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By on February 28, 2014

We found this great article on multifamilyexecutive.com:

How to Make a Million Dollars
With some small strategies, owners can easily inject $1 million into their property thanks to today’s market.

Illustration: Chris Gash

It may be easier than you think to find a million dollars.

With rent and occupancy growth continuing to bless the multifamily industry, owners are in a great position to inject more value and additional revenue into their properties, with a series of strategic tweaks. The operative word is “series”—a checklist of small, incremental changes can add up to one big number.

Owners can boost their bottom line with a tried-and-true combination of ancillary income and rent increases, or through some renovations and enhanced customer service, depending on their audience.

“The first thing that you should try to do is see how your target market defines value,” says Mark Segal, president and CEO of Chicago-­based Habitat Co. “There are two paths you can go down—physical improvements or improvement of service level.”

But there are a handful of hidden gems, too, that can remain overlooked. Using a 100-unit property with a 7 percent cap rate and average rents of $600 as a model, the following sections outline seven steps owners can take to unlock about a million dollars’ worth of latent value. Call them the seven habits of highly effective owners.

Raise Rents Intelligently

The process of raising rents is a timeless dance, an eternal game of tug-of-war between renter and owner. But if you’re going to increase rents, it’s best to spell out why, in order to sell the increase and illustrate the reasons behind it. When a manager isn’t delicate in how it raises rents, it can raise a lot of ire, too.

In fact, R. Lee Harris, president and CEO at Overland Park, Kan.–based Cohen-Esrey Real Estate Services, remembers precisely how managers announced rent increases when he was starting out in the industry.

“You’d stick them under somebody’s door and then run like crazy,” he says. “That wasn’t the most effective way.”

Not only was this method impersonal, but there was no value proposition communicated to the resident. One way to create a sense of value is to show the renter what other, competitive properties in the area are charging, giving tenants a snapshot of market dynamics.

Using revenue management software is the easiest way to compare what the market will bear. But you can’t just rely on the computer to do all the work.

“We realize that our employees and team members and the people operating the system must be astute and make very good decisions to optimize those rents,” says Todd Bowen, vice president of operations at McLean, Va.–based Kettler Management. “We can’t just let it go, so we rely on them to study and get out in the marketplace and interact with our competition in addition to getting into the details of what the system is requesting.”

Why is it important to see your competition in the flesh? Because all properties have their own unique attributes that help determine rents, to which managers need to pay attention before relying solely on the otherwise invaluable technology.

“I do find it very challenging to try to base rents and increases on market knowledge when many of the communities around us are doing the revenue management systems,” says ­Stephanie Brock, division president at Bethesda, Md.–based Riverstone Residential Group. “So it’s not always cut-and-dry, exactly, what they’re offering that particular day.”

Assuming that the average rent is $600—and the property’s cap rate is about 7 percent—a 5 percent rent increase on a 100-unit property can grow value by $480,857.

Maintain Occupancy

Maintaining a high occupancy rate can hinge on the ability to build bridges and create relationships between staff and residents.

Giving the on-site staff the opportunity to interact with residents in a non-businesslike manner is key. One way of doing this, Segal suggests, is by alleviating the on-site staff of many back-office functions.

“So the people who are on site, who are the only ones who can have that positive interaction with our residents, are free to do so,” Segal says. “We really make a great effort to try and relieve our on-site team members of administrative burdens so that customer service is happening on a recurring basis. It’s every single touch point we have with our residents on a daily basis that makes that difference.”

At Riverstone, Brock’s team employs a customer satisfaction system that measures the life cycle of its renters, as well as prospective residents, to understand why they didn’t renew or lease.

“Was our team available and accessible to them?” she says. “And how did they feel about our customer service? So that’s what we drive first on the prospect side.”

If the owner of a 100-unit property can increase economic occupancy by 1 percent, that can affect the value by more than $200,000.

Reduce Turnover

Don’t wait until the renewal notice goes out: Reducing turnover starts on day one. Riverstone starts at the beginning by seeking to understand how a renter’s move-in process went.

“If they don’t get off on the right foot, that is a painful 12-month lease process,” Brock says. “It’s so critical that the move-in process went smoothly, and if something did happen, which it’s been known to do, it’s time to salvage that.”

The company solicits feedback within 30 days of move-in, as well as every time a service request is done. In fact, frustration with maintenance issues is the No. 1 reason folks move out, she says. It affects whether they would refer a friend to the property and may compel them to leave a bad review on a ratings website.

“It’s creating that comfort level—you want them to settle on their renewal effectively over the entire course of their tenure,” Segal says.

At Riverstone, many properties offer a coffee bar featuring Starbucks coffee free of charge for residents. They encourage residents to take advantage of the service and to meet others in the process.

