784% ROI With Just 1 Tactic
As a commercial real estate operator, one of the most important things you need to focus on is increasing your net operating income (NOI). NOI is essentially the income that your property generates after all the operating expenses have been deducted. And if you're able to increase your NOI, you're also increasing the value of your property.
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But how can you increase your NOI? The answer is simple: you need to find ways to either increase your income without increasing expenses or decrease expenses without decreasing income. In this post, we're going to share one strategy that is projecting a 784% ROI.
A Quick Recap On Cap Rates
The value of most multifamily assets is determined by taking the NOI and dividing it by the cap rate. So, if your property has an NOI of $1 million and the cap rate in your market is 6%, the value of your property would be $16.6 million. (1,000,000 / 0.06)
Small Swings in Net Income Can Have Huge Impacts
Even small swings in net income can have a huge impact on the value of your property. For example, let's say you have a property with $2 million in annual income and $1 million in annual expenses, resulting in $1 million of net income. If you're able to increase your net income by just $12,000 a year (without increasing expenses), that would result in a $200,000 increase in the value of your property (assuming a 6% cap rate).
One of the first expenses I always look at when evaluating a property is the water bill. While some things in the water bill can’t be adjusted, like the rates charged by the local government, a high water bill can be a sign of leaks in the property or outdated faucets and toilets. By doing things like fixing leaks and replacing faucets with low-flow options, we're able to see significant reductions in our water bill.
In our most recent acquisition, we spent $22,123 to fix all 144 units' faucets and toilets with low-flow options and get a report on any leaks that we could fix. After a few months, we saw our water bill decrease by an average of $1,012 per month.
Spending $22,123 to save $1,012 a month is already a good deal, but when we apply what we learned about cap rates, the ROI becomes even more impressive. By saving $12,144 a year, we were able to effectively increase our net income by that same amount. And if we apply a conservative 7% cap rate on the property, that's an increased value of $173,485.
This is the kind of big win that we look for when evaluating value-add properties. By spending just over $22k, we were able to capture over $173k in value. And this is just one example of the kind of strategies that we use to increase our net operating income across all of our properties.