Learn how to effectively respond to tenant inquiries in this blog. From setting clear communication expectations to providing complete and accurate...
Increasing real estate NOI: a 5 step guide
Discover effective strategies to boost the value of your real estate assets through Net Operating Income (NOI). Learn how to calculate and optimize your NOI, reduce operating costs, and implement revenue-enhancing tactics. Explore ways to upgrade amenities, monetize services, and mitigate risks associated with increasing NOI.
Increasing the value of your real estate assets is no easy task, but knowing where to start is half the battle. One good starting point for determining, and eventually increasing, your property’s value in Net Operating Income (NOI).
No doubt as an asset manager you're well acquainted with this metric, which is calculated by subtracting your total rental income by your operating expenses.
Investors and appraisers rely on NOI as a basis for determining a property's worth. The capitalization rate, derived from dividing NOI by the property's market value, is a crucial factor in assessing potential returns and comparing properties.
In this blog, we'll take you through some steps you can take to increase your NOI and with it your properties values
The steps are as follows,
- Calculate your current NOI
- Find ways to reduce operating costs
- Build a strategy for optimising revenue streams
- Consider the risks
- Enhance tenant satisfaction and retention.
Let’s take a closer look.
1. Calculate your current NOI
The Net Operating Income (NOI) serves as a fundamental metric in the analysis of real estate investments. It empowers investors to assess the profitability of a property and make well-informed decisions when it comes to buying, selling, and negotiating.
Knowing your NOI is a good starting point to start increasing the value of your properties. But to accurately determine Net Operating Income, first determine the following variables.
Formula: NOI (net operating income) = Real estate Revenue - Operating Expenses
Potential rental income
Potential rent income is the maximum amount of rental income a property could generate under optimal conditions, assuming full occupancy and charging rents at their highest feasible levels.
It involves determining market rental rates, evaluating unit types and sizes, and calculating the potential monthly rental income for each unit.
Additional revenue streams
Your revenue doesn’t just come from rent. Most modern real estate properties have multiple amenities and services on-site that contribute to total Real estate Revenue, be that laundry services, parking spaces, cleaning services, shared spaces, gyms, childcare, shared bikes etc.
Determine the total value of these additional revenue streams and include in your final Real estate Income for accurate net operating income. We’ll discuss additional revenue streams in more detail in a later section.
Since vacancy loss can have a big impact on rental income, it’s worth including it in your NOI calculation. When there are vacancies in the property, it means that not all units or spaces are generating rental income, leading to a reduction in the total rental income component of the NOI calculation.
The impact of vacancy losses on NOI can be expressed through the following formula:
NOI=(Total Rental Income−Vacancy Losses)−Operating Expenses
Operating expenses are what is subtracted from the total Real estate Revenue to calculate NOI. Make sense of all these expenses and include them in your calculation. Operating expenses might include:
- Property management fees
- Property taxes, insurance and utilities
- Maintenance and repairs
- Janitorial services
- Waste disposal
2. Find ways to reduce operating expenses
The lower your operating expenses, the less it takes away from your total rental income and the higher your Net Operating Income will be. But how do you go about reducing operating expenses?
Minimise property management costs
By introducing greater efficiency to property management, you can minimise costs. Digital technology has a huge potential here, making communication, security and processes more streamlined, less time-consuming and ultimately less expensive.
Consider upgrading your property management software to further streamline processes, automate tasks, and improve efficiency.
Lower utility costs
Invest in energy-efficient upgrades to reduce utility costs over the long term. Installing energy-efficient appliances, lighting, and HVAC systems can lead to lower operating expenses.
Consider complying with ESG frameworks to keep to reduce costs and environmental impact around things like water conservation, waste management and recycling.
Conduct regular preventative maintenance to address issues before they become major problems. Proactive maintenance can extend the lifespan of property components and reduce emergency repair costs.
Invest in comprehensive ticketing software that makes processes quicker and more transparent.
3. Build a strategy for optimising revenue streams
Your revenue streams can make a significant impact on your total rental income. But it’s important to understand which revenue stream actually brings revenue, and which will simply increase your overheads over time.
For those that can bring real revenue, it’s essential to steps to make them as a optimal as possible.
Implement value-add strategies
One way to optimise revenue streams is to identify and implement value-add strategies that enhance the property's appeal and market value. This could include property renovations, upgrades, and improvements that allow for higher rent rates or increased tenant demand.
- Smart technology—Installing smart home technology, such as smart thermostats or keyless entry systems like iLOQ or Salto KS, can attract tech-savvy tenants and potentially allow for premium rent rates.
- Property renovation and upgrades—Undertake renovations to modernise the property's appearance, and improve functionality. This might include upgrading kitchens, bathrooms, flooring, or common areas.
- Upgrade or add amenities—Gyms, communal workspaces, rooftop gardens, or outdoor recreation areas can attract higher-paying tenants and improve tenant retention. More on this in the next section.
