Net Operating Income (NOI) is a key commercial real estate ownership metric, especially in the context of a multifamily property. While increasing rent is a common strategy to improve NOI, it can sometimes backfire. Increasing rent often leads to decreases in NOI, as tenants leave to find cheaper housing alternatives.
A more effective approach for improving NOI is to invest in more thorough tenant screenings so that you can attract and retain quality tenants. While, initially, a bad tenant may sound better than no tenant at all, that is rarely the case. Bad tenants translate to missed/late payments, noise complaints, and potential damage to the property itself–all of which are costly.
You may even have to evict some of these bad apples, a process that, on average, can cost anywhere between $3,500-$10,000, between lost rent, property turnover costs, and legal fees. Eviction isn’t just a hassle. It can cut into your monthly net operating income, which is why it’s so important to keep evictions at bay.
But the NOI optimization shouldn’t stop there. You’ll also want to reevaluate your leasing terms.
Here are some innovative strategies for how to increase NOI.
Improved Tenant Screening and the Impact on NOI
A bad tenant is a nightmare come true in the world of property management. Bad tenants can leave you with property damage to attend to and an eviction to process. Once the eviction process is wrapped up, you’ll be tasked with finding a new tenant to fill their place.
As exciting as it is to have a potential tenant walk through your doors, it is essential to have a proper tenant screening process in place when dealing with multifamily properties. When property managers take the time to prescreen tenants with proper application forms and credit checks, they can effectively lower both maintenance/repair costs and eviction rates.
Common Turnover and Eviction Costs
The associated costs with turnover and eviction will directly impact your bottom line. These costs include unit cleaning and repairs, marketing and leasing fees, lost rent due to vacancy, and eviction-related legal fees. In addition to these costs and fees, tenant retention saves time for staff members and multifamily owners.
Cost Comparison with Improved Tenant Screening
A higher NOI and better tenants will also improve overall property value. The table below shows potential savings a property can accrue when they implement a stricter tenant screening process.
| Screening Type | Turnover Rate | Turnover Cost Per Unit | Total Turnover Costs | Eviction Rate | Eviction Cost Per Instance | Total Eviction Costs | Total Turnover + Eviction Costs |
| Standard Screening | 40 | $1,200 | $24,000 | 5% (3 units) | $3,500 | $10,500 | $34,500 |
| Improved Screening | 25 | $1,000 | $12,000 | 2% (1 unit) | $2,500 | $2,5000 | $14,500 |
Recommended Tenant Screen Procedures
All property managers should have a property management software system in place with tenant screening capabilities. This system will help manage the recommended tenant screening procedures.
Naturally, tenant screening procedures come at an additional cost, yet the money saved from lower turnover and less property damage will be quickly recuperated. The addition of tenant screening procedures should cost between $15 and $50 per tenant.
At the very least, we recommended the following tenant screening procedures for all multifamily building owners.
- Comprehensive Application Form: Collect detailed personal information, rental history, employment details, and references.
- Credit Check: Assess creditworthiness and financial responsibility through credit reports.
- Background Check: Identify any past criminal offenses that may pose a risk.
- Employment Verification: Confirm employment status, job stability, and income level.
- Rental History Verification: Contact previous landlords to verify rental history and behavior.
- Reference Checks: Reach out to personal and professional references for additional insights.
- Pet Policy Review: Review pet policies and request documentation if applicable.
- Interview: Conduct a personal interview to gauge suitability and clarify concerns.
- Fair Housing Compliance: Ensure all processes comply with Fair Housing laws.
Key Lease Term Strategies for Improving NOI
Now that you have a better tenant screening procedure, it’s smart to include improved lease term strategies to increase NOI.
Longer Lease Terms
According to Rent Grace, longer lease terms (18-24-month leases instead of 12-month leases) can help reduce tenant turnover. A more stable income will help with property management fees and even property taxes.
Rent Escalation Clauses
Annual rent increases are unavoidable for multifamily property owners hoping to keep pace with inflation and local rental market trends. However, they can lead to tenant dissatisfaction. By adding a rent escalation clause, tenant satisfaction should improve. It’s easier for a tenant to justify rent increases when they’ve been made aware of them 12 months (or more) ahead of time.
Tenant Responsibilities
Specify very clearly in the lease agreement the exact responsibilities of tenants when it comes to maintenance and repairs on the property. Are they responsible for any appliance malfunctions? Wall damage? Plumbing issues? Having tenants help with minor maintenance reduces operating expenses for the property owner. It also saves time.
Ratio Utility Billing System (RUBS)
A ratio utility billing system is used by property owners to allocate utility costs among tenants based on a predetermined formula. The approach ensures that tenants contribute fairly to the cost of utilities without the property owner bearing the entire expense.
The chief benefit of the ratio utility billing system is the cash flow improvement, but this reduction in utility expenses will also improve NOI.
Additional Revenue Streams (Renting Out Parking and Storage Spaces)
Traditional rental income isn’t the only source of income multifamily property owners should rely on. Consider leasing out parking spaces and storage areas to non-tenants. Instead of letting valuable space sit unoccupied, utilize your property to its fullest potential.
Here’s a step-by-step breakdown of how to do this:
- Identify unused spaces: Assess your property to find underutilized parking spots and storage units that can work for cars, RVs, or even boats.
- Market to local residents: Use online platforms like Neighbor and local community boards to advertise available spaces. Consider charging different rates for residents and non-residents to increase interest.
- Set competitive rates: Research local market rates for parking and storage spaces. Setting competitive prices can attract more renters and fill the spaces quickly.
- Consider short-term options for storage: Parking spots and storage spaces don’t necessarily require a year-long commitment. Renting on a monthly or short-term basis for storage can help generate cash flow faster.
- Highlight security features: Potential renters value security. Emphasize features like lighting, fencing, and surveillance cameras to entice renters.
Here’s a rundown of the monthly income you can generate when you rent on-site parking and storage to non-residents:
| Space Type | Location | Monthly Rate per Space | Spaces Available | Potential Monthly Income |
| Parking Space | Urban Area | $150 | 20 | $3,000 |
| Parking Space | Suburban Area | $100 | 20 | $2,000 |
| Parking Space | Residential Area | $75 | 20 | $1,500 |
| Storage Unit | Urban Area | $200 | 15 | $3,000 |
| Storage Unit | Suburban Area | $150 | 15 | $2,250 |
| Storage Unit | Residential Area | $100 | 15 | $1,500 |
Final Thoughts
Multifamily owners can boost NOI in several ways. From filling parking vacancies in on-site parking garages by renting spaces out to non-residents to screening tenants via Neighbor, there are creative ways to boost NOI (that don’t involve rent increases).
The post Improving NOI: How to Increase NOI Through Improved Tenant Screening and Lease Terms appeared first on Neighbor Blog.