The number one goal when investing in multifamily real estate is to increase the Net Operating Income (NOI). NOI can be defined as the total gross revenue subtracted by the operating expenses of a property. A cap rate is simply the rate of return on an asset based on income. The higher the NOI, the higher the value of the asset.

Cap rates are primarily used in commercial real estate and are one metric used to establish a property’s value. Cap rates fluctuate from market to market and property type, so it is imperative that you become familiar with cap rates in your market. We use cap rates in conjunction with cash on cash returns and debt coverage ratio to analyze the purchase of a property. Your broker should be able to provide you with market cap rates.

How do you calculate value with cap rates? Let me show you a quick calculation. Let’s assume the NOI of a property is \$200,000 and the prevailing market cap rate is 10. You would take the NOI and divide the cap rate to obtain the market value. Thus \$200,000/.10 = \$2,000,000 value. Market value and cap rates have an inverse relationship. As cap rates lower, values rise and vice versa.

If the NOI on the same property increased to \$220,000, the value of the asset at a 10 cap would increase to \$2,200,000. As you can see, a \$20,000 increase in the NOI boosts the value of the property by \$200,000. Your focus in multifamily is squarely on increasing the revenue or decreasing the operating expenses of the property. I call this forced appreciation because you have the ability to increase the value of the asset through exceptional management.

Let us illustrate our three-step framework on expanding the NOI.

## 3 Simple Steps to Increase the Value of Your Multifamily Property

### Step #1: Fill the vacant units.

Once you take over the property, your number one priority is to lease up the vacant units. You should already have a concrete idea of what market rents are. Our preferred tool to use when analyzing market rents is Rentometer. It is an invaluable tool to compare rents in the market and will tell you if your rent is reasonable, too high or a good deal. It also depicts other rentals in your area. Their resource center is also loaded with essential services and products for landlords and investors.

Related: The Real (Often Overlooked) Reason Many Multifamily Investments Fail

If you have a real estate broker as a team member, you can have him prepare a comparative market report for you. Have him collect the market rents of all rentals within a 20-minute radius of your property. This analysis is always performed as part of your due diligence when purchasing the property to see if there is any upward mobility to rental increases. Once you take over, continue at least quarterly to monitor rents in the area.

A couple other strategies to implement: Visit Craigslist and other rental sites to analyze current rents, and Google your property and visit all complexes near your property to analyze rents. Jake and I also pick up the phone and call the competition to see what they are charging and what amenities they offer.

Some investors may be intimidated by properties that contain an above average vacancy. It may be due to market factors, such as demand or low job growth. Our experience has been that most of the vacancy was due to poor management and poor marketing of the property.

We quickly establish a website and market our property online through Rentlinx and Apartments.com. We are now testing the market with targeted Facebook ads. The strategy is to target individuals living in a five-mile radius of the property and deliver ads to them. We also begin to deliver top quality service to our customers, the tenants. These two variables allow us to fill up the vacant units quickly.

### Step 2: Implement RUBS

You may be asking yourself, “What is RUBS?” Also known as ratio utility billing system, RUBS allows landlords to bill back a portion of the utility expense to the tenant. RUBS can comprise water, sewer, electric and garbage. It allows the landlord to implement the system with no capital expenditure and is a very fair system to implement when sub-metering is not possible. It can be based on certain factors — square footage and number of occupants are the most common.

We target properties where landlords overlook this source of revenue. Why would some landlords ignore this simple system? I think there are a couple of reasons. First of all, landlords are simply too lazy to try something new. Ever heard of “if it ain’t broke, don’t fix it”? In this case, it’s time to break it.

Secondly, many landlords have not kept up with their education and continue the status quo. We have also seen that landlords feel that tenants will vacate the property if they are charged for their utilities. The only instance where this will happen is if your competition is not using RUBS on their properties.

We are fortunate that in our market, it is common practice to bill back the tenants for usage. I recommend visiting NWP for more information on how to implement a system for your property. Our plan has been to bill the tenants \$30 per month for utilities. We are not recouping the entire portion of the utility expense, but more importantly, we are not exceeding 100% of the utility expense. Moreover, the rest of the market has set the rate at that dollar amount, and we feel comfortable charging this amount.

