How to Make your Property as Profitable as Possible
2020 was unlike any other year. Interest rates are currently incredibly low, and banks may be willing to negotiate if you’re creditworthy. Commercial real estate investors have struggled with decreased market values — or the threat of declining values. In these uncertain times, ask yourself three questions to help maintain profits and preserve market value.
1. Can you trim expenses?
The value of commercial real estate usually is a function of net operating income (NOI). NOI equals gross rental income less vacancy and operating expenses. One way to maximize NOI is to reduce these expenses.
Commercial properties are often ripe with costs that can be cut. You might, for example, adjust energy-related expenditures, such as your automated energy management system. Be sure to adjust the settings to take advantage of downtimes, such as weekends and holidays.
A surprising amount of energy is consumed overnight when buildings are essentially unoccupied. Install sensors that will automatically turn off lights — and building fans and motors probably don’t need to run around the clock. Implementing environmentally friendly practices may improve tenant satisfaction, while simultaneously boosting property value.
Speaking of tenants, when was the last time you examined your properties’ monthly utility and water bills to ensure that you’re charging your tenants properly for their consumption? Be sure to watch for unusual spikes in usage.
You can also review your service contracts. Should windows be washed and driveways be blacktopped so frequently? Rebidding or renegotiating contracts may lead to cost savings, particularly if you take advantage of economies of scale by hiring the same contractor to service multiple properties.
Reconsider your internal maintenance, too. Do you use a time-based schedule for preventive maintenance? Adopting a predictive approach that relies on statistics and past experience to determine the optimal intervals for servicing equipment may be more economical.
Other expenses worth re-evaluating include real estate taxes and insurance. As property values decrease, you should pay less in taxes and insurance premiums. But reassessments aren’t automatic; contact your county assessor and insurance agent for adjustments.
Although interest isn’t customarily part of the NOI equation, it can be a significant expense, depending on a property’s debt load. Rates are currently incredibly low, and banks may be willing to negotiate if you’re creditworthy.
2. Is your property in good shape?
Another way to boost your NOI is to decrease vacancy. Careful management can result in lower carrying costs and quicker leasing. Visit all your properties regularly to check for any problems that might delay leasing — such as a leaky roof or malfunctioning security system. Keep the premises clean and free of trash and pests. Ensure that maintenance continues on the roof, HVAC system, elevator and similar components so that they’re in working order for new tenants.
While it’s important to confirm that these systems are fully functioning, they don’t need to operate 24/7. As with occupied space, adjust the startup and shutdown mechanisms to reduce energy costs.
3. Are your tenants happy?
To keep vacancy rates as low as possible, it’s essential to retain your existing tenants. Plus retaining existing tenants is more economical than bringing in new ones.
Regular communication is critical to keeping tenants happy. Answer your phone and respond to e-mails and texts promptly. Give tenants both your office and cell phone numbers. Consider conducting annual tenant surveys to determine their satisfaction levels and if they have suggestions for improvements. At the very least, a survey shows that you value the tenants’ opinions.
Your employees are the front line of tenant relations. Develop an incentive structure that encourages them to provide outstanding service. You can then reward and recognize those who go the extra mile.
And don’t forget: Janitorial and HVAC issues usually top the list of tenant complaints. Keeping a close eye on these services can preempt future problems.
Be proactive, not reactive
By focusing on these three questions, you’ll stay ahead of comparable properties in your area and protect your property’s market value. Even if your property’s value has slumped in the COVID-19 economy, it’s not too late to make changes.
For assistance reviewing your financials, contact Nick Sarinelli, CPA, CFE or Doug Collins, CPA on (973) 298-8500. Visit our real estate services page for more information.