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As many markets continue the process of overheating their rent rates, it will become more and more challenging to force appreciation when purchasing multi-family assets in larger markets.
Buying an asset at an attractive rate is only one part of the equation when investing in apartments. To be successful, you will need to provide a product which is not only attractive but also profitable.
If the raising of rental rates is not an option and utilities are already billed to the tenants via a rubs or sub metered system, a landlord has only one other option to increase profit margins. Ancillary services.
Ancillary income is normally the income which is produced by amenities or services or through creative strategies in either leasing or marketing. The income produced by these programs is meant to supplement increases in the properties net operating income normally by adding on small fees to leases on a monthly basis. What often makes this income stream the most attractive, is that you normally do not have to inject large sums of capital to add these services.
Below is a list of four ancillary items which have been proven to not only increase income but resident satisfaction as well.
Pets: Per the APPA National Pet Owners Survey there are 393.3 Million owned pets in the United States 183.9 Million of which are either cats or dogs. On average $50.00 per month can be allocated to a fee or “Pet Rent” for allowing the renter to keep one cat/dog. This is not counting the pet deposit which can range from $250.00-$500.00 in case of damages. Also, in some states, you are permitted to require renters to add a rider to their renter’s insurance policy concerning damages to the property caused by their animal.
To further illustrate the earning potential with regard to pet policies, let’s say that you have a 50 unit apartment building. If 40% of your renters (20 units) are currently paying rents for a pet at an additional $50.00 per month, by year end this will be an additional $12,000 in profit.
Reselling Cable/Internet: Technology is the driving force of today’s world, which has increased the community wide demand for reliable Wi-Fi. Renters are mobile and the idea of losing connectivity while they move about the property is a real problem. As a landlord you can use this need to supplement additional income very painlessly. By purchasing internet for the entire property, you have the ability to market a fast connection for an additional fee.
Getting back to the example of our 50 unit apartment building this would allow you to raise rents by a fee of at least $30.00 per month, which would be an additional $18,000 in revenue, while marketing the service as complementary. The benefits of building wide internet also become much more prevalent as smart technologies continue to change the way we exist in our homes. That being said, be sure that the service is set up by the provider on an individual log in basis to remove any liability.
Laundry System: Although this amenity seems common as an everyday necessity, there are a number of multi-unit housing structures which do not offer common area laundry. When asked, most owners will state that the service is far too expensive to either incorporate or maintain given the cost of the equipment. Luckily, there is more than one way to incorporate this service into an apartment complex. Laundry service providers can and will install machines into your existing structure for a fee which is derived from the profits generated by the machines.
With our example property, a third party service provider you would normally issue 6-8 washers and 6-8 dryers with a fee of $1.75 per load on each machine. Saying that every two weeks each unit uses the machines for an average of 3 loads. If the structure of the third party service agreement states that the service provider receives 60% of the income produced by the machines, you would still be left with $5,460 in additional revenue for the year.
What is important to remember with this type of service is that everything has to be negotiated with the service provider, especially fee structures.
Renting Vacant Space: Whether you are renting storage space in a rural area or parking space in an urban metropolis, you need to capitalize on the vacant space which would normally be unusable. Covered parking spaces or storage lockers are excellent methods in which to raise ancillary income in any market however, they will require some capital investments upfront in order to introduce these services. Carports need erecting, walls and gates need to building the income generated by these ancillary items often are over $100.00 in income per unit on a monthly basis.
With the example of the 50 Unit apartment building, say that the current parking lot allows for the construction of 20 covered spaces. Using the example of $100.00 per month, this would generate $24,000 in additional revenue.
The key to success in creative commercial real estate investing is innovation. Additional revenue of any kind should be welcome. Some investors will go so far as to rent difficult to access spaces such as rooftop space for cell-phone towers or the ground underneath a property to horizontal slant drilling for oil companies.
There are a number of services which fit in multiple markets. So long as there is a balance to how the services are represented to the tenants and the charge is in line with what the market will support you will be able to continue to drive your net operating income (NOI) higher.
If you are a looking for additional methods to drive NOI growth for one of your current properties or are new to the world of Commercial Real Estate Investment and want a strong platform in which to dive into the market, the Commercial Academy will be hosting the first of our 2018 Commercial Property Academy Live events in Orlando Florida March 8th-11th.
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