4 Proven Methods For Increasing Net Operating Income of a Multifamily Investment
By Percy Nikora, Owner & Co-Founder of Penn Capital
Net Operating Income (NOI) is one of the most significant metrics that savvy real estate investors use to gauge the profitability and value of a multifamily property.
The value of a multifamily property is calculated based on the NOI using this formula: Multifamily Property Value = Property’s NOI divided by the Market Cap Rate for that property. For example, if the cap rate for a property is 5%, that means that every dollar added to the NOI has a 20x multiplier in value.
Net Operating Income represents the total revenue generated by a property minus the operating expenses, providing a clear picture of the property's ability to generate income from its operations (i.e. before accounting for factors such as debt service and capital expenditures).
Total Revenue includes all income generated from the property, such as rental income, parking fees, laundry income, internet, cable, and any other sources of revenue. Operating Expenses encompass the costs associated with operating and maintaining the property. These expenses can include payroll, property taxes, insurance, utilities, repairs and maintenance, landscaping, marketing, and any other costs directly related to the property's operation.
NOI is an essential metric in multifamily real estate investing because it provides a reliable measure of the property's cash flow potential and its ability to generate returns. Thus, a savvy investor seeks to increase and maximize the NOI of their multifamily property in order to receive higher cash flow payments and increase the value of their investment.
In this article, we explore 4 different strategies to boost your net operating income. Read on to discover how these actionable steps can lead to significant gains in both financial performance and asset appreciation.
#1 Increasing Base Rents
A straightforward way to augment your NOI is by increasing rent on your properties. Achieving this isn't always about simply raising the prices; it involves strategic improvements to your property that justify a higher rental fee. This could include renovations, adjustment of rents to match market rates, or introduction of short-term leases or high-end amenities that warrant a higher price. It's crucial to navigate this within the confines of local regulations and market conditions, ensuring that rent increases are both lawful and competitive.
Here are two strategies for deciding how to increase base rents:
Monitor the Consumer Price Index (CPI) for Informed Rent Adjustments: Regularly tracking CPI data allows investors to make well-informed decisions about rent adjustments, ensuring that their properties remain competitive in the market while maintaining profitability.
Compare Current Rents with Local Market Rates: Researching rental prices local to the property can help determine if current rents are too low or high compared to similar properties. Industry data sources like CoStar and ALN, along with websites like Rentometer provide valuable insights into average rental prices within specific neighborhoods, enabling you to adjust your own pricing strategy accordingly.
#2 Implementing Additional Revenue Streams
While rental income remains the bread and butter of a real estate investment, exploring other avenues of revenue generation can significantly improve NOI. We consider integrating auxiliary services like laundry, internet, cable, vending machines, paid parking spaces, or offering storage units for an extra charge. Additionally, investors can further boost NOI with tenant fees such as application fees, credit reporting fees, late fees, and pet-related charges. Adding supplementary services and evaluating tenant fees are great ways to increase your bottom line.
#3 Reducing Operating Expenses
Increasing NOI isn't solely about revenue maximization; it also involves managing and minimizing your operating expenses. Implementing cost-saving measures such as energy-efficient property lighting, utility management and systems can be a good starting point. Also, consider renegotiating contracts with vendors and service providers or better management of property taxes to keep costs in check.
#4 Improving Occupancy Rates
High occupancy rates are synonymous with consistent income. To boost these rates, concentrate on minimizing tenant turnover, which can be achieved through thorough tenant screening, effective relationship management, prompt and efficient handling of maintenance requests, and crafting an enticing living environment.
In conclusion, increasing the net operating income of a multifamily real estate investment requires a comprehensive approach that focuses on both revenue maximization and expense management. By implementing the proven methods discussed in this article, investors can enhance the financial performance and value of their multifamily properties.
To learn about current multifamily investment opportunities with Penn Capital, click HERE.
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