How to Add $554k to Your Property Value

The net operating income (NOI) of a multifamily property is as important to real estate investors as blood pressure and heart rate are to a cardiologist. They’re all predictors of health.

As a property owner/operator there is a never-ending quest to implement strategies that help wring out a few more dollars of net income. And with owners’ and investors’ desire to realize an appropriate return on their investments, managers are under constant pressure to perform.

During the summer months, when tenant tours are plentiful and new leases abound, it is easy to hit needed numbers.

But in the dead of winter, tenant traffic and new leases can be few and far between.

Combatting the Winter Lull by Exploring Profit-Generating Strategies

Asset managers looking to tweak their bottom line this time of year have to be creative. But for owners who provide utilities to their tenants, the search for strategies to increase profits may be shorter than you’d think.

When performing due diligence on a 125-unit townhome community we purchased last year, it came to our attention that paying for tenants’ water and gas was costing the previous owners around $130,000 per year. About $35,000 of that cost was for gas heat.

Upon further inspection, we found most of our competitors—a set of apartments surrounding our asset—were not offering owner-paid utilities.

We were charging tenants a flat $60 per month. This fee was supposed to cover water, gas, trash, and pest control, whether they left their water running all month or kept their unit heated to 95 degrees all winter. The costs were out of control, and unfortunately, with the flat fee, there was absolutely no incentive for the tenants to conserve.

We began to research how we might pass the direct utility cost back to tenants so that they would be responsible for their own bills.

Early on in our ownership, we were able to install a system which individually metered water consumption. After appropriately notifying tenants, we began billing them for their actual water usage.

Once winter hit, our attention turned to the gas bills. We had a vendor install digital thermostats, which could be monitored wirelessly.

The thermostats provided two benefits:

The beauty of installing this type of setup was its ability to generate tenant-specific gas bills. Based on HVAC run times and BTUs (or British thermal units, which measure the amount of energy needed to raise temperatures), a simple math calculation could predict the gas usage for each specific townhome. A third-party billing company was then used to process all of the tenants’ individual bills.
Smart thermostats can help predict which HVAC units need service, lowering maintenance costs and improving NOI. For instance, on any given day with an outside air temp of 40 degrees, nine out of 10 HVAC units in a building might run for an average of 20 minutes per hour in order to bring the townhome’s inside temperature up to 70 degrees. If another HVAC unit in the building was running 50 to 55 minutes per hour to maintain 70 degrees, the onsite maintenance team would know something was wrong with that specific HVAC unit and could schedule to service it.

Adding $554k in Value Through a $31k CapEx Project

We are in the process of implementing the gas billing as I write this article. When completed, we should be able to collect 90 to 95 percent of the $35,000 in gas costs from our tenants. The amount we are able to collect (somewhere between $31k and $33k) is added directly to the bottom line, thus boosting NOI.

If we are able to save that money in a 6 percent cap rate environment, we will have just added $554,000 to the valuation of our asset. This is enough to make even the most pessimistic owner smile a little!

The cost of these the smart thermostats was around $250 per installed unit. With 125 units, the total project cost came in right around $31,000. Our savings the first year will just about pay for the entire cost of the project. (Thats a 17x ROI over the life of the project!)

Not only will this one improvement put more dollars in our investors’ pockets each and every year going forward, but it will also significantly increase their return at the time of sale.

Of course, there is another way to pass utility costs on to tenants (depending on your state) without going through the hassle and expense of installing smart thermostats. A Ratio Utility Billing System (RUBS) may be just your answer.

If the units in your buildings are not individually metered, some states allow for landlords to simply take the total utility cost for a single building and prorate the utility expense between tenants occupying the building. Each state has its own rules on billing back utility expenses, so be sure to check local ordinances before attempting to do it. Also, make sure your current lease has language that allows for this possibility.

Or, if you like the idea of tenants paying their own utilities but are not quite ready to implement this system, at the very least make sure that all new leases being offered facilitate the possibility of a RUBS implementation.

Whether you choose to use the RUBS system or not, having a lease that allows it will enhance the value of your asset should you ever want to sell.

Do you handle the billing of utilities in your multi-family property a different way? How so?

Feel free to share your thoughts below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.