Decreasing Expenses in Multifamily – Special Double Header

Decreasing Expenses in Multifamily – Special Double Header

January 14, 2020 3 By Luis Garrison


Hi my name is Rod Khleif and I’m the host
of the “Lifetime Cashflow through Real Estate Investing Podcast” and every week I interview
multifamily rockstars. We talk about how they built incredible wealth for themselves and
their families through multifamily properties. So hit the like and subscribe button to get
notified every Monday when a new episode comes out. Let’s get to it. Hey guys welcome! So
listen this is a special episode that I’ve never done before and that I’m gonna be interviewing
a couple of people that are instrumental in helping people decrease expenses. So this
episode is going to be focusing on improving the net operating income and I’m gonna start
by just kind of giving you guys some tips and some strategies because as you know or
maybe you don’t know but if you don’t know any increase to the net income or net operating
income is an exponential increase to the value of the property. Let me give you an example.
Let’s say you’ve got a hundred unit complex and you just raise the rents twenty bucks
okay all things being equal if that property is trading or selling at a six cap or that’s
how its valued, you’ve just increased the value four hundred thousand dollars with a
twenty dollar rent bump. That’s why this is such a big deal and that’s why we freaking
love this business. I’ll give you another bigger example. We’ve got an asset you probably
heard me talk about the asset that got destroyed by a tornado up in Beavercreek Ohio well that’s
a hundred and one unit complex and we’re gonna be able to increase the rents there five hundred
dollars. Now I don’t want to tell you that’s not normal. That’s a huge home run but that
five hundred dollars equates to a ten million dollar increase guys. It’s a really big deal
you know so you know it’s important to focus on anything you can do to improve the NOI.
Now for purposes of today’s call, we’re gonna talk about strategies to decrease expenses.
I’m gonna do a different episode on increasing revenue but today I want to talk about decreasing
expenses. So let’s talk about some of the strategies that you can implement to immediately
decrease expenses on your on your property. The first one which is an awesome way to do
it because it goes right to the bottom line is to bill back utilities if it’s possible.
And so there’s quite a few ways to do that. One is to sub-meter the property or put some
sort of a measurement system by each unit to check consumption. Another one is to institute
something called RUBS which stands for Ratio Utility Billing System and basically there
are companies that do that and again you’re just billing back the utilities. Now important
thing to remember about utility bill back is that if you’re the ground breaker in your
sub market like let’s say none of the other properties charge utilities and you do you’re
gonna have some vacancy, doesn’t mean you shouldn’t do it but just as an aside important
for you to know that now again I’m gonna I’m gonna have someone on today that’s going to
talk about utility reducing utility costs and you’re really gonna like her. I’m also
gonna have someone today talk about how to minimize flood insurance and so these are
both really big ways to impact and reduce your expenses which again increase your net
income which exponentially increases the value of your property. So that was RUBS. The biggest
expense you will ever encounter is turnover and so anything you can do to reduce turnover
number one okay like keep your residents happy as much as you possibly can so they don’t
move or if they do move, reduce that turn time okay the unit turn time. And that’s a
question you should always ask your third party property manager is how quickly they
turnover units because it’s so freakin expensive like for example, if you’ve got a couple of
vacancies a month in your complex and your rents say $1,000 let’s say it takes you a
month to fill them that’s twenty four thousand dollars of lost income a year which had a
six cap is four hundred thousand dollars in value it’s a big deal guys okay but if you
you know you cut down that turn time you massively increase your net operating income and again
it equates to value, very very important. So you want to do everything you can to minimize
turnover to begin with by you know creating a culture in your community, having community
events you know treating your residents like gold you know there’s so many little things
you can do to make them feel cared about and certainly you want to fix anything that’s
legitimate right away. You want to follow up if and make sure it’s fixed to their satisfaction
but you want to build community and whenever you do that you minimize people don’t want
to leave. If they’ve got friends and people, they’ve connected with in the community. So
it’s very very important to do that. All right so let’s talk about other ways to decrease
expenses and again I’m gonna be interviewing two people today. This is an unusual podcast.
I’m actually have two interviews on this podcast to help you with decreasing expenses. So another
way to decrease expenses is to install motion lighting in common areas you know put in LED
lighting you know one of the ladies I’m having on today, she’s gonna talk about water saving
methodologies but that’s a big way to save money and Fannie Mae has something called
the green program where you know if you do enough of savings you can actually get an
increase, I’m sorry an interest rate decrease. So you know it can be very very profitable
to save energy. And then another thing is with residents if they cause a damage or they’re
the cause of a repair, you charge them right at the time of that repair for that repair
okay very important. Another thing is to challenge your tax assessment okay and there are attorneys
and companies that will do that for you but you should challenge that every year. Another
thing is put your insurance, really put all your vendors out to bid every year insurance
being one of them. You should always get new bids and you should you know get new bids
on your vendors because there’s something called vendor creep you know where they’re
bill just happens to creep up and that’s a you know that’s an issue. So anyway so I wanted
to give you guys a few tips ahead of time and now we’re going to move into the interview
portions of this particular podcast episode. Rod: Welcome to another edition of “Lifetime
Cashflow through Real Estate Investing”. I’m Rod Khleif and I am thrilled you’re here
and as I said earlier, we are having this session, this episode is all about saving
money as an operator. And the lady we’ve got on today is a huge step in that direction.
