Commercial Real Estate

8 Awesomely Simple Ways to Maximize Your Apartment Building Profits

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
maximize-apartment-profits

You’re probably already familiar with the power of commercial real estate. For example, if you’re able to increase rents by $50 and decrease expenses by $50 per unit per month and you have a 24-unit apartment building like Brandon does, you’ve increased the income of the property by $28,800 per year.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Not that much, you say? It doesn’t seem like much. But if you assume that the capitalization rate is 8.5% for buildings like this in this area, then your tiny increase in income increased the value of the property by $338,824.

Sound a little better?

“Yes,” you say, “but how do I create this value?”

Here are 8 ways you can increase the income of your asset and increase the value to maximize your profits with apartment buildings.

8 Simple Ways Maximize Your Apartment Building Profits

Tip #1: Reduce your water bill.

In many cases, you (the owner) is paying for your tenant’s water bill. The biggest reason the building’s water bill is high is because there are leaks and drips. The best way to catch these is to encourage your tenants to report them, to look for water issues whenever the property manager enters the unit and to do regular unit inspections. Another way you can drastically reduce your water bill is to install low-flow toilets, faucets and shower heads. There will be a capital expense to do so, but the break-even is several months, not years.

Tip #2: Reduce your heating bill.

If you’re paying for heat, then your heating bill will be a challenge to control. That’s because your tenants will have the heat turned to full blast in the middle of winter with the windows wide open. This is why you should try to stay away from buildings where you have to pay for the heat.

Related: 4 Smart Ways to Overhaul Your Outdated Landlording Business (& Boost Profits!)

A good option if you are paying for heat is a programmable thermostat. Even though the tenant could override the programming, most will not do so because it’s too complicated to figure out. If set to EPA standards, programmable thermostats can save a significant amount of energy and costs.

boost-profit

Tip #3: Reduce your electrical bill.

Another way you can reduce your electrical bill is to replace all lighting with energy-saving bulbs.

Tip #4: Challenge your property tax assessment.

If you are buying a property substantially below its tax assessed value, you should appeal the tax assessment. The process may take several months, but it is worth it.

One of my buildings was assessed at $650,000 and had a $5,100 per year property tax bill. I purchased it for $475,000, appealed the tax assessment and got it reduced to $525,000, which reduced my taxes to $3,800.

Tip #5: Price shop your vendor contracts annually.

Each year, price shop your insurance, trash, landscaping, janitorial and other vendor contracts to see if you can improve over the previous year.

Tip #6: Increase rents.

The most obvious way to increase income is to increase rents. This is sometimes easier said than done for a variety of reasons. However, you and your property manager should always be on the look-out for ways to increase rents.

If the rents in your building are below average in the area, ask yourself why that is. Perhaps the other apartment buildings are in better condition or offer better amenities.

Before you buy a building, be very clear what your business plan is to increase rents. You may decide that the exterior of the building needs work to look more appealing and more comparable to the competition. This may require the installation of awnings, a new sign, painted shutters and improved landscaping. Sometimes even minor cosmetic improvements like this improve the curb appeal substantially and make the property more desirable.

The size of the units affect the rent. If your units are below the average size for the area, it will be tough for you to get the average market rent. If the competition has a laundry area and you don’t, then this will put downward pressure on the rents as well. However, if your product at least matches that of your competition and your rents are below market, then it’s time to increase rents.

If your building is in a rent-controlled area, then you can’t arbitrarily increase rents as you please. Rent control laws regulate exactly how much you can increase rents. Therefore, increasing rents in a rent-controlled building can take a long time, unless you rent to Section 8/subsidized housing voucher tenants, who are exempt from rent control. The local housing authority who runs the voucher program typically pays above-market rents for their tenants, and so this is a GREAT way to increase income and reduce delinquencies.

If your building is not in a rent-controlled area, then you can send a rent increase notice as soon as the leases of each tenants expire. You have to consider the impact of a rent increase on turn-over expenses and vacancies, but essentially you can ask whatever you want.

Make sure you increase the rents by something each year so that the tenants get used to an annual rent increase, even if it’s only very little.

Tip # 7: Install laundry facilities or vending machines.

Do not underestimate the income from laundry or vending machines. Let’s do some quick math on a washer and dryer.

Let’s assume each unit does two loads of laundry per week. Let’s assume one washer load costs $1.25 and the dryer also costs $1.25. That’s $5 per week or $260 per year. At a 10-cap, you just added $2,600 of value per year. If you have 10 units, then you just increased the value of your building by $26,000 just by adding laundry facilities.

In addition to increasing the income, you also added an amenity to the building, which may allow you to ask a little more in rent.

profit-apartments

Tip #8: Pass on utility expenses with the RUBS system.

RUBS stands for “Ratio Utility Billing Systems” and may be appropriate for situations where the constraints of space and/or construction do not allow a property to be submetered (i.e. to have separate gas, water or electrical meters installed for each unit). RUBS can be done for almost all utilities, including water, wastewater, electric, gas and trash.

Often, implementing a RUBS system requires no upfront capital investment. RUBS uses pre-calculated formulas based on industry-wide usage statistics. Once the RUBS system is in place, each tenant receives their own utility bill, which they must pay.

