Monday, June 23, 2014

Increasing apartment property values through NOI

by Lee Fehrenbacher,
HFO Research Analyst

It’s a good time to be a seller in the Portland/Vancouver area.

With vacancy rates as low as 3 percent, and rents pushing $1.16 per square foot, demand for apartments is high – from tenants and investors alike. But with a lack of available product on the market, opportunities to get a financial foot in the door are scarce, and that could spell opportunity for Portland/Vancouver area building owners.

Last week, HFO’s Greg Frick described those market dynamics to a room of private investors at the Heathman Lodge on Northeast Greenwood Drive in Vancouver. A scarcity of available multifamily investment properties, he explained, has helped compress cap rates in Vancouver into the low 6 percent range – which, with interest rates expected to rise in the not-too-distant future, is as low as they’re likely to go.

As such, there probably won’t be a better time for owners to sell in the current real estate cycle. But first, Calton urged landlords to take another look at their properties’ income streams. Consider that in a 6.6 percent cap market, for every additional $50 a unit generates per month, the value of that unit increases by roughly $9,000, he said.

HFO brokers offered a number of strategies for increasing a property’s Net Operating Income:
  • The trap of over occupancy – If a property is consistently 100 percent occupied, there’s a very good chance it’s not charging enough rent. Having a small percentage of vacant units allows landlords to assess the market’s appetite to pay more. Consider placing an advertisement touting higher rents as soon as a tenant gives their notice to vacate. If a unit traditionally garners $1,000 per month, try listing it for $1,050 or $1,100 and see who bites.
  • Add amenities – Amenities are becoming increasingly important for tenants, who are expecting more for their dollar as rents rise. Of all amenities, missing dishwashers are probably the biggest deal killers. Many residents are willing to pay as much as $100 more a month to have one. The same is true for washers and dryers. Some managers are also looking at including WIFI services in base rents.
  • Pet rent – More and more renters in Portland have dogs these days, and as a result many apartments are opening their doors to their tenants’ four-legged friends. But instead of just charging a pet deposit, some owners are charging a monthly pet rent.
  • Appliance rentals – Some apartment managers are beginning to rent out appliances like vacuums and carpet cleaners – things renters need occasionally but not enough to buy themselves. “How great would it be for your residents to pay you to help clean up your property? That one is becoming more and more popular.”
  • Reduce utility expenses – common sense upgrades to low-flow toilets and shower heads, sink aerators, and LED light bulbs are easy changes that can go a long ways toward cutting expenses. Combine that with native landscaping and many owners are able to reduce water usage to as much as half. 
  • Vending machines – all over the country, managers are adding new vending machines that can sell everything from deodorants to cleaning products, from the convenience of the main lobby.  Some machines bring in as much as $2,500 per week.
  • Take nicer pictures – When marketing apartments for rent, it pays to have quality photos. Even though you’re not supposed to judge a book by its cover, residents do.
Other income-producing improvements could include:
  1. Instituting a RUBS program
  2. Leasing rooftop space to cell tower owners
  3. Increasing the cost of a load of laundry.
But before making any of those decisions, investors should really get to know their market. Baby boomers, for instance, searching for luxury apartments won’t be looking for the same things as 20-somethings straight out of college. A successful building will respond to the specific needs of its targeted demographic.

For more ideas on positioning your property for maximum return, contact the HFO team at 503-241-5541.