Let me illustrate the power of RUBS. We took over a property with 136 units that was not billing back the tenants. We decided to charge the tenants \$35 per month for utility. Most of the tenants were on a lease, and we had to wait until the lease expired to begin billing. Once the entire tenant base was switched over to RUBS, the results were extraordinary. We were able to generate an additional approximately \$50,000 per year in revenue. More importantly, the NOI increased by that amount, and the value of the asset increased by \$625,000 (based on an 8 cap — \$50,000/.08).

Related: The #1 Thing Newbies Should Do to Get Started With Multifamily Investing

### Step 3: Raise remaining tenants to market.

Now that a lot of the heavy lifting has taken place, it’s time to reevaluate the market and begin to increase the current tenants to market. Don’t forget to use the website Rentometer to gauge current market rents. At this point, the tenants have seen a transformation at the property. The exterior has been painted, the common areas are attractive, the maintenance staff is very responsive, and overall customer service has skyrocketed. Now it’s time to start raising the remaining rents.

Our strategy is to choose a few units to begin the process. This is where you have to test the market and see if your property will sustain these rental increases.

One note: We have had very little resistance to rent increases when we followed our three-step strategy. Some tenants will complain about the increase. Let them vent their frustrations and search for another apartment. When they calm down, they will realize the deal they’ve had the past few years and that renting another apartment will cost them as much as what you are going to charge them.

Once we’ve accomplished our goal of increasing the NOI, the fun begins. We approach banks and commence the process of refinancing the property. It normally takes us about 12 months to reposition a property and extract the equity from it. Banks usually expect to have 12 months of profit and loss figures to establish an accurate appraisal of the property.

Let me give you an example of one of our purchases that led to a refinance. The complex was purchased for \$4.075 million with \$53,000 per month in income. We quickly realized that the property was underperforming due to poor management. We were able to grow the income of the property to over \$80,000 per month within the first year.

The problem we encountered was that banks were confused with how we were able to reposition the asset so quickly. This confusion and denial led to unimpressive appraisals. After working with two lenders, we finally struck gold with a portfolio lender who was willing to offer us great terms and accept a \$6.33 million appraisal. We were able to extract \$1.6 million of equity from this one deal.

This is what I refer to as icing on the cake. We still control the asset with no money in the deal, and the property is continues to cash flow. This was all possible from acquiring an asset that was underperforming and then concentrating on raising the NOI.

## Your Task

Begin to focus on the NOI of a property. Look for value-adds, such as increasing the rents, filling any vacant units, and implementing a utility bill back system. Purchase the property on actual 12-month profit and loss figures. NO pro formas! The goal of any real estate purchase is to create value. The more value you create, the bigger your paycheck. Create a game plan from day one of takeover and execute once you become the new owner. Failing to plan is planning to fail.

Investors: Any questions about this process? What have you done to raise the value of your multifamily?

Leave your comments below, and let’s talk!

### About Author

Gino Barbaro is a father of six and the co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing. He has grown his portfolio to 674 units in three years and is the best-selling author of "Wheelbarrow Profits".

### 23 Comments

1. My community seems to be a outlier. A lot of landlords here have an NOI of near zero, or even negative. A lot of them are hoping for appreciation. Cap rate is about 4.0. Now what?

You ask, “Why would some landlords ignore this (RUBs)?” Most landlords do not ignore it; they account for it and bundle it into the rent. No tenant thinks that when the ad for a place says, “Water, sewer and trash included,” that it means the water, sewer and trash are free.

In my town, any landlord charging “market” rent is charging too much. Nor should tenants pay more because the landlord is finally fulfilling his responsibility to offer a decent place to live by painting, maintenance and customer service. All that is not supposed to cost extra.

On Rentlinx, the cheapest 1 bedroom in my town is \$1425. If you expect your tenant to make 3 time s the rent, that would be a monthly gross income of \$4275 which implies an hourly wage of more than \$25. The typical tenant makes far less than that. However, most of the 1 bedrooms are listed at around \$1900. What is the point of pricing out typical tenants? I prefer to look at the HUD zipcode-specific information for guidelines on reasonable rent.