- Overperform on key ESG frameworks and get a rent premium—Complying with ESG frameworks in real estate contributes to a value-add strategy by enhancing property appeal, fostering long-term cost savings through sustainability measures, mitigating risks, attracting socially conscious tenants, ensuring market competitiveness, promoting community integration, and aligning with evolving regulations for sustained success in the dynamic real estate landscape.
As we’ve just mentioned, introducing or upgrading your properties amenities can add great value to your property and make a healthy contribution to your NOI.
But such amenities can be expensive to run, so you want to make sure that they become revenue streams, not revenue sinks.
So if you’re introducing new amenities - ask yourself a couple of questions beforehand.
- What amenities are useful for my tenants?
- How can you make your tenants aware of these amenities?
Consider supplementing your property management or ERP system with a community app where bookable amenities and services can be listed and made accessible. Advertising them within the property itself will also help.
- How can tenants pay for these amenities in a user-friendly way?
The last step to truly monetising your amenities is giving your tenants a user-friendly way to pay for these amenities. This again can be solved through a digital community app with a booking module, provided that it integrates with a payment provider.
Introduce fee-based services
Introduce fee-based services for tenants, such as concierge services, pet services, or cleaning services. These services can create an additional revenue stream while providing added value to tenants. Such services can provide a reliable supply of recurring income that feeds into a better NOI.
Services like cleaners, childcare, parking spaces and laundry can all be offered through a subscription model.
Want to know what kind of services and amenities tenants are willing to pay for?—Download our tenant survey.
4. Consider the risks
Risk is an inherent part of any financial venture. While going through these steps, it’s important to understand the risk involved with building strategies to increase revenue and bring down costs.
Once you understand these risks, you can take steps to mitigate them. Let’s consider some risks involved with growing your NOI.
It’s possible that, when implementing a value-add strategy or investing in revenue-generating amenities, budgets will overrun and unexpected expenses will arise during renovations or improvements.
This only increases your costs and could have a big impact on your total revenue, and therefore your NOI. Perform an analysis of what the biggest costs are in your strategy and what you can do, if anything, to minimise those costs.
Disruption caused by renovations may lead to tenant dissatisfaction, which could in turn result in higher turnover rates, increased vacancy periods, and potential difficulty attracting new tenants.
This is another reason why it’s important to have software that enables you to communicate easily with tenants, through message boards or instant chat, and from which you can understand their concerns by collecting feedback and running surveys.
By notifying them of potential disruption beforehand and working collaboratively with tenants on what renovations need to be made and why—you can foster a stronger relationship with your tenants which may withstand any inconvenience caused by renovations.
5. Enhance tenant satisfaction and retention
Satisfied tenants are more likely to renew leases, reduce turnover costs and provide a consistent rental income—all of which can lead to a more stable Real Estate Revenue.
They’re also more likely to pay rent on time and may accept reasonable rent increases. Additionally, positive tenant experiences contribute to positive word-of-mouth, attracting quality tenants and reducing vacancy periods, further supporting NOI.
Focus on community building
Tenants are more likely to occupy your property for a long time, tolerate rent increases and pay extra for access to amenities and services if they feel that they are part of a community. A sense of community can have a huge impact on your tenant’s wellbeing and quality of life.
Creating and fostering a sense of community within a property requires effort and dedication on the part of the property manager. Some ways to create and foster community include:
- Organising events and activities that bring tenants together, such as movie nights, potlucks, and game nights.
- Creating a shared space, such as a community garden or lounge, where tenants can gather and socialise. In our recent tenant survey, shared spaces were listed as one of the top factors motivating tenants to rent a property, with 88% choosing this in our recent survey.
- Encouraging communication and interaction between tenants through tenant communication apps. 57% of the tenants we surveyed said that good communication and responsiveness were desirable traits in a landlord.
- Providing opportunities for tenants to get involved in the management of the property, such as serving on a tenant advisory committee, or taking part in tenant surveys.
Take a tenant-centric approach
Tenant-centricity is a business strategy that centres around prioritising the tenant or customer in all operational and decision-making processes.
This entails comprehending the needs, preferences, and behaviours of tenants and aligning all business activities to address those requirements.
A tenant-centric organisation endeavours to craft a positive experience for its tenants through the provision of high-quality services, responsive support, and personalised attention.
Adopting this approach has the potential to elevate tenant satisfaction and retention, ultimately resulting in heightened revenue and expanded growth opportunities for the organisation.
Elevating the value of real estate assets through Net Operating Income (NOI) requires a strategic approach. Strategies like reducing operating expenses through efficient property management and energy upgrades, optimising revenue streams with value-add initiatives, and fostering tenant satisfaction contribute to increased property value.
However, it's crucial to mitigate risks such as cost overruns and tenant turnover through thorough analysis and proactive communication. By prioritising NOI and tenant relationships, property managers can not only enhance financial performance but also build a resilient and flourishing real estate portfolio, navigating the challenges and opportunities in the dynamic real estate landscape.