Multifamily residential properties are investments created to provide income to the owners and stakeholders.
There are a variety of philosophies as to how to best maximize the income of a property. Among the most common are the Expense Reducer strategy and the Revenue Leader philosophy. Each one has their pluses and minuses. Let’s take a look at each strategy in turn.
The primary goal of this method is to maximize NOI (Net Operating Income) by reducing expenses. Some of the methods used in this strategy are:
- Completing work in-house rather than using contractors. In general, it is ideal to complete whatever work possible in-house, but there are scenarios where it is either faster or less of a strain on the maintenance team to hire and utilize an outside contractor. The expense reducer will likely make the expense decision solely based on cost and will keep as much work in-house as possible.
- Using quicker, less permanent fixes to complete more costly repairs. The minimum requirement is to take care of the resident and preserve the asset. Beyond that, this strategy would favor a repeated repair in place of a replacement to address a maintenance concern.
- Little to no investment in amenities or property appearance. All properties should remain free from trash at all times, but there would be little attention beyond that to the property appearance.
- Little to no spending on discretionary items. Oftentimes we can use unspent, budgeted funds, to enhance the property or show appreciation to residents. An expense reducer would save any unused funds rather than apply them elsewhere. Additionally, there likely would not be a budget for items geared toward resident appreciation or retention.
Due to the lack of investment in the property and the effect on resident experience, this strategy is best aligned to short-term positions. This strategy could be appropriate if a property is for sale and the seller does not want to spend any unnecessary money. Similarly, an expense reduction strategy could be a necessity for properties with cash constraints.
On the other end of the spectrum is the Revenue Leader strategy, which seeks to maximize NOI by increasing income. Some of the tactics used in carrying out this strategy include:
- Charging rents at the top of the submarket
- Maximizing billings such as RUBs and amenity fees
- Pushing renewal rents
In order for the Revenue Leader position to be viable, the property must be worth the income premium. This can be achieved through methods such as:
- Offering amenity quality at or above the submarket. Ideally the property would have amenities similar to those in its submarket, but the property can still be a revenue leader if this is not the case. We most often see this with pools. Properties without pools, even when the submarket has pools, can still perform very well within this model.
- Clean, modern property appearance. The property should be modernized at or above its submarket. But, take note that the successful revenue leader does not have to have an appearance or amenity outside of the expectation of its submarket.
- Units well prepared for move-in. The unit finishes can be in line with the submarket, but the quality of the make ready should be exceptional. This means a high quality paint job with no overspray or runs, attention to detail through all aspects of the make ready process and very thorough housekeeping.
- Marketing budget that can reach a wider audience. Some applicants will not be interested in the property due to the higher rents. To reach those open to paying more, your marketing needs to have wide appeal to maintain high occupancy levels.
- Excellent customer service. Good customer service should always be the expectation, but revenue leaders have the discretionary authority to go above and beyond expectations by taking care of residents quickly, and with a higher level of service than is expected in the property’s submarket.
- Timely, professional maintenance. Oftentimes, after the resident moves in, the maintenance staff has more interaction with the resident than the office staff does. It is vital for the maintenance team to take care of the resident by offering quality work and professionalism. This is one of the reasons we train our maintenance staff in customer service.
Revenue Leaders are in a good position to be a long-term hold asset. Initially, the property will be spending more heavily as it prepares to achieve it’s long-term goals. Some may see this as unnecessary spending, but these expenditures are just as much a part of investing in the property as the purchase price. The widespread income success will come in due time, and will produce returns much greater that of the initial investment.
The Bottom Line
Both of these strategies can be applied to properties in any asset class. In A and B class properties, we often expect the Revenue Leader approach. Class C assets can also be extremely successful as a Revenue Leader with a little extra attention to detail. Remember, the comparison is within the property’s submarket, not the overall rental market.
Whenever possible, I prefer the Revenue Leader strategy. The higher income, Revenue Leader strategy produces a more stable community with less need for capital investment in the future. In addition, properties are typically valued on an income-based capitalization rate. The higher income can significantly affect the value of the property when the time comes to divest. Even if you don’t plan on selling the asset, this valuation could allow you to complete a refinancing that will free up cash flows that can be used for other investments.
In my experience, the Revenue Leader model is the one that produces the best results for our property owners, and makes for the most satisfied residents.