When we talk about how to buy apartments the focus invariably turns to income. But is there a way to “juice” the revenue side of an apartment community without raising rents beyond comparable properties? Absolutely. It’s called “other income”. Property management is charged with implementing this from a “solutions perspective” with tenants as most other income provides a service to your customers.
The vast majority of revenue from multifamily property operations is derived from rental revenue. Great. Good. Wonderful. How boring is that? Actually, it’s wonderfully boring in a stabilized asset. Particularly if you can keep turnover down.
Some fees are absolutely necessary to enforce the lease agreement (like late fees). The lease is the controlling document for the vast majority of income; rental income. The lease can also gain and control other income sources.
Think of other income as a menu of services for your customers (tenants). Some will be imposed upon them for not adhering to the terms of the lease (example: late fees) while others are completely optional (example: covered parking).
Note that many “high yielding” multifamily investment properties will often have high levels of “other income”. There’s a reason for that. Sometimes having high “other income” is a testament to the property manager or ownership group. They are just that good and diligent about enforcing the rights afforded the Landlord via the terms of the lease.
In other instances “other income” is all late fees. Consistently high late fees, while looking good on the income statement, is a testament to the credit quality of the tenant base. And you can bet management is working overtime in collections.
When a multifamily property is for sale “other income” can have big numbers because an owner/seller is looking to bolster their Profit/Loss statement. This could be to represent higher numbers to a potential buyer. Good business? No. Happens all the time? Yes.
Beyond rental revenue, what other opportunities for revenue growth are there from apartments? How many different ways is there to peel a banana? Lets see….
Application fees. The application fee is usually a wash as the fee collected offsets the direct costs of obtaining credit information and completing employment verification. Application fees can be used as a “screen out” function or a concession. When struggling to get people in the door this fee can be waved removing a barrier to entry.
Late fees. Late fees in C-class multifamily properties can represent as much as ten percent of revenue. Of course, this is earned through increased time, energy and effort in collecting payments. As part of the lease, late fees must be enforced fairly and evenly. It’s imperative not to play games or show favoritism. I say this both from a legal and financial perspective.
Pet fees. If your multifamily property allows pets, then there should be income from pet fees. Like application fees, this is not a money maker but an offset to incurred costs. And there will be costs. We suggest limiting the number and size of pets per apartment to not more than two pets with no pet being more than twenty pounds (charging by the pound is probably a bad idea).
Laundry income. This can be a major source of revenue sometimes representing as much as three to five percent of revenue. The industry has evolved to the point where there are divisions within commercial laundry companies that specialize in the operation and maintenance of laundry facilities on property at multifamily developments.
Internet & Cable. Some cable operators offer a percentage over-ride for delivering customers to their service. This can range from 2-10% of revenue. Every market is unique depending on the local competition. Ask about anticipated apartment-wide product penetration and if there are minimum monthly fees payable to the service provider per unit (occupied or not). This industry, as it relates to apartments, is bigger than laundry services. Shop around and compare service providers. There is an array of services, some simple, some very complex. Take your time implementing this one.
Parking. Parking is a microcosm of economics where scarcity leads to higher prices. In many urban areas parking is no longer a right but a privilege. As our housing stock has aged the ratio of parking spaces to units has decreased significantly. Apartment buildings built in the 1950’s and 60’s presumed one car and one bread winner per household. In the 1970’s many cars were bigger than a standard parking space. Going forward, many two bedrooms have two room mates. And they each have their own car. Fees are market specific and can include any of the following:
- Off street, single space parking
- Covered Parking
- Garage Parking
On site storage. The storage industry is huge in America. Being able to offer storage at an apartment community is a bonus not only in potential income but a quality attribute to sell to tenants and potential tenants. They can keep their “stuff” close by.
Concierge Services. This can range from laundry pick up/delivery to dog walking. Many concierge services can be out-sourced so that the apartment property is obtaining a referral fee from the service provider. I would suggest staying away from certain personal services like baby-sitting and auto detailing. In both of these examples I just think the risks/reward ratio is much too low.
RUBS. This stands for Renter Utility Billing System. Similar to laundry equipment and servicing for apartments, this is an entire industry with many service providers to choose from.
As you can see, for apartment property owners, there are many alternative income sources to pursue in addition to rental income. Start with the one’s you believe will be most utilized by your customers and expand accordingly.