Lowering operating expenses is usually not the first place a multifamily investor looks to make significant changes. While the main focus for investors remains on increasing property income, lowering operating expenses (OPEX) can be as beneficial in increasing a property's net operating income (NOI).
Real estate investors rely heavily on NOI to determine their offers for multifamily properties. This is because the NOI of a property divided by the average cap rate for the area gives potential buyers a strong idea of the value of the property. For example, a property with an NOI of $1,000,000 in an area where the average cap rate is 5% gives the property a valuation of $20MM ($1,000,000 / .05). Cap rate is defined as NOI/Purchase Price. If a property manager can increase the NOI to $1,200,000, while keeping all other things equal, this would increase the property value by $4,000,000 ($1,200,000 / .05= $24MM). In this article, we share a few tips for how we improve NOIs for multifamily properties by saving on water, electric, and gas usage.
Water usage
Water usage is one of the top utility expenses in multifamily apartment buildings. There are a number of easy and manageable cost-saving operational adjustments landlords can make to cut down on excess water usage. A savvy new way to save on water costs includes installing high-efficiency toilets using WaterSense. Water-efficient toilets can reduce toilet water use by up to 50% and indoor water use by an average of 16%. Buildings constructed before 1990 did not include these low-cost options, as this technology was invented in the early 1990s. Installing high-efficiency toilets is a huge opportunity for investors to reduce water bills for older buildings. Saving an average of $140 per household, high-efficiency toilets pay for themselves after the first year. Toilet tank banks are also a low-cost option for landlords who are not yet ready to spend capital on new toilets. Toilet tank banks are placed into toilet tanks to save on water usage.
After toilets and washing machines, showers account for the third greatest use of water per day, with the average amounting to 11.6 gallons per person, per day. A 2.5 gallon per minute (gpm) shower head can use up to 440 gallons of water every month, solely from shower use. A low-flow shower head can help save 50% of shower water usage per month. One person can save 2,000 gallons per year by switching to a low-flow shower head.
Another way landlords can save on utilities is to use the ratio-utility-billing-system, or RUBS. RUBS allows landlords to bill-back utility usage to the tenants. The landlord can bill the tenant's portion of the utility bill in one of two methods: a) by billing the unit based on the number of tenants per unit or b) by billing the unit based on the square footage per unit. This allows landlords to cut utility operating expenses (OPEX) and mark the bill back as "additional income" in their underwriting, adding to NOI.
Finally, when it comes to saving on water, it’s time to talk about the dishes. One load of dishes washed by hand can squander a whopping 20 gallons of water. Contrary to popular belief, dishwashers actually save on water. Water- and energy-saving dishwashers are known to use as little as four gallons of water per load of dishes. Compared to hand-washing dishes, this adjustment can account for a boatload of savings. Installing dishwashers in older units should be a no-brainer.
Gas and Electric Usage
Electricity is also a significant operating expense for multifamily buildings, so it's important to conserve it when possible. Replacing light bulbs with energy-efficient options, such as light-emitting diode (LED) bulbs, can help cut costs. LED and compact fluorescent light (CFL) bulbs use about 75% less electricity than traditional light bulbs. The use of LED bulbs in common area hallways (an expense the landlord usually covers) is always advised. Sensor lighting is also recommended in non-common-use areas.
To improve gas and heating bills, expert property managers recommend installing smart thermostats for temperature control. Programmable thermostats are known to save up to 10% on energy costs per year. In addition, the tedious task of sealing ducts, caulking windows, and adding extra insulation can play a major role in saving on gas and heating costs. Landlords can also use the RUBS system to bill back tenants for gas and heating utilities. (Another suggestion to investors: it is advisable to first research neighboring properties and the amenities they provide their tenants. If your competitors offer certain utilities as part of the rent and you do not, it may be a detractor for future prospective tenants.)
Conclusion
High-efficiency toilets, low-flow shower heads, RUBS, dishwashers, energy-saving and motion-sensing lights, smart/programmable thermostats, and extra insulation can help increase multifamily NOI, and therefore increase multifamily property values. The experts at Goldsher utilize the above strategies in our value-add projects for properties built pre-1990s. Older properties with minimal upgrades provide a larger opportunity for OPEX savings. While some investors shy away from these opportunities due to the facade of higher OPEX and lower margins, our team deliberately seeks these types of investments to improve operational efficiencies and increase NOI over our holding period.