems (RUBS) that explains what it is in greater detail.
In essence, what you’re doing is taking the cumulative cost of utilities across an entire property and dividing it fairly (usually according to square footage). The important thing here, is that you’re billing back the utilities to tenants. Ideally, the burden of cost should fall on tenants for the services (electricity, water, gas, etc) that they use.
Decreasing the overall expenses incurred by paying for tenant utilities can have a huge impact on NOI. This is only compounded when you bring multiple properties up to adequate performance.
- Upgrade Utility Systems
Upgrading to utility systems that require significantly less electricity to function dramatically cuts costs and can generate huge returns in terms of savings. Assuming you’re also billing utilities back to your tenants, paying to upgrade utility systems will not only improve NOI, but your tenants will see savings on their utility bills as well.
Here are some common improvements that can really snowball NOI.
- LED Light Fixtures
- Solar Film on Windows to Reduce Cooling Costs
- Low Flow Water Fixtures
- Programmable Thermostats
- Ceiling Fans
- Updated Appliances such as Ovens, Refrigerators, and Dishwashers.
Here’s a really thorough article that puts energy savings into concrete numbers that make environmental options an easy and cost effective decision.
- Negotiate Utility Contracts
It’s hugely beneficial to stay on top of utility contracts and make sure you’re getting the best rates possible. Across an entire portfolio this simple task can save hundreds of thousands of dollars per annum.
There are Energy Consultants that help audit your utility bills and negotiate better rates.
Here are a few consultants that provide this service specifically in the multifamily space:
Many energy consultant’s work in a specific area too, so it’s a good idea to run a quick google search to find what specific companies service your area. In addition to contract negotiations, energy consultants help develop an entire strategy for reducing costs across your multifamily assets.
Here’s a post from an unlikely blog called, “Early Bird Mom.” Here, Sarah outlines tips and tricks for communicating with utility companies to secure discounts. It’s not specifically tailored to the multifamily industry, but it’s still solid, and let’s be honest, sometimes moms give the best advice.
- Utility Tax Breaks
To put the cherry on top of the metaphorical, energy savings sundae, efficient, clean energy solutions are incentivized by numerous tax breaks and savings programs at the state and federal level. Check with your utilities provider and state government to make sure that you are getting all the kick backs that you qualify for.
Check out this PDF from the National Multifamily Housing Council and the National Apartment Association to learn more.
- Negotiate Insurance and Taxes
Whenever you can, shop around for cheaper insurance rates. This is one way that capitalism does you a huge favor.
Let’s talk phone plans for a moment. Consumers sometimes uses their current cellular plan to negotiate lower rates with a new provider. For example, Sprint might offer you a discount for switching from Verizon and vice versa. You can and should use this same tactic for making sure you’re paying the lowest possible rate for insurance.
Per annum, these savings can mount up quickly. Failing to shop around for the best rates is money that’s being left on the table for you and your investors.
Another thing to negotiate is taxes. Assessors don’t always assign the appropriate value to the properties they assess. It’s equally important to communicate and inform your assessor about accurate information about the properties value.
Here’s some tips from Multifamily Executive about negotiating taxes and insurance.
- Access Contracts
Here’s a podcast from The Multifamily Review where the host, Michael Avent interviews Kevin Gardner about Access Contracts. Kevin Gardner worked for Comcast for nearly 20 years. His insider perspective takes a beautiful scenic route through the rich countryside of access contracts and wraps the conversation just under 25 minutes.
Multifamily properties provide cable companies and internet service providers with unique advertising opportunities. An access contract with providers in your area helps provide discounted services to tenants, reduce overall expenses.
As with insurance, shopping around whenever an access contract expires to secure the highest value for your dollar can similarly boost NOI.
- Batch Services
If you’re managing multiple properties, it can be a huge opportunity to look at all of the services (trash, landscaping, etc) for opportunities to batch them together and increase savings through bulk discounts. As assets are acquired at different times, it’s fairly common to have two properties that use different service providers. Bringing your entire portfolio under one provider in a given industry can drastically improve NOI.
This is only amplified by the size of your properties and portfolio and can lead to several hundred thousand dollars in savings per annum.
Asset management is a complicated machine. At any given time, there’s reports to review, contracts to renew, property managers to manage, the list goes on. Making sure that your administrative systems are well oiled can lead to cash savings and large upticks in NOI.
And since many administrative systems operate at a portfolio level, the savings are often compounded, further increasing the importance of having effective systems in place for managing your multifamily portfolio.
Utilizing technology helps asset managers derive key insights into their business and make better strategic decisions. Watchtower is a new Private Equity technology that helps to accomplish exactly that.
With Watchtower, asset managers can:
- Improve Team Communication To Keep Everyone Rowing In The Same Direction
- Get Portfolio Wide Insights Into Income and Expenses
- Set Reminders for Access, Utility, and Insurance Contract Renewals
- Manage Projects Such As Renovations and Capital Improvements
- Track Asset Performance Over Time
- And More.
If you’re interested in learning how Watchtower can increase your NOI, click [here] or the link in the sidebar to schedule a call.