While it may be technically feasible to use the RUBS system and pass your utility expenses to the tenants, you must first determine whether the market allows you to do so. If you’re the only owner passing along the utility expenses to your tenants and everyone else pays for water and heat, then you may have trouble filling your units or getting market-level rent!

Related: How to Use Internal Controls to Mitigate Risk & Prevent Profit Loss

RUBS is most appropriate when it’s customary for tenants to pay for utilities, but the building you purchased is not separately metered. If the market allows for it, RUBS is an excellent way to increase your income!

Conclusion

Making money with apartment buildings is all about creating value. What I like about apartment buildings is that even a LITTLE value can have a huge impact on PROFITS. Increasing rents a little bit here, adding laundry machines there, re-evaluating your contracts and watching your utilities — all contribute a little bit to the bottom line. Multiply that little bit by the number of units for the entire year and divide it by the capitalization rate, and the result of your little improvements can mean BIG profits.

What other things have you done to increase income and decrease expenses?

Let me know with a comment!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.

    Chad Carson Investor from Clemson, SC
    Replied over 4 years ago
    Great article, Michael. I too love this principle of value add in multifamily and commercial properties. Your list hit the highlights, but I also thought of a couple more: – charge for parking (in more urban areas especially) – build and charge for storage on site Thanks for sharing!
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 4 years ago
    Chad – good ideas, thanks!
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied over 4 years ago
    Great list! The nice thing about apartments is every cent you save is basically pure profit. So cost cutting a little here and there can really add up!
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied over 4 years ago
    Great list. I would add offering satellite or cab’e discount while receiving a portion of the profits.
    Roy N. Rental Property Investor from Fredericton, New Brunswick
    Replied over 4 years ago
    Michael: RUBS is not an option for everyone … it’s not legal in some jurisdictions. Our experience with coin-operated laundry, especially in smaller buildings, is you are lucky if the ancillary revenue covers the capital and operating costs of the machines. In our area, particularly in buildings < 20-units, we find en-suite laundry has a bigger pay-back than common laundry rooms with coin-operated laundry.
    David
    Replied over 4 years ago
    Michael, I agree with all but #2. In all our buildings we pay for the heat and hot water which is gas. We have installed “landlord thermostats” in every unit in which we can set the high limit to say 70-72 degrees. No matter what the tenant cannot surpass the limit and as long as we maintain a temperature at or above 68 they cannot complain. The savings to us are immediate. The thermostats go for around $30 a piece and are well worth the investment. Tenants love the utility included and in my market tend to even pay more for an apartment with heat included. We have also done other things as install higher efficiency hw tanks and boilers, and air seal and insulate attics. We are saving around 20% or more a year on our gas bills.
    David
    Replied over 4 years ago
    Michael, I agree with all but #2. In all our buildings we pay for the heat and hot water which is gas. We have installed “landlord thermostats” in every unit in which we can set the high limit to say 70-72 degrees. No matter what the tenant cannot surpass the limit and as long as we maintain a temperature at or above 68 they cannot complain. The savings to us are immediate. The thermostats go for around $30 a piece and are well worth the investment. Tenants love the utility included and in my market tend to even pay more for an apartment with heat included. We have also done other things as install higher efficiency hw tanks and boilers, and air seal and insulate attics. We are saving around 20% or more a year on our gas bills.
    Charles Tucker from Irving, Texas
    Replied over 4 years ago
    Michael, thanks for the great article and great information. I have my sights on a fourplex that is currently fully rented! Should I attempt any or all of these tips on a fourplex?? I don’t think the laundry facility would be possible but, I guess the others can be considered at least, right?
    Bob Smith from Robesonia, Pennsylvania
    Replied about 4 years ago
    Just closed on a 48 unit in Columbus Ohio coming back inspection getting the contractors up and running have 5 they get them online
    Jerry W. Investor from Thermopolis, Wyoming
    Replied almost 4 years ago
    Michael, thank you for the article. It was informative, easy to follow, and offered concrete suggestions on how to save or even make money.
    Erik Beutler Vendor from Littleton, Colorado
    Replied almost 4 years ago
    Michael, our company has renovated over 30,000 bathrooms to low flow. We have seen the impact over and over again. It is amazing to me how many don’t take advantage of this SUPER quick, easy and almost fool proof solution. Another add-on here is there are rebates for lighting, landscaping and toilets in many places in the country.
    Jimmy Hoff Professional from Lumberton, New Jersey
    Replied over 3 years ago
    The MOST simple way to maximize your apartment complex profitability is to run it through an algorithmic revenue prediction before picking your location. Something like #SiteZeus.
    bob shultz
    Replied over 3 years ago
    Completely agree with your analysis.. And then when you go to sell even at a 10 cap. That’s when you really see the profit
    Marcus Cox from Knoxville, Tennessee
    Replied over 3 years ago
    Thank you, Michael for such awesome information
    Erwin Oliva
    Replied over 2 years ago
    This was really helpful Michael. Thanks for the analysis!
    Terrence Allen Kinchen from Bellefontaine, Ohio
    Replied over 2 years ago
    I can’t get a definitive answer from google. I am looking to purchase a 5 unit apartment building. I may need to update the heating mechanism. I just want to know how you give the tenants control of how warm they keep their space. Do I install multiple furnaces and thus multiple thermostats or is there a better way?