Her name’s Kelly Stinson and she’s with SAS which is a water conservation company and
it’s kind of funny she’s got a nickname which I’ve heard previously which is really caught
on in the last couple years. She’s called the Potty Princess and so she’s out there
bringing awareness and education in the whole arena of saving money on your freakin water
bills and we’re gonna dig into all that. So now in the last year alone she saved owners
two million dollars on their water and sewer bills and let’s see it at a five cap that’s
forty million dollars in value just from saving some money on water bills. This is a big deal
guys so pay attention. Kelly welcome to the show Kelly: Thank you so much for having me I’m
excited to be here Rod: Absolutely! Now let’s dig in to this,
to the exciting topic of toilets Kelly: That’s exactly what everybody wants
to talk about right? Nobody ever thought that you can make a ton of money from toilets.
So it’s the hidden secret of operating expenses on your property Rod: Wow well let’s talk about how okay so
let’s say somebody buys an apartment complex and what are you able to do? what’s possible?
And guys, remember this is just one piece of where you can save money but this is a
big one. So what are you able to do? Kelly: Yeah absolutely so with the water conservation
piece as our owners are going in and they’re purchasing these value add properties and
they’re doing these fabulous renovations on interior so that way they can get some rent
increases, most often though the toilets are overlooked during those renovations. They
pull in, they lay new flooring, they put in new plumbing fixtures, but the toilets are
there for 30 years and what a lot of owners don’t recognize sometimes is that those toilets
and inefficient humming fixtures like the showerheads and the bath faucets, are actually
taking up a considerable amount of consumption on your water and sewer bills. So you have
this unique area where you can reduce that water and sewer consumption anywhere by thirty
to sixty percent and how that equates to the owners is that that’s gonna save on their
water bill twenty to forty percent and that’s huge Rod: Yeah let’s use an example. Let’s say
someone’s got say a hundred thousand a year in water bills which guys is really not unusual.
What’s possible? Kelly: Yeah so we take a conservative measure
on it and they’ve got a hundred thousand dollar-a-year water bill on their property. Let’s say we’re
gonna reduce that water consumption and reduce the water bill by forty percent so that’s
gonna be a $40,000 a year savings we take that across with a 5% cap rate that might
be most common with your network and at that point you’re looking at an asset value boost
of $800,000 Rod: $800,000 for putting in toilets guys
okay that’s why I wanted her on the show. Th is is a big deal and so let me ask you
this you know you can change out the toilets you change out the shower faucets the actual
bathroom faucets. I don’t know maybe the kitchen, I don’t know what all do you do Kelly: So yes we are a nationwide service
provider. We focus solely on water conservation that’s our sweet spot. That’s where the company
was founded 20 years ago and with that our crews will come in they will remove and install
ultra-high plumbing fixtures around the toilets, the showerheads, the bath aerators, and your
kitchen aerators. Okay so we’re looking at reducing consumption in each of those areas
and in addition to that, prior to any consulting that we’ll do with any of our property owners,
we will actually complete a 100% full assessment on the property and document the current interior
flow rates of each of those plumbing of fixtures but we take it one step further because if
your owners go through and they upgrade all of these plumbing fixtures and they start
to see the reduction in their water consumption through that but they’re not shoring up those
additional leaks that they might see, then they’re still leaving money on the table or
you know in my world you’re still flushing water down the toilet or flushing money down
the toilet right. So we’re providing you a total punch list of hey these are the faucets
that are leaking at the base these are your tub diverters that are spitting out five gallons
a minute when your showerhead is you know spitting out 1.25 gallons a minute and this
is all an opportunity where the cost of water and sewer is continuing to rise across the
country. We have such varying rates I mean like Atlanta has some of the highest water
and sewer rates in the country Rod: Yeah we’re about to go into contract
on an asset they’re actually but so that’s good to know now let me ask you this, I mean
you just said something very interesting you know we all have used those shower diverters
that are still spitting water out and of course you’re not getting showered with that water
and it’s just going down the drain very interesting point. Now let me ask you this what sorts
of leaks should a property owner really pay attention to? What should they be looking
at them? Maybe there’s some surprises in that question Kelly: Yeah great question. So on that as
they’re looking at a property or they might have within their portfolio today and they’re
walking through some things to look for is walk into a residence bathroom and turn the
shower on and pull the tech diverter to engage the showerhead and you’ll be surprised that
you made that showerhead may not be attached properly and could be leaking or the actual
temp diverter is again spitting out water at the same time so while you think you have
all these you know special water saving devices, in actuality you could be increasing your
water usage by five to seven percent and that is every single penny counts on LOI Rod: Sure it absolutely does. Okay so I would
guess now I assume you do other asset classes besides just multifamily? Kelly: We do so we focus also around hospitality
which I seems to be you know very popular now in Rod: Hotels you bet yeah Kelly: Yeah so hospitality, student housing
as well as government housing or military housing okay but multifamily is really where
SAS’s sweet spot is and when we’re talking about that two million dollars in savings
that we’ve delivered to our owners that’s specific to multifamily Rod: Well that’s why I wanted you at my bootcamp.
