Rod Khleif Real Estate Investor, Mentor, Coach, Host, Lifetime Cash Flow Through Real Estate Podcast.
Commercial multifamily assets are valued based on the amount of net operating income (income minus operating expenses) they produce. The more NOI a property throws off, the more valuable it is.
One of the major benefits of a commercial multifamily investment is that property owners have the ability to “force” a property to appreciate by taking steps to increase its NOI through effective management practices. These steps can impact the income side of the NOI equation or the expense side. Ideally, they impact both.
I want to concentrate on the income side of the equation by describing eight ways that multifamily property owners can increase non-rental income in a multifamily property. Specifically, we’ll focus on a la carte items that residents only pay for if they want to opt in.
Not all rental units have a washer/dryer. Tenants in those that don’t may benefit from the ability to do laundry onsite through paid laundry machines.
For the property owner, the cost to obtain laundry machines is minimal and they have a long useful life. For the tenant, an onsite laundry option is convenient and cost-effective when compared with paid wash/fold services.
Vending machines are another low-cost way to provide an added benefit to multifamily residents. The size of the benefit is often directly proportional to the demand for the products that can be purchased through the vending machines, and we like to consult residents on their preferences. In many cases, they could be snacks and soft drinks. In other cases, they could be household basics like soap, toothpaste or shampoo.
If there is unused space in a basement or parking lot of the property, converting it to paid storage provides both a valuable service to residents and a potential way to generate a steady stream of non-rental income. Converting space into storage units has a higher upfront cost, but they are very scalable and the demand for them can be high. Once the upfront cost is recovered, the income goes directly to the bottom line.
4. Event-Based Fees
While most of us are opposed to new fees, it can make sense to implement a fee system that is triggered by certain events. Examples of event-based fees include application fees, move-in fees and late payment fees.
These types of fees are only incurred by tenants based on certain events so they do not constitute higher rents, but they can provide an ancillary income stream that increases NOI.
5. Ancillary Rent
Under certain situations, it is common for multifamily real estate owners to charge ancillary rent. This is particularly common in two situations: pets and parking.
With regard to animals, pet rent is usually charged based on the size and/or weight of the animal. Fair market rent for a pet can range from $25 to $100 per month, per animal.
In dense, urban markets (like New York) where there is high demand for parking and limited supply, it is common for multifamily lease agreements to charge monthly rent for parking on a per unit, per month basis.
6. Cable And Internet
For larger properties, there are certain cable and internet providers that may be willing to provide a hefty payment in exchange for the exclusive rights to offer their services in the community.
The cable and internet bills are separate from rent payments so residents have the option to purchase these services (or not) and the property owner has the potential to collect a significant upfront payment in addition to recurring monthly revenue.
7. Bike Storage
For multifamily rental housing that is located in urban areas and/or bike-friendly cities, there may be strong demand for onsite bike storage. If this is the case, it could be a good idea to create a secured area that is dedicated to safely storing resident bicycles. Of course, residents who wish to store their bicycles will be charged a nominal fee for this service. In most cases, it is added to the tenant’s rent (as a separate charge) to make it easy and convenient to pay.
Multifamily tenants — especially new ones — have a near-constant need for services. To assist them, it can be a good idea for property managers/owners to connect with local companies that are willing to pay a commission for a successful referral.
For example, a property owner could partner with a moving company whereby they refer customers in exchange for a small commission on each sale. As a best practice, tenants should be provided with written notice of this arrangement to ensure they are aware of it and not being charged above-market rates.
How Impactful Are Increases To Net Operating Income?
At a 7% cap rate, every $1 in new NOI adds $14 to a property’s value. At scale, the value-add can be dramatic. For example, if a property owner could add $100,000 in additional NOI, they could benefit from $1.42 million in property appreciation. But, there are some risks to this strategy.
New costs or fees always run the risk of upsetting existing tenants, who have the option to vote with their feet and their dollars. At a minimum, they could decide not to use the vending machines or storage space. Or, in a worst-case scenario, they decide not to renew their lease and leave altogether. As a best practice, there should be an open line of communication with tenants and any new fees should be phased in gradually over time.