You say you raise the rent and tenants realize “renting another apartment will cost them as much as what you are going to charge them.” That is resignation and resentment, and neither are positive qualities you want to encourage in your tenants.

2. The point is not to buy properties with a ZERO NOI. Why would anyone buy a business that is losing money. Go look into another market. Investors do tall the time. I live in NY and my portfolio is in TN.
When I say raise the rent, it’s after the property has been repositioned and you have offered the tenant value.
I own a portfolio of 674 units and have 8 vacancies. The strategy seems to be working, no resentment on the tenant’s part. It’s a business and the market dictates the price, not me.
And yes, landlords do not charge RUBS. I have purchased several properties where it was not being implemented. DOn’t ask me why, maybe laziness, maybe afraid tenants will leave.

• Why would anyone buy in a zero NOI environment? That is a very good question. Why do landlords in my town routinely overpay for a property? Another good question. Then these same landlords admit that their rent is too high, but complain that if they charge less, they will bleed more, causing tenants (who NEED a place to live) to subsidize their mistakes.

I do not know what you mean by “repositioned.” Maintaining the property and providing customer service is supposed to be standard, not extra value. In my town, we have landlords who charge more for extra value, like a swimming pool, but then they refuse to use some of that extra rent to heat the pool, which means the tenant pays for an amenity he cannot actually use.

It is a business, but it is silly to say the market “dictates” the price. The market may provide some guidance, but it is the landlord who dictates the price. Years ago, when I was a tenant, I had a landlord who refused to let the “market,” ie the big property managers tell her what to charge. Every April she would get a phone call from them urging her to raise her rents, so they could justify their high rents. She steadfastly refused. She became a landlord when the standard guidance was the rent should be no more than a third of a typical tenant’s wage, because after all, it is tenants’ wages that pay rent. These days that guidance has been turned upside down, ie landlords require tenants to make at least 3 times the rent they dictate. In my town, that prices out the typical tenant.

How would you even know whether the tenant resent the rent increase? Most likely they grit their teeth every time they write the rent check because as you note, all the other landlords are just as overpriced. When I look for a property, it needs to cash flow at a rent I deem reasonable. I never forget what it is like to have been a tenant.

You say, “Treat your investors like gold…” I say, Treat your tenants like gold. They are the source of your NOI.

• Katie,
Treat investors like gold when they are funding your deal. Repositioning a property is to revitalize it by increasing income/reducing expenses and creating value adds.
As far as it being silly the market dictates the rent, try to rent an apartment 25 more than the going rate. Tenants are amazing at knowing what the market rent is. The internet has changed everything. Buyers know exactly what they are paying, can google the address of an area and find out what the rents are for the market. Landlords do the same

• All I know is that most of the “repositioning” I see is landlords doing a lot of deferred maintenance, and then listing it as a “complete renovation” worthy of rent higher than market rent, when it is really now just a standard rental instead of the previous crummy one.

My point was that it is silly to justify unreasonably high rent by saying the market dictates the rent. You answer with a strawman about even higher rent. Generally, throwing out such a ridiculous strawman is tantamount to admitting the validity of the original counter-argument.

One reason that landlords get away with too-high rent in my town is because with our 1% occupancy rate, there is virtually no competition. For market rent to be reasonable assumes competition between landlords wherein if a landlord tries to charge to much, tenants will choose a lower-priced comparable place. Eventually, the overpriced landlord, if he wants any NOI at all, will reduce his rents to “market” level. With such a scarcity of rentals in my town, the “market” rent mechanism is not working well.

Treat tenants like gold always. Why the unnecessary qualifier?

3. Hi Gino,

Thanks for the article. I was wondering, do you structure your deals so that if you refi and pay off all your investors/OPM, then they will no longer be part of the deal? Or how long are your OPM still in it?

