Discover 3 powerful ways to increase multifamily property income so that you can get more cash flow and a higher property value.
3 Reasons Why You Need to Increase Multifamily Property Income
Here are 3 reasons why you need to increase your multifamily property income.
Reason # 1: Cash Flow
The first reason for increasing income is that cash flow is essential for the longevity of any business, and multifamily investing is no exception. However, knowing how to generate cash flow is a learned skill. Many people believe that they can just buy a multifamily property and cashflow from day one, but it’s not that easy. Many investors struggle to generate positive cash flow because they lack the knowledge and skill to find, structure and execute a profitable deal. It's for this reason that we have a training called Commercial Real Estate Deal Start to Finish that will take you through the 10 steps of a multifamily real estate deal.
Reason # 2: Combat Rising Expenses
The second reason is that increasing income helps combat rising operating costs. As you know, insurance costs, utility expenses, and property taxes are all rising rapidly. And as these expenses go up, you need to either increase your income, or reduce your expenses so you can maintain your cashflow. For more on how to reduce expenses, I have two recent posts that will give you key strategies. Check out How to Reduce Your 3 Biggest Expenses and How to Lower Commercial Property Taxes for all the details you need to significantly reduce rising operating costs.
Reason # 3: Forced Appreciation
The third reason for increasing your income is it allows for the appreciation of the property. This is one of the most powerful ways to create wealth in multifamily real estate. You’ve heard me say again and again, the Net Operating Income (NOI) is the value driver in your commercial property because as your NOI increases, the property value increases. This is why increasing the income on your multifamily property is so important. Simply by improving the property’s financial performance, you can force the appreciation of your multifamily asset and build equity.
3 Powerful Ways to Increase Multifamily Property Income
As a multifamily real estate investor, you have control over the performance and management of your asset. Here are 3 practical ways you can increase the income of your multifamily properties.
#1: Lease Agreement Management
The first way to increase income is through lease agreement management. This method is so simple, but it's often overlooked. What exactly is lease agreement management? Simply put, it is raising rents at regular intervals. Here are 3 strategies to use to increase your cash flow with lease management:
- Evaluate your rents every twelve months and then raise them to market value. If your apartment building is safe and well maintained and your expenses are increasing, shouldn't your rents go up too? Remember, the purpose of owning commercial property is to make a profit; this is a business, not a charity.
- Increase the rents upon lease renewal. The timing of this strategy will depend on when each tenant’s lease comes due, but if your rents aren’t at market level, this is a perfect opportunity to raise the rent. Again, you need to offset rising operating costs with more income by raising your rents. The tenant will either pay the rent increase and renew their lease or leave.
- Raising Rent on Rent Subsidized Properties: For those of you who own Section 8 multifamily properties or are under other subsidized rent programs, you can ask for a rent increase every year. A lot of landlords forget to take advantage of this opportunity. There are deadlines for applying, but the requests are usually granted. I personally don’t know anyone who requested an increase that didn’t get one. So this is a way for you to increase your income if your property is under Section 8, but again, it’s not automatic; you need to ask for it.
So, whether you own a five unit or a 40-unit apartment building, you need to evaluate your leases and implement strategies for keeping the rents at market level. When was the last time you looked at your tenants’ leases? Are any of the leases coming up for renewal? Are any of the leases expired? Or maybe you have some tenants with no leases. These are all opportunities for raising the rents, and are simple, practical steps you can take to increase the income on your multifamily property.
#2: Implement RUBS (Ratio Utility Billing System)
Another way to increase cashflow and manage expenses is to implement the RUBS System, whereby you bill back utility costs to the tenant. What’s great about this system is it allows you to recapture utility costs without installing separate utility meters.
Here’s how it works: Let's say you have a 12-unit apartment building, and you only have one water meter. Your monthly cost for water is $500 a month and as landlord you are paying that bill. When you implement RUBS, you can divide that bill equally among the 12 units and charge each tenant $41/month. And you can apply this system to all utilities like gas, electric, sewer and trash.
Now, $41 dollars a month for the tenant doesn’t seem like much but look at the impact it has for you as an investor. Instead of an expense of $500/month, you are collecting that as income which will increase your Net Operating Income by $6,000 annually. Divide that $6,000 in income by a 6% market cap rate and you’ve added $100,000 in forced appreciation. In other words, you have added an extra $6,000 to your bottom line and increased your property value a hundred thousand dollars. And all you did was send a 30-day notice billing the tenants $41 a month for water.
Not only do you benefit from the extra cashflow, but there are also other advantages as well. The first advantage is that tenants use 5 to 15% less utilities when they have to pay for it. And the second advantage is that now your tenants are incentivized to report leaky faucets and leaky toilets to management. Remember, one leaky toilet or leaky faucet can cost you a hundred dollars per month. What if you have multiple leaks? Then we're talking hundreds if not thousands of dollars lost down the drain. So optimize expenses with RUBS, a simple but powerful system that you can implement today.
#3: Selective Interior Upgrades
The third way to increase income is through selective upgrades to the interior of the units. This is not remodeling the kitchen or replacing all the flooring. Instead, the idea is to offer upgrades or benefits to tenants to get higher rents. Again, these are not expensive or elaborate measures, but they can get a $50 to $100 rent increase and when you multiply that by your number of units, it can significantly increase your income and property value.
- Upgrade Lighting Package: You can offer a lighting package for additional rent. It may seem insignificant, but lighting can transform an entire room. A lighting package could include pendant lighting over the kitchen island or mood lighting in the corner of the living room. And you can improve the lighting of any room inexpensively with lighting from Home Depot or Loew’s.
- Upgrade Appliance Package: You can offer an upgraded appliance package that includes new stove, fridge, or dishwasher. The additional rent you bring in will pay for the appliances in just a few years and increase your income and increase the value of your multifamily property.
- Install Washer/Dryer Hookups: Adding in-unit washer and dryer hookups is a big benefit for tenants and most are willing to pay more for the convenience of doing laundry at home. This is not providing the washer and dryer, only the water and electrical hookup. The tenant must provide the appliances. Depending on where you are, you can get an extra $75-$125 a month. Now this will cost you more, likely a few thousand for the plumbing, electrical and sheetrock, but over time this will pay for itself, increase cashflow and add value to your multifamily property.
If you have any questions, post a comment below or text PETER to 833-942-4516.
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