Decreasing Expenses in Multi-Family

Welcome back, everyone!

This post is a continuation of a topic which is critical for owners of multi-family apartments: how to decrease operating expenses so as to increase the Net Operating Income (NOI) of a property. This post will describe 3 vital areas to address in order to reduce operating expenses: 1. Tenant Turnover 2. Competing Bids for Services 3. Tax liability. I've chosen these areas because they have the potential to have the greatest savings and thereby largest impact on the NOI.

Before I dive into the three areas which must be addressed when considering reducing operating expenses, let’s get a quick refresher on how NOI is calculated. Remember that NOI=Gross Income-Operating Expenses. Gross Income can come from various income streams associated with the property: rent, application fees, pet fees, coin operated laundry, etc. Operating Expenses include those expenses related to the operation of the property: utilities, insurance, repairs, etc. What is NOT calculated as an operating expense includes items such as: loan payments (principle, interest, loan points), capital improvements, income taxes and real estate transaction commissions. Now that we’re comfortable with the concept of NOI, let’s look at critical ways to decrease operating expenses! 1. Reduce Tenant Turnover The likely largest operating expense associated with residential real estate is tenant turnover and vacancy. While owning multiple units reduces the impact of turnover/vacancy on the NOI, it remains a large expense which must be reduced as part of an overall asset management strategy. Costs associated with turnover and vacancy are: lost rents, cleaning costs, repair costs, and advertising costs. The goal is to empower and expect your professional property management team to have a tenant retention plan. This includes items such as: having quarterly tenant get-togethers, hosting holiday events, bar-be-ques, timely resolution to tenant repair issues, adding value and convenience for tenants. If tenants feel comfortable, safe and receive value for their rent, they will WANT to stay. One of the first things to ask a property management company before you hire them is: what is your tenant retention plan? 2. Get Competing Bids for Services When businesses are forced to compete when offering services needed by you to manage your multifamily asset, you the owner get the benefit. For every service you or your management outsources, get three competing bids from three different companies. Ideally, representatives from the bidding companies show up to the site all at once, which shows them they are in fact competing for your business. Competing bids should always be obtained for: trash disposal, property insurance, internet/cable services and major repair projects. These contracts should be reassessed on an annual basis, if possible, and go through the competing bid process before signing new annual agreements. 3. Reduce Property Tax Liability Property taxes are a large portion of the operating expense budget for multi-family assets. It is critical that your tax valuation is accurate and that you are taking advantage of all applicable tax benefits allowed based upon the location of your property. Important members of your team which can assist you with taxes are: tax attorneys, CPAs, and cost-segregation specialists. You should work with your attorney and CPAs on an annual basis to ensure your tax valuation is accurate and file any appeals in the event they are not. Multi-family owners have the added tax benefit of cost-segregation. Cost segregation is conducted by a professional expert with knowledge of real estate and tax law. Cost segregation studies will allow the owner to identify which parts of the multi-family asset can be depreciated at a faster rate than standard depreciation thereby reducing the annual tax cost. It should be noted that depreciation for tax purposes only defers taxes; however, when depreciation is coupled with other real estate tax benefits like 1031 Exchanges, taxes can be deferred essentially indefinitely. For a complete review of cost segregation, visit the IRS website: https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-1-introduction. So there you have it, 3 practical ways to decrease operating expenses in order to raise the Net Operating Income and force appreciation of your assets. We would love to hear what topics you’re interested in: leave us a comment on our website or send us a note. Stay tuned for more multi-family content! *No content in this blog should be considered legal or tax advice. Readers should consult professional, licensed experts prior to making any investment, legal or tax decisions.*