The way to increase the value of a multifamily property is to either increase the income and or decrease the expenses, which will affect the net operating income (NOI). The NOI is a key metric when analyzing the value of a multifamily property. For the purposes of this article, I would like to focus upon the top line of the investment, revenue — and how to grow the revenue of the asset. The asset classes that we focus upon are B and C properties. If you would like more information on NOI and increasing the value of your asset, read our article on “How to Reposition An Apartment Complex.”
12 Ways to Increase Revenue in Your Apartment Complex
1. Add additional units.
On our most recent purchase, the property had laundry rooms spread throughout. The rooms were large, and we began to consolidate the laundry and decrease the size. We were able to create three additional studio units from the extra space, which allowed us to increase our monthly revenue by $1,800 per month. At a 7 cap, the value of the asset increased $308,500. We are in the process of building additional units throughout our portfolio from space that was deemed “useless” from previous owners.
One of our favorite strategies is to convert units that are being utilized as storage units back into apartments. Mom and pop apartment owners fall into the trap of allowing their units to fall into disrepair, and they then begin to fill these vacant units with supplies (a.k.a. crap!). It’s a lot cheaper to go out and buy a shed to store your supplies in than it is to take a unit generating income offline because the owner is unwilling to invest a few thousand dollars. In addition to storage units, we also look for basements that have a means of egress (windows) so that we can build additional units.
2. Generate laundry revenue.
When you think of laundry, you don’t think of excitement. But you should! Laundry is a vital service that can attract and retain quality tenants while adding revenue to the bottom line. We recently interviewed John Steinhofer from Caldwell & Gregory, who went into depth about the merits of hiring a laundry provider.
The discussion was focused on the new technologies in the market, how to draft a contract, how to receive a bonus from the laundry company, what to look for when assuming an existing contract, and much more.
A laundry service company will provide you with new machines, a bonus to sign a contract, a plan on how to maximize revenue, and the maintenance of the machines for a split of the revenue. You have to ask yourself if it is worth your time collecting coins and servicing machines — otherwise, you may decide to share the revenue with another party and focus on other vital aspects of your business. Our focus is on providing a valuable service to the tenants, and the laundry provider allows us the time to delegate our maintenance crew to handle service calls from tenants. We don’t want them wasting time fixing machines and collecting coins.
Related: How a Small Apartment Building Made Me $40,000/Year
3. Provide storage.
When we purchased our first property, there were four garages that were filled with junk (that’s an understatement). We decided to empty out the garages, place locks on the doors, and rent them out as storage units. We generated an additional $200 per month while providing an amenity to the renter.
Look for properties that contain garages or closets throughout. Once a tenant rents the space and moves his or her belongings into the storage space, when the lease comes due and you decide to raise them $20, they will think long and hard about vacating because they have a storage unit full of “stuff” that has to come along.
4. Charge late fees.
Every operator should be charging late fees to tenants who pay after a specified date in the lease. The reason is two-fold. The tenant will not want to incur a fee, and extra income will be generated. Once a tenant pays the fee once, he will most likely not repeat that mistake. We charge a 10 percent late fee to all rent that is received after the fifth of the month. You need to stay consistent with all of your policies and charge every single tenant who violates this law.
5. Implement utility bill back.
Ratio utility billing system (RUBS) is a program that allows the operator to bill back the tenants for the usage of water, sewer, electric, gas, cable, and garbage. To learn more about how to implement RUBS, click on the article above and visit NWP. It has been such a vital component to our value-add strategy that we have created the three-step framework. It has literally created millions of dollars of value on our properties.
6. Charge for applications.
Every landlord needs to process background checks and evaluate all potential tenants. You are giving control of your asset to a potential problem. Every tenant needs to be screened, and you should charge the market rate. In our market, we are currently charging $45 per applicant. You may be able to purchase these reports at a discount and earn revenue while protecting your asset. The company we use charges us $16 per report.