“That creates a sense of community,” Brock says. “They get that for free and the next thing you know, they’ve got that stickiness. It may be simple, but it’s $5 a day.”

When factoring all the make-ready costs, plus the lost revenue from a unit sitting vacant, reducing turnover by as little as 10 percent (or 10 units, in our example) can add value of more than $142,000.

Manage Payroll

Efficient and effective staffing at every level of a community not only can reduce resident turnover and boost occupancy but also cut unnecessary payroll and operating costs.

First, office hours don’t need to be 9 to 5. You have to understand what your residents want—they might not be coming into the office until lunchtime. So opening at lunch and staying late, until after work hours, may be a better way to service them.

“You’re understanding what your resident base and prospect base is looking for, and managing to those times,” Brock says.

Having maintenance members on site every day eliminates the need to call someone on the weekend for emergency service requests. Staggering the maintenance staff’s times can prevent the need for any one staffer to work overtime and result in a shorter workweek for each, which may allow you to have more part-time employees. College students are often a great talent pool for such flexible positions.

“That’s for both admin and maintenance teams,” Brock says. “College folks that are going to school, it’s a good part-time job for them and we can float them on a couple of different properties if they want full-time work.”

This type of roving flexibility is particularly useful when you have several communities in one market. If a full-time employee has to miss work for a period of time—for maternity leave for instance—a trained associate from a nearby property can fill in at critical times.
If your payroll cost is about $1,050 per unit, reducing it by $100 per unit will result in an approximate 9.5 percent annual saving, adding value of $142,857.

Devise Ancillary Strategies

One of the most abundant opportunities for ancillary income is pet fees, which generate a lot of cash across the board.

“Pet fees are huge for us,” Brock says. “The concentration of pets was 45 percent [at one] site—great fees. It’s great recurring money.”

Pet rent is a growing trend, but the ability to charge a monthly pet rent greatly depends on the market you’re in. If the local laws treat pet fees as a deposit, and not a recurring monthly rent, the charges can incur penalties and a hefty fine that far outweigh the benefits of additional revenue.

Parking fees are another great way to generate additional income. Just as apartments with spectacular views can command higher rents, communities can charge premiums for reserved spots over standard ones, for instance. This is especially effective in infill sites or other densely populated locales.

“It’s market specific,” Bowen says. “We have limited parking and we charge for it. The markets allowed for that to happen. In some of our D.C. properties, you can get as high as $125 a month parking.”

By charging a $25 monthly pet rent for just 30 pets at a property, owners can add $9,000 to their operating income and add value of $128,571, assuming a cap rate of 7 percent.

Negotiate Taxes

The relationship between an owner and a local assessor can be tricky. The county assessor tends to measure property valuations at higher levels, while the owner, obviously, wants the opposite. But through diligent preparation, and the ability to come to a fair compromise, owners can save hundreds of thousands of dollars on a typical 100-unit property.

“One of the things that the assessor isn’t privy to because they’re doing this on a mass basis—they might not be doing site visits, just lots of Internet work—is the physical state of the property,” Harris says. “Unless the property is brand new yesterday, there will obviously be things that need to be repaired or replaced.”

Typically, the local assessor will need to be educated about the property’s condition, or else the owner will get a very general valuation that doesn’t speak to the property’s individual strengths and weaknesses. By maintaining a thorough inventory of the property and documenting the cost necessary to put it in appropriate shape as valued by the assessor, an owner stands a great chance of lowering its property taxes.

If a property is valued at $5 million but you need to spend close to $500,000 to reflect that value, you’ll likely receive a lower assessment.

There’s also the obsolescence factor. It can be difficult to pinpoint, but in a highly competitive market, sometimes your property doesn’t quite measure up to the competition. Outdated kitchen designs or shag carpets could decrease the building’s value, lowering an assessment and, thus, taxes.

When the monthly property tax valuation decreases by about $50 per unit, the annual savings are close to 11 percent, assuming an annual tax bill of approximately $65,000. That increases the property’s value more than $100,000.

Lower your insurance Premiums

The same negotiation skills need to be applied to insurance, as well. Owners can easily become overinsured, resulting in higher premiums, if they don’t pay attention to the coverage.

The costs depend on a general square-footage formula, and it’s easy to say that it covers the property’s attributes, but “that might be grossly overrated,” Harris says. For instance, a property’s foundation will typically not have to be replaced after a severe weather event. “If a tornado comes, you still have slab,” he explains.

By providing solid evidence that these insurance standards are flawed, generally by speaking with architects and contractors, you can get your valuation down, thus dropping the insurance premium, which can add more than $35,000 in overall value to a 100-unit ­community.