• Hi Powell
I am not syndicating yet. The entire portfolio is owned by myself and my partners. We are trying not to syndicate yet. We will have to at some point. It all depends what your investors want. I would think if you refied the deal, the investors would want to take part in the gain and continue to hold with their money back. It all depends on how you structure with them. Some investors have 3-5 year window, which would be awesome in your scenario. You pay them off with a really good return, then continue to control the asset with no investors.
Doesn’t seem fair to me, so give your investors the option.
Treat your investors like gold so they will keep coming back

• Thank you for your insight Gino. Btw, I enjoyed your book as well. Especially the part on local financing then refiancing to a non- recourse loan. Keep up the good work.

4. Good advice! I checked out Rentometer and it was slightly off for Chicago’s summer rental prices, so I would say use that tool but also check out Padmapper.com to see what most current rents are in the area as that will fluctuate with the time of year.

5. I will use padmapper. Thanks!

6. Please enlighten me on what I’m missing? Wouldn’t the NOI be the same if you increased the income by increasing rent \$30/mo or decreased the expenses by charging \$30/mo for utilities?

7. how would it be the same? rent is 600, you add 30 for utilities. the new gross revenue figure is 630. Your expenses stay the same but your revenue increased by 30.

• My question is how is that different than a rent increase? Why not just increase rent when the lease is up? Why call it a new utility fee that they weren’t responsible for before?

8. It is technically not different. It is more psychological. If the tenant knows that he is responsible for water usage, he will become more responsible. Studies have shown that water usage has gone down by as much as 60% when tenants begin to pay their share.
You can only implement this fee if it is being done in your market. Fortunately, for us it is standard for landlords to bill back tenants for utilities. I still don’t know why many landlords don’t do it, but it creates a huge value add for investors. Visit http://www.nwp.com for more info
Gino

• I understand the psychology of encouraging tenants to conserve water. On the other hand, conservationists like me end up paying for other people’s water usage regardless of the scheme “to make it fair.” This happens because I use my dish water to water my garden. I also capture shower water by putting a stopper in the tub drain and using that to water the garden. This is also how I maintain a garden in California with its five-year drought. If I am on a shared meter with other tenants, it means my huge water savings actually helps everyone but me, because the savings I generate will be prorated to all the tenants, or most often nothing happens. Landlords have never reduced rent because I am saving them big on their water bill.

9. Great article, Gino. I’ve never heard of RUBS in multi family properties but it is very similar to charging common area maintenance (CAM) in commercial real estate (retail, office buildings, etc). I’ll keep RUBS in mind.

10. Good advice, I will definitely suggest padmapper. I think most landlords account for the RUBs and put it into the rent. I agree a lot of the time it\’s laziness or fear about tenant leaving can affect this.

11. I understand that in order to have an accurate picture you need actual numbers for the last 12 months, but I’m confused if you are running numbers on every deal you see on Loopnet, Costar, etc. with actual numbers. Are you contacting the owners for all these calculations or are you doing some rudimentary calculations with their provided pro forma numbers and then contacting for actual when you see some potential? Thanks for the answer in advance!

• You try to get actual numbers. If you know your market, then you can plug in your numbers. For example, 2 beds rent for 650 per month and the expenses are about 3600 per unit. I plug in my numbers, see if the deal makes sense at their price and then request actuals if the deal is interesting.
You have to contact the broker for actual numbers eventually

12. Gino,
Great article.
Have you or your partners ever invested in a special niche of multi family that is growing in demand, assisted living? There are a myriad of ways to increase NOI with assisted living properties.

Have you ever bought or sold a multi family to or from an institution( mutual fund,insurance company,pension fund,etc.)? Experiences?

Have you or your partners ever bought multi family property/s inside your Solo 401k?

Do you have an e-mail address or other contact info. to share?

• Hi Todd
We have not ventured into assisted living or bought from an institution. I cashed in my pension plan, took the 10% penalty, and invested in a property. Most people would think that was crazy, but I bought a great deal and have paid that penalty back 10 times.

13. Gino,
Have you ever forced appreciation by condoizing a multi family property?
What is the name of your book?

• I have not. I am not a builder and do not want to get into that niche. Very lucrative if you can time the market
Name of the book is Wheelbarrow Profits
Gino