Paying Bills

How to Increase your Net Operating Income (NOI) by Cutting Costs

One of the largest areas of savings that we have found in our years of doing property management has been in the effective management of vendor and utility contracts. This is true whether you have one unit, or a thousand units. This is one of the most-often overlooked areas in all of property management, making it one of the best places to find savings that can help you maximize your profitability. Here, we point out some of the more common places that owners can save:

Watch those Utility Contracts! It is easy to overlook the details of the utility contracts as they gradually change over time. However, if you don’t pay attention to these contracts, you could be spending hundreds, or even thousands of dollars extra each year! We have found that phone lines, Internet, insurance, and trash services are the biggest culprits! There is frequently savings of thousands of dollars per year within these utilities alone. In fact, for larger complexes, we have seen savings of tens of thousands of dollars annually! The devil really is in the details. To make sure you’re getting the best deal, make sure your rates aren’t increasing over time. Ensure that your contract didn’t expire (some utility contracts increase your rates drastically when your contract expires – watch out for this!). Additionally, make sure you shop around for the vendors. A little bit of

Maintenance, Maintenance, Maintenance: They say that the rule of thumb for maintenance costs is that they typically total around 1% of your properties cost per year, and Fannie May says you should expect 2%. So, if you own a $500,000 property, this would mean that the average maintenance cost would be $5,000 to $10,000 per year. This is a substantial amount of money, and it really adds up over time. There are a couple of key ways that you can save on maintenance costs.

The first, is with a proper preventative maintenance plan. When it comes to maintaining real estate, an ounce of prevention really is worth more than a pound of cure. We encourage all of our owners to keep up on their properties. Properties last longer, rent at higher rates, and have less turnover (tenants stay longer) when the property is well maintained. Too often we see owners end up in what we like to call the ‘death spiral,’ where they let the property condition decline by taking short-cuts on maintenance items, which in turn lowers the rents, which in turn means they have less money available to fix the property, so the property becomes more run-down, and the rents go lower and so on. Obviously, this is the worst-case scenario, but it happens more often than you think so it is worth mentioning. In the end, the way to get the most value out of your real estate investment is to maintain it properly. You will end up with a higher resale price and higher revenues throughout the entire time you own the property, which ends up resulting in higher profits.

The second item when it comes to maintenance is this: who does your maintenance? An average licensed handyman typically costs around $45 an hour. This is quite expensive, considering the lions share of your annual maintenance costs ($5,000 to $10,000) are labor (as opposed to materials/supplies). Let’s say for this estimate that your labor costs are around 75% of the overall maintenance costs. In this case, you would be paying approximately $3,750 to $7,500 per year in handyman labor. That can really add up.

Now you’re not going to be able to get out of paying maintenance expenses, so we will dispel that notion. However, hiring a quality property management company who has an in-house handyman can help significantly with these costs. Frequently the in-house handyman of a property management company charges less per hour than the going rate in the market. The bottom line being that if the industry rate is typically $45/hour, an in-house maintenance man will typically cost around $35/hour. Using the above annual labor costs, this feature alone can save you between $800 to $1600 per year!

Our owners frequently save thousands of dollars per year using the above methods. We hope that you will too! If you have any questions or would like some advice on your particular situation, feel free to reach out to us.

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