As operating expenses tick up, affordable housing operators need to find ways to improve the results at their properties. It’s a tough task because their developments aim to be attainable, and they are often limited in how much rent they can charge residents.
That means owners must search for ways to boost the bottom line. Several industry leaders provide seven ideas for increasing net operating income (NOI):
1, Engage property management early: Different types of properties operate differently. Senior housing developments may need less maintenance than family properties, but they often have higher heating costs. Utilities and property taxes vary by region. Having property management input and buy-in during early deal structuring puts the project on the right path from the start and avoids big “misses,” which affect the project NOI indefinitely, says Tania Kadakia, director of partnerships and residential investments at Chicago-based DL3 Realty Advisors. Before spearheading new housing efforts for the firm, she worked in lending and low-income housing tax credit equity, overseeing originations, underwriting, and asset management.
2. Engage asset management: Watch the books and operating metrics. What’s the time on unit turnarounds after a tenant leaves? Is the management company getting Section 8 rent increases as scheduled? “It was eye-opening to me in my lending and equity roles how many owners aren’t seeing these opportunities,” Kadakia says. “This especially seems to happen when an organization is in that tricky transition phase from a smaller organization with a few properties to a midsized organization with 10 or more. “
3. Retain existing and reliable long-term residents: This can be more valuable in the long run than the overall benefit of renting to new residents. “For families with a long tenure at the property and a strong track record but newly struggling to pay rent (because of the impact of the pandemic), the manager might consider rent reductions for longer leases,” says Allen Feliz, vice president, affordable housing managed services, at MRI Software. Managers might also consider this strategy for other types of dependable residents, including those tightening their budgets and wanting to either find a less expensive unit or families in search of more space to accommodate work from home and/or at-home schooling for their children. The missed income from not increasing rent on these types of residents may be offset eventually by preventing vacancies and turnover costs, particularly in a market that has slowed, Feliz says.
4. Budget for unusual amenities: Balconies and unusual amenities are wonderful offerings for tenants. Just make sure to add budget or a reserve for their upkeep so you aren’t hit with a big bill several years into the property life, Kadakia says.
5. Think about economies of scale: Because affordable housing rents are restricted and revenue is therefore capped, increasing NOI really boils down to keeping operating expenses as low as possible, without compromising quality, explains Matthew Rieger, president and CEO of Housing Trust Group, a Florida-based developer and operator of affordable, workforce, and market-rate multifamily housing. Although you can appeal your taxes, shop for a less costly insurance premiums, and negotiate a better management fee, the reduction achieved on these so-called “non-controllable expenses” is usually pretty low. “So HTG’s approach is to focus on everything else,” Rieger says. “We see two key ways to achieve better NOI. One, economies of scale—the larger the property (more units in total), the less expensive per unit it is to manage. Properties with more than 120 units tend to perform better, for example. Second, high-quality construction—this will help mitigate expensive maintenance fees over the long run. This includes incorporating cost-saving green features like sensors that keep electric/energy costs low.”
6. Work with your vendors: On the expense side, can operators get discounts from vendors they’re using more frequently during the pandemic? For example, most organizations have increased their cleaning supply expenses during the pandemic. Bulk purchasing presents opportunities to negotiate better rates and achieve volume discounting, says Feliz.
7. Tighten up your banking protocols: Contact your banker about the many security offerings available to prevent fraud. Fraudulent activity can quickly cost you, and thieves are becoming less easily detectable. Ask your accounting and asset management departments to attend fraud prevention classes, Kadakia says.
