Inexpensive Tactics for Optimizing NOI
Submitted by M. Drouin
As a means of increasing value, investors often look to boost rental income through deploying capital into upgrading apartment homes in their portfolio. This strategy can work well in primary markets with relatively low capitalization rates. However if you have exposure to assets in secondary and tertiary markets, relying on rental growth to optimize net operating income can be risky. Furthermore, because these markets have a lower barrier to entry, operators plans for rental growth can be thwarted from new supply coming online. This point will be even more relevant as institutional investors start pushing capital from overheated primary markets into secondary markets in their chase for higher yields.
The methods discussed in this post are designed to optimize NOI without taking on risk. They are also designed not to have a deleterious effect on your liquidity position. Utilities are often times one of the largest operating expenses on your P & L. This can be even more important in low cap rate primary markets, because every dollar saved is that much more important to the asset valuation.
Energy and Utility Management
In order to cut your utility expenditures, you could get all new boilers for your apartment communities. However, this could cost millions of dollars in precious capital and have a relatively long payback period. Chances are, you may have lower hanging fruit that costs less in the way of managing your utility expenses.
Utility companies are required to issue rebates for cutting energy consumption. For example, through a collaboration with National Grid and the MC Alliance Energy Group, the Suffolk YJCC was able to have half of their project cost covered by National Grid incentives. This resulted in a lower cost of ownership for the heating and cooling system, greater comfort for building occupants, and a less than two year pay back on their investment. At a 50% ROI, these types of projects are a no brainer. Furthermore, NYSERDA incentivizes property owners by offering 0% financing, sometimes up to half of the out of pocket cost after rebates.
For one of our property management clients, we estimate that we saved some $200K/annum by adjusting the service categories for our utility billing accounts. This was low hanging fruit which provided an immediate $200,000 to our clients’ NOI with no capital expenditure. Assuming the average cap rate of 8.0% for these particular client assets, you can figure a $2,500,000 increase in the underlying asset value.
When is the last time you evaluated your make ready process for vacant apartments? Are you tailoring your make ready process to augment your total utility expense management strategy? Require your make ready team to swap in low water usage fixtures: such as shower heads, faucets, and toilets. Instead of buying expensive energy efficient windows with low pay back, re caulk around cracks. Install weather stripping and door sweeps around doors that act as borders for the overall heat envelope of the apartment. Some of these initiatives may be covered by grants, depending on what state the property is in.
Do you own your laundry facility equipment? You may want to consider retiring those machines and outsourcing to a third party company. One of our property management clients owned their machines. On a resident survey we conducted, one of the most popular complaints that residents shared was that the washers and dryers were unreliable. The client’s maintenance team was constantly flooded with service requests related to machine malfunctions. Not to mention, the administrative burden of reimbursing residents for malfunctions or ruined clothes. We quarterbacked a directive to get rid of the machines and bring in a 3rd party company to set up new high efficiency washers and dryers. Our client had to give up some gross operating profit and share it with the company. However, after a year, our laundry income increased significantly, completely off setting the profit sharing with the 3rd party company. The service request response time improved markedly because they didn’t have to deal with machines constantly breaking down, increasing resident satisfaction as a result. Lastly, the newer machines resulted in a significant decrease in water and energy usage. All of this benefit was achieved with little to no change in liquidity to the client. Incidentally the old machines are not garbage either, there is a market for them among private landlords and laundromats!
The truth of the matter is, you do not have to spend a lot to save a lot. The Cabot Group is a leading expert on identifying expense control opportunities and energy management. Contact us for a portfolio evaluation to receive objective advice on maximization of your total return strategy.