How to improve NOI on your Residential Real Estate Portfolio
If you are seasoned investor or even just starting out, you have already probably created Return on Investment into a mantra of sorts. You want to make sure that the money you invest (as well as the time) creates a return that pushes you further toward your goals.
But investors also need to consider their NOI—Net operating income. This is a valuable way of calculating the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure that appears on a property’s income and cash flow statement, but excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.
NOI is very similar to DSCR, which is a way that Lima One Capital and other private lenders evaluate a rental property or portfolio for underwriting purposes. While DSCR is used to underwrite a property, NOI is usually used to optimize the profit and performance of an asset under management.
NOI is crucial because investors must know how their property will perform after accounting for operational expenses. So how can real estate investors choose operating expenses that boost NOI instead of draining it? Here are some ideas.
This is seems like a no-brainer, but a lot of investors will sink money into unneeded interior renovations when they may be losing potential tenants turned off by chipping paint, overflowing trash containers and overgrown greenery. One mistake we see often is investors putting a lot of money into greenery near an entrance or a front sign. Yes, that attracts people in, but well-kept landscaping in front of a house or near apartment entrances may do more to get renters to sign a lease more quickly. Reducing the time of vacancies and the effort spent recruiting and landing tenants is a sure way to improve NOI.
A lot of investors budget for maintenance costs during the course of a year and cross their fingers that their numbers were on point or better than expected. It’s a good system, but a smarter one would be taking a preventative approach. This may apply to annual service checks on HVAC systems or to more extensive repairs that can happen when a unit is already vacant. For example, it’s easier to replace roofing over a unit that is unoccupied than after an unoccupied unit after a major rainstorm and water is pouring through a hole. So it may actually be cheaper to replace that roof early and avoid the irate tenant by being proactive.
Know your market’s rates
If the median price for a one-bedroom is $1,000 in your zip code, and you are charging $800, then you’re missing an opportunity. Make sure your properties offer the comfort and amenities at or above the local market so that you can raise your rates to meet the demand. As you do this, make sure that you consider the hyperlocal market. Things like school zones, crime rates, and traffic patterns can make a big difference in market rates, even on a street by street basis.
Find unique ways to increase additional revenue
This doesn’t mean charge for parking and pool use, but it could be as simple as offering storage units on site as an add-on. Your tenants will see that proximity as an advantage over having to drive somewhere to get their packed items. The same could be true of on-site services. For example, might a local dry cleaner pay a referral fee in order to have the ability to market pickup/drop-off services? Get creative and find ways to add revenue at a minimal marginal cost.
NOI doesn’t have to be tricky, but improving it takes strategic thought and planning. Use this tips to start your process of boosting NOI for your rental portfolio or multifamily property.