Strategies to Boost the NOI of Your Multifamily Property

In 2023, a volatile economy and elevated housing prices caused a surge in demand for multifamily. This resulted in an 111% increase in absorbed units. At the same time, 583,000 new units were delivered, marking the highest number of completed units since the mid-1980s. This led to flattening rent growth (0.7%) and an elevated vacancy rate of 7.8%. Expectations for 2024 construction projects revealed a mere 460,000 in completions. As of February 2024, multifamily has the highest transaction volume out of the major asset classes in the past 12 months, recording $114.6 billion. Additionally, the typical rate of renter retention has remained relatively stable over the last three years. Each of these metrics are crucial to understanding and optimizing a property’s net operating income (NOI).

Whether through minimizing operating expenses, increasing rental income, or undergoing improvements, an investor can maximize their multifamily property’s NOI in several ways.

Increasing Base Rents

Increasing base rents is more than raising prices indiscriminately; it’s a strategic enhancement to the property that justifies a higher rental fee. Enhancements can be implemented through renovations, community amenities, technology, and more. Rents can also be raised to match market rates or through short-term lease offerings. It is essential to navigate these changes within the boundaries of local regulations and market dynamics to ensure that the rent increases are legal and competitive.

By raising rents, investors run the risk of losing business to their neighborhood competitors, so remaining within the bounds of the market average is instrumental in a successful rent increase. Conducting ongoing research on local market rates will enable investors to adjust their own pricing strategy accordingly.

A notable advantage of owning multifamily properties during periods of high inflation is the opportunity for annual unit turnover. With each lease renewal, landlords can renegotiate rents depending on the local municipality, allowing them to align rental rates with inflation. Monitoring the consumer price index (CPI) is also an excellent tool to utilize to avoid too high or too low base rent increases. The CPI is measured by the average change in prices over time in a fixed market basket of goods and services. California adopted AB1482, a state law that limits annual rent increases to no more than 5% + local CPI, or 10%, whichever is lower. In order to mitigate tenants’ surprise at increased rents, leases can include a clause linking further rent adjustments to any rise in the annual CPI. These rent adjustments are crucial for increasing NOI and managing the expected rise in operational expenses that also come in times of high inflation.

Examples of Rental Enhancements Include:

• Exterior Renovations: Painting & New Landscaping
• New Appliances: Refrigerator, Stove, Oven
• Offering Amenities: In-Unit Washer & Dryer, Pool, Gym
• Interior Renovations: Flooring, Kitchen, & Bathrooms

A landlord would be able to add $50-$100 more in rent by investing in new appliances for the rental unit.

The Crucial Role of Effective Property Management

Multifamily property management is an excellent indicator of overall atmosphere and success. The management is responsible for maintaining the property, keeping tenants satisfied, and running the operation. A well-managed and effective property management team has the potential to generate higher rental income, therefore increasing the property’s value and NOI.

There are an estimated 326,000 property management companies in the U.S., with California boasting the highest number at 54,173 companies. Notably, 51% of rental property owners typically enlist the services of a property manager.

The 2024 AppFolio Renter Preferences Report revealed how much property management affects a renter’s attitude and decision to renew their lease. The results prove that investing in a well-established and professional property management company will increase renewals and,
overall NOI.

According to the report, 75% of surveyed Baby Boomers indicate satisfaction with their property management. The data also reveals that renters who express dissatisfaction with property management are twice as likely to be actively looking for a new home. Specifically, 24% of satisfied renters are currently searching for a new residence, whereas nearly 50% of dissatisfied renters are actively engaged in their search for a new home.

Highlighting the correlation between renter satisfaction and tenant retention, roughly half of dissatisfied renters mention “looking for a superior property manager” as a factor influencing their decision to relocate, whereas only 12% of satisfied renters share this sentiment.

What does this mean? Property management alone is not the way to increase NOI for multifamily investments; the company must be effective and well-credited in order to make a real difference.

Successful investors should research the management companies available and choose the one that best fits their needs and goals. The report also reveals that renters who are satisfied with technology in their rental experience are nearly twice as likely as those dissatisfied with technology to cite satisfaction with their property manager as one of the main reasons for renewing their lease (50% compared to 27%). An effective property management company will be able to add enhancements to the property, such as technology, that improve the overall rental experience. The lack of property management may result in lower lease renewal and declining NOI.

Understanding tenants’ expectations from their property management company is essential for enhancing tenant satisfaction and increasing NOI.

Revenue Diversification Through Ancillary Income

Ancillary income refers to additional revenue generated from services or amenities provided to tenants beyond basic rent. This revenue diversification not only reduces investment risk but also creates a sustained competitive advantage. Multifamily investors can explore additional revenue streams beyond traditional rental income. Including offering pet fees, parking fees, storage rentals, or laundry services. Identifying opportunities to use underutilized space within the property can further enhance revenue streams and maximize the property’s financial potential. Examples include installing vending machines, leasing out common areas for events, or partnering with local businesses for sponsorship opportunities,

According to Apartments.com, nearly 90% of renters are pet owners. This poses the perfect opportunity for multifamily properties to charge an additional pet fee and implement a pet park or pet sitting service in exchange for higher rental prices. Car ownership is also rising (up .4% from 2018), with 91.7% of U.S. households having at least one vehicle as of 2022, according to Forbes Advisor. This means  most renters will need a place to park their car, ultimately paying the parking fee at their complex.

Expense Management & Cost Reduction

The rise in operational expenses has put a strain on multifamily owners nationwide. According to GlobeSt, operating expenses have risen 28% YOY as of February 2024. This has resulted in higher debt costs, stalled project proposals, and construction delays.

Over the last 12 months, the most noticeable cost increases were observed in insurance expenses. Compared to 2022 they surged by over 10%. Increasing costs in administration, taxes, management, and payroll, each experiencing a growth exceeding 7%, also contributed adversely to their overall financial performance.

To combat rising operational costs, efficient expense management and cost reduction are popular strategies that boost NOI. By conducting a comprehensive review of operating expenses, investors can save money for other future property enhancements. This includes analyzing expenses such as maintenance, repairs, utilities, property management fees, insurance, and administrative costs. Landlords should then negotiate favorable contracts with vendors, suppliers, and service providers to reduce these costs.

Reducing expenses by a dollar has a more significant impact on NOI and multifamily property value than adding an extra dollar in revenue. This is because expense reduction goes straight to the bottom line, whereas additional revenue is subject to various deductions. In multifamily buildings, where operating ratios typically range from 35% to 45%, a dollar in expense reduction can have nearly three times the impact of a dollar in revenue increase at a property with a 35% expense ratio; this is commonly referred to as a “force multiplier.”

Utility Optimization & Expense Pass Throughs

Investors should consider implementing a Ratio Utility Billing System (RUBS) program for certain operating expenses, such as utilities and trash. RUBS allocates these costs among tenants based on factors like unit size or occupancy. This allows landlords to pass a portion of these expenses directly to tenants. It can help offset rising utility costs and improve revenue streams.

Research has shown a direct link between separating utility payments from rent and promoting responsible water usage in buildings. For instance, properties using RUBS experienced a 27% reduction in water consumption in some cases, according to Janover. Moreover, RUBS is a more reliable option than estimating utility expenses and adjusting rents accordingly. It often leads to improved NOI and multifamily cap rates, enhancing the investment’s profitability and value.

Maximizing NOI for a multifamily investment requires a strategic approach. It encompasses factors such as rent optimization, effective property management, revenue diversification, expense management, and more. By implementing these strategies and leveraging market dynamics, investors can enhance property value, improve tenant satisfaction, and achieve sustainable profitability in the multifamily sector.