7. Implement move-in fees.
We have acquired properties that utilize security deposits, but we decided to jettison security deposits and replace them with non-refundable move-in fees. Our feeling is that security deposits can create an uneasy feeling between the owner and tenant (“when am I going to get my money back?”), and we wanted to avoid this uneasiness. Plus, we wanted to collect the fee and retain it. In our market, move-in fees range anywhere from $300 to $500. In some markets, this also creates a low barrier to entry for tenants.
You may be asking, “What happens if the tenant damages my property?” Our solution is to have the tenant purchase SureDeposit in addition to the move-in fee. SureDeposit is a risk management tool that enhances traditional security deposits by offering surety bonds to residents. Most tenants do leave their apartments in decent shape, and we use part of the move-in fee to turn the apartment for the next tenant.
8. Encourage renter’s insurance.
Some property owners require tenants to carry renter’s insurance. If a tenant’s property gets damaged, the landlord’s policy does not cover any of the tenant’s contents. We do not require tenants to own renter’s insurance, but our software company Appfolio offers renter insurance for $9 per unit. As the operator, you can turn around and charge the tenant a very competitive $15 per month. Kill two birds with one stone! Protect your asset and make a few bucks.
9. Consider offering short-term rentals.
We’ve had a few tenants inquire at our properties about short-term leases — anywhere from three to six months in duration. At first, we decided against it. But we noticed that these requests were becoming more frequent, and we realized we could charge a sizable premium in rent for a short-term lease.
The end result has been terrific for the company. We were able to fill a need for the tenant base, along with generating additional income. When the market is asking for something, it is the job of an entrepreneur to listen and to try and provide the solution. When tenants find out that your company is there to find solutions and be flexible, the word gets out. As of now, most of the apartment communities do not offer short-term leasing. I hope it stays that way.
10. Make the most of rental amenities.
If your property has a clubhouse that is underutilized, consider renting it out to tenants for functions. Does your fitness center sit empty most of the day? Rent it out to yoga teachers and personal trainers. Tenants will love the service, instructors will earn money, and you will maximize the amenities on the property. The use of these amenities will also begin to create a more pleasant atmosphere within your property.
11. Work out a deal with cable companies.
When we assumed control of our most recent acquisition, the owners had just signed an exclusive cable contract with a provider for $50,000. Guess who got the money? Although the contract lasts seven years, the company paid the bonus up front. If you purchase a property with an existing contract, ask the seller to pro-rata the fee and credit it to you at closing. You are obligated to abide by the terms in the contract. Why shouldn’t you be entitled to the remaining value on that contract? If your property does not have any type of contract, try to negotiate with a cable provider in your market.
12. Use built-in rent increases.
In our leases, we have a built-in rent increase upon renewal. The increase is only 3%, which calculates to approximately $15 per month. But that is huge for us. It ensures that our rents are always priced to the market, and it is a hedge against inflation. Rents have climbed dramatically over the past several years, and many of the mom and pops have not kept up. We don’t want to become another mom and pop.
We have focused solely on increasing rents and have yet to discuss expenses. I would like to address something that Jake calls refers to as the “expense creep.” What is it? Jake’s simplified definition is those teeny, weeny expenses creeping up each year until you wake up and notice they aren’t that small taken collectively. How do you guard against expense creep?
Let your vendors and service providers know that you will be reviewing their services at the end of each year. You need to keep them honest and competitive. Who should you include in your review?
- Software providers
- Cell phone/internet services
- Trash removal
- Pest control
- Property management
- Carpet and flooring
- Laundry leasing
- Painters (try every month)
- Home Depot/Lowes/HD Supply
For every dollar of expenses saved, that is one dollar that goes straight to NOI.
I hope this article has given you a clear path to increasing revenue and being diligent about your expenses.
If you have any other ways to generate revenue on your property, please let us know. We would love to share them with the BP community!
Leave all your questions and comments below.