Apartment buildings are the most profitable of all commercial real estate investments partially because they give the owner and investor so many ways to increase the bottom line. The bottom line or profit margin as it is known in other industries is called the net operating in commercial real estate investing. The NOI is devised by subtracting all expenses, including financing, from the gross monthly income. Therefore, in order to increase the NOI of an apartment building investment the investor/owner can chose to either reduce expenses or increase income.
Ownership of an apartment building exposes the investor to numerous costs on a monthly basis. By reducing monthly costs by incremental and seemingly small amounts, the apartment building investor can increase the net monthly cash flow and simultaneously increase the overall value of the real estate. Some of the areas where it can be easy to cut costs are:
5) Maintenance and Repairs
The first thing that a new apartment building investor should do after buying his apartment building is to examine his tax situation. He should determine if his or her building has been taxed at the correct rate. Many investors are unaware that they are able to contest their tax rate by contacting the tax assessor. If the tax assessor discovers that too high of a tax has been levied the investor will be charged less in the future and possibly even credited back for years past.
Insurance policies for apartment buildings typically last one year. It is important for the investor to shop for a new policy about two months before the policy expires every year to make sure that the best rate and terms are being acquired. The difference in prices for similar coverage offered by different insurance companies can be dramatic.
The next cost to consider is the management company that you have managing the property. Every two years or so you need to assess the job they are doing managing the property. The investor must examine whether the company is doing a good job of keeping costs in line and whether they are maximizing the rented units.
If the property owner is paying tenant utilities there are several things that can be done to remedy this situation and pass on these considerable costs to the tenant. One alternative is to contract a company that specializes in residential utility bill back. This company will bill each tenant for his portion of the electric bill based on the square footage of the apartment. In common areas you can then install energy efficient lighting.
Now, let’s see how these simple efforts have “turbo charged” the bottom line and economic value of the investment like I promised. Let’s assume that we saved the following amounts of money:
1) $100.00 in insurance premium
2) $110.00 in taxes
3) $70.00 on utilities
That equals a total monthly savings of $280.00. This may not sound like a lot of money but let’s take a look at how it affects the bottom line.
Your annual savings would equal $3,360.00. Let’s assume that the cap rate for your apartment is equal to 8.5%. If you divide $3,360.00 by .85 you arrive at the increase in your property value, which is $39,529.40.
The investor just increased his property value by almost $40,000.00 in addition to collecting an additional income annually of $3,360.00. That is what I call a “turbo boost” to the bottom line and it was all accomplished with little out of pocket expense or effort.