3 Tips for Driving Net Operating Income Growth
Come up with a game plan to help drive income and valuations
As most investors are aware, net operating income is a calculation that subtracts operating expenses from the income of the property. It helps define how a property is operating without the distraction of debt or taxes.
With this calculation in mind, here are some ideas to help increase the NOI of your investment:
Make a commitment to drive rental growth. This may seem like a no-brainer, but it's relatively common to find landlords who have held onto properties for a long time and not bothered to raise the rents on their existing tenants. Some landlords are afraid that the tenant will move out in protest, however it's important to understand that this rarely happens simply based on rent. If you are a good landlord and provide a clean and safe place for them to operate their business (or home in the case of MF) then they are unlikely to take on the cost and disruption to move. Secondly, if the tenant were to move, they would quickly find that their new space would likely be at market rate anyway. My advice is to find a broker, investment professional, or search for comparables to determine the market rents and slowly raise them over time to compensate for the time value of money.
Formulate a game plan to reduce vacancy. This is somewhat harder to do and can be market-driven, however there are some simple ways to reduce vacancy by being proactive with your turnover. Tips such as developing an ongoing marketing plan with multiple listing services, calling brokers and letting them know about spaces, being active in Chamber of Commerce, or calling the local economic developer can all prove fruitful for the enterprising investor. Fix up units and make capital improvements to improve both the spaces, building, and curb appeal. Many times, these capital improvements will pay for themselves in increased rent/decreased vacancy. The bottom line is don't be stagnant and just throw a "for lease" sign in the window.
Reduce your Operating Expenses. Sometimes this can be done through targeting building inefficiencies such as outdated HVAC systems, automatic sensor lighting, or replacing insulation. Other times expenses can be reduced by simply passing them along to the tenants. Consider switching commercial leases to NNN where the tenant(s) pay their prorata share of the operating expenses. If you have multifamily, consider implementing RUBS (Ratio Utility Based System). Ensure that these expenses are not capped and can increase as costs increase. This also helps in the value and marketability of the property at sale. Prospective buyers do not want to be hamstrung by caps on expenses.
In many ways these are simple tricks to increase net operating growth with very little effort, but it's always astonishing to me that most investors don't make the effort. The question to ask yourself is: are you taking the risk of investing and not taking advantage of the reward?
About the author:
Michael Hironimus, CCIM is the Certified Investment Advisor and Principal Broker for Duckridge Realty Advisors specializing in portfolio and asset management for high net worth clients and institutions. He is also a faculty instructor for the CCIM Institute, teaching professionals globally in the CI-102 Market Analysis Core Course.
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