Operational Value-Add Strategy for Multifamily Real Estate Investing

Do you want to learn how we force the appreciation of a multi-family real estate property?

I'm going to walk you through what happens on the operation side of a value-add play.

Multifamily real estate on the commercial side is valued-based on the income approach. That means, the NOI (net operating income) is what is used to determine the value of a property.

So remember, whenever we're forcing the appreciation of the property, we're always forcing the NOI. This is what matters — increase the gross revenue, decrease the expenses. That is what boosts up the NOI. This in turn increases the value of the real estate property.

This is where everything is focused — bumping up this NOI.

The renovation side is what people see all the time on TV — flipping homes and redoing kitchens. Depending on the property, that certainly has a lot to do with increasing its value. You can get higher rents if you improve the condition of the property in the units.

But operations is a sometimes overlooked way of increasing the value of your property and increasing your NOI. It doesn't entail any renovations whatsoever. So operations can have a big impact on the valuation of your real estate property.

Here are just six examples of operational value-ads and how they impact net operating income.

1. Cost Control

Oftentimes, when an owner has had a piece of real estate for quite some time, they’ve not bid out to the open market for services provided. I’m talking about insurance, cleaning contracts, snow removal contracts, etc. Maybe they've had the same company for the past ten years, and they don't know that there are better options out there.

Industries change. Insurance is a big one. We've seen properties where the insurance premium can be cut in half just by going with a different company who may specialize in that type of asset. Or they might offer additional benefits.

So cost control is an easy one. If you can reduce your expenses, that's going to increase your NOI and have a big impact on the valuation of your property.

2. Advertising

Everything's shifted online now. Yet we still have some owners doing newspapers and flyers. But here are some strategies you could implement:

• Present the property online with an online presence or website.
• Run a Google AdWords campaign, targeting people — whether on Facebook or Instagram — in the niche that you're focusing on.
• Staging units. Have a designer come in to make sure the unit's looking in tip-top shape.
• Before you do photographs, do video tours of the property.
• Highlight the pool, the gym, and all the amenities you have. Lots of owners are still not doing this, and this is a must for getting top dollar for your rent.

So get control of your advertising. Advertise more, and you will obviously have less vacancy. You can even push your rents a lot higher. And as you advertise the property more effectively, it's going to look more appealing to your potential tenants. And this will improve your NOI.

3. Closing Ratio

Just like any type of sales, you have leads come in — inquiries from prospective tenants. Maybe the staff on the property isn't closing as much as you’d like. Consider additional training. Or perhaps you have to bring in new staff if the existing staff isn't cutting it in terms of closing skills.

We always want to keep an eye on how many leads we’re receiving and how many leases or contracts we’re assigning. So if that number is dropping down — if you're not closing like you should — that's going to increase the number of vacancies, the time a unit is not being rented.

As you improve your closing, you're going to have less leads come in and more contracts closed. That’s going to decrease your advertising budget because you're doing more with less. You’re going to be able to fill people in. And that's what will impact your bottom line as well.

4. Turn Time

When a tenant moves out of a property, you sometimes or oftentimes have to go in and repaint and usually fix things up. Maybe you're doing full renovations as you're turning those units to a higher standard. But as you do that, why not try to decrease your turn time?

Maybe the person managing that on the property is not so good in that area. It’s not their forte. So maybe you need to get somebody who is a specialist at managing renovation projects. Maybe you need to outsource to a different contractor. So if it's taking you 45 days to turn a unit and you can decrease that to 30 days, that's an additional 15 days of somebody paying you.

One unit doesn't make a big difference, but let's say you're turning 50 units a year. That's a lot of days of income produced just by decreasing the turn time and managing things a whole lot better. More rent, more people paying, improves your gross rental income. And if you have cost control and other things in place, all that is going to help you out in pushing up your NOI.

5. Separate Metering

For some properties right now, the water, electricity, and all the utility costs are borne by the landlord, the owner. But if you can meter all the units separately and shift that cost to the tenants, it will not only increase your NOI, it will also make the tenants more responsible.

For example, when the tenants are more responsible, they will use less water. They're not going to take a 30-minute shower all the time if they know they're paying for it. This is going to have a really big impact on your bottom line. This is an expense reduction strategy. After all, why should one tenant pay a higher rent if they're using a whole lot less utilities?

6. Eco-Friendly

Let's say you own or are managing a very large property. If you will change out all the light bulbs in all the parking lots and common areas, that will make a big impact on your energy usage. Those utility expenses are borne by you. And if you can install low-use appliances in the unit, that will really help out your tenants. Their water and electric bills will be a whole lot less.

You can also have low-flush toilets, low-water faucets, and showerheads. This makes a big impact on the total usage of the property, whether it's you or your tenants bearing the cost. The point is, saving money on utilities is always a good thing, whether you’re a landlord or a tenant.

The Bottom Line

These are just six examples of operational value-add strategies. Again, these don't entail any sort of renovation work. They’re only about improving the operations, or perhaps the staff or systems, at your property. These make an impact and you don't even have to pick up a hammer.