There is a widespread misbelief that rents only go in one direction, Up. With rental markets in small cities and suburbs still experiencing rent growth mid-pandemic there is mounting support for this misconception. The main source of income for multifamily investors is rental income, we would love for this myth to be true, but it simply isn’t.
Many large cities are seeing declines while rents in other markets have plateaued. If expenses are creeping up and rents are already maxed out or even worse declining, owning the property will not be financially sustainable. How do you increase multifamily returns if rent growth is limited?
Whether rent growth is a problem or not, here are a few ways to increase profits in any market without raising rents.
Two Methods: Decrease Expenses, increase other income
There are two methods to increasing profitability when rents are maxed out. Multifamily investors can either decrease expenses or increase other income. It may be cheaper and faster to decrease expenses than to increase other income.
Other income is the income a property generates from sources besides rent collection. Increasing other income may require an initial capital investment to make a service or product available at a multifamily property.
Decreasing expenses may be as simple as a few phone calls and artful negotiation. Here are some tips to reduce multifamily operating expenses.
Debt service is one of the biggest payments multifamily investors make each month. Refinancing the mortgage is a great way to reduce this expense. This may not make sense if you are planning to sell the property in the near future or have just recently purchased the property.
Most loans have prepayment penalties which means you will have to pay the lender a percentage of the loan as a fee if you pay the loan off early. This penalty may negate any additional savings from a lower mortgage payment.
There are a few contracts most multifamily properties have. At the bare minimum a property will need a contract for insurance and unless you self-manage there will be a contract for property management.
If your property management company is doing a poor job then getting a new management company may not only save you money but also increase your revenue. If your current property management company is doing a great job you can lower monthly payments in exchange for profits from the sale.
Insurance contracts can also be negotiated. Depending on your risk tolerance or how much longer you intend to own the property, a higher deductible plan with lower monthly payments may be appropriate.
You can also review your insurance coverage to see if there are other providers that offer similar coverage at a more affordable rate. If you are carrying excessive coverage for unlikely events it may be worth removing these riders from your policy.
Other contracts may include landscaping and pest control. Shopping around for quotes or simply negotiating with current contractors can trim your expenses. Most contractors offer discounts in exchange for advertising or referrals.
If you live in an area where there are options for utilities, negotiating these contracts or shopping around will help reign in expenses.
“…negotiating these contracts or shopping around will help reign in expenses.”
Strive for efficiency
Making your property more environmentally friendly will reduce expenses but will also require upfront capital investment. Switching to LED Lighting, having water-efficient fixtures and appliances are a few ways to do this.
It may take a while to recapture the costs of these upgrades in the form of savings but they will immediately increase profitability and value of the property. There may even be grants or tax credits available to help with these upgrades.
Grieving your taxes is the process of contesting your tax assessment in order to have your property tax bill reduced. This can be done annually through an attorney or on your own. Be aware of the annual deadlines to complete this and the forms required by the county your property is located in.
If you serve a lower income community or tenant base there may also be some tax credits available that can help reduce your annual bill.
Decreasing turnover can reduce your expenses significantly. Turnover is the process of a resident leaving an apartment and releasing that apartment to a new resident. This can be an expensive process.
Minimizing turnover costs requires awareness of tenant lease expiration and current market vacancy. Starting the search for new residents early on or offering current residents incentives to stay will minimize turnover costs.
Another way to decrease turnover is to increase other income. Increasing other income usually involves added services, products or amenities that will attract new residents and encourage current residents to stay. This will decrease your expenses, and increase your income and cashflow. Win-Win-Win.
Increasing other income: Monetized Amenities
So far we have covered ways to increase profits by reducing expenses. There is a limit to how low expenses can be reduced as all properties have operating expenses. It cost money to make money. Here are some amenities you can add to make your property cash flow positive
If you have space available outdoors or in the basement of the property you can construct self storage facilities. These can be rented to tenants or non tenants helping to bring in additional income.
Event Space rental
If your property is large enough to have outdoor or indoor space that can be rented for events this may create another stream of income for the property. This space may be used by residents or external businesses.
For example you can rent space to a fitness instructor, small convention, day care, meeting space for local clubs or organizations in the area. This will generate traffic to your apartment community which may help with future leasing as well as act as a source of additional income.
“…This will generate traffic to your apartment community which may help with future leasing as well as act as a source of additional income”
Laundry and Cleaning
Adding an onsite laundromat or cleaning services such as laundry pick up or mobile dry cleaning can add convenience to your residents’ lives and also increase income. You can also offer other cleaning services such as mobile carwash, or pet grooming.
If you have a resident welcome package, monthly newsletters or space for signage this may be an opportunity to advertise. Local businesses may pay directly for the advertising or offer a referral program. By allowing a utility provider such as an internet or cable provider to service your property exclusively you may be able to earn a percentage of their sales.
Depending on the size of your property adding vending machines
Increasing Cashflow increases Value
All of these methods will increase your property value as multifamily properties are valued based on their net income. As other income grows and expenses decrease your property will become more valuable without relying on rent increases.
The main ways to increase cash flow and profits without raising rents are to decrease expenses and increase other income. Doing both will super charge you bottom line and your residents will appreciate it.