So I’m excited to see you again in LA and we met at somebody else’s event and like you
know I’ve got to get you to my bootcamp because this is something everyone should do that’s
a multi-family owner. Now I’m assuming you know obviously on a brand new A product you’re
not going to be able to do a lot because they’re typically built you know with that in mind
today but I would guess correct me if I’m wrong than anything from a be asset down to
a D, it would make sense to do this yes? Kelly: Yeah I would say that about ninety
percent of the projects that we’re engaged on are anywhere from a B to a low C Class
asset. The A-class, we do have opportunities in there and we certainly have installed in
A class but for new development they’re typically already suspecting in the most efficient technology. Rod: Yeah okay okay now what what happens,
there’s a good question, what happens if you’ve got a property and they’ve already instituted
RUBS you guys heard me talk about rubs earlier in this session you know a Ratio Utility Billing
System where the water gets billed back to the residents or a portion of it. Can you
do any anything in that sort of a scenario? Kelly: Yeah so this is a perfect example as
to why so many of our owners have overlooked the water conservation piece because they’re
like, that’s not really hitting my operating expenses. I’m rubbing it back to the residents.
Take a look at it from this side, I have spent an extensive amount of time this year in working
with our current owners and their residents to understand why those residents are not
selecting their property to sign a lease or they’re not renewing their lease. So here’s
a couple of things right, if you have a property in a certain area and let’s say you’re rubbing
back you know 80 percent into that unit or it could be by the number of residents in
that unit. If their total costs out of pocket between all of their utilities and the rent
is exceeding what a competitor product across the street is offering, that’s certainly a
red flag. You need to look at that. Why is it that that competitor across the street
is able to rub you know rub back less or reduced amount of money. So with RUBS, if you’re rubbing
back take this into consideration for your residents you may be able to two things, you
could reduce the amount that you’re rubbing back to the resident and increase the rent.
So it’s still even if you haven’t hit your you know top-line rent increases in the area
or you’re actually reducing your entire water and sewer bill so you could actually potentially
rub back to them even more but it’s the percentage-wise but it’s a reduced amount okay Rod: That makes sense that makes sense or
you can be more competitive in your marketplace now that totally makes sense. So Kelly let
me ask you this, let’s say you go into a unit and you’re doing your replacing everything
the toilet, the bathroom, faucet or maybe just the aerator, the kitchen faucet aerator
did I miss something oh the diverter what could what could a person expect to pay per
door for example to make these upgrades and maybe there’s a range or whatever but I’d
like to get an idea Kelly: On average provided that we can stick
a drop trailer on the property and put the dumpster on the property and we don’t have
to shuttle it back and forth, its $275 a bathroom and that includes all of the material, all
the project management, all of the labor, your trailer duster everything associated
out the door. So it’s very affordable because Rod: That is very reasonable Kelly: Yes. If you walk to the home depot,
it’s gonna be like a hundred and seventy dollars for the toilet alone Rod: Yeah and you’ve got labor you’ve got
labor or everything, no that’s very reasonable I expected to hear more than that so that’s
awesome Kelly: The best part about this though is
that I have a huge passion for giving back in this particular space because when I started
in this organization two years ago, I found that there’s very limited resources that are
reliable for education and analysis around water conservation in the properties. So one
of the ways that we give back is we will, on the front side we will help owners analyze
their property in what we call a pre proposal. I will have a discussion all day any day if
you own a property already, if you’re underwriting a deal, if you’re just running a deal analysis,
I can quickly run an ROI for you to see if this is water conservation that you can underwrite
into your new asset Rod: Love it love it love it especially on
an asset that you’re considering that yeah no I love it. So guys her website is SASconserve.com
and those either of you going to LA, she’s gonna be there, her smiling face will be there Kelly: The Potty Princess will be Rod: The Potty Princess will be there. Now
do you want to give your email address? I want to caution you to be careful what you
wish for I’m happy to put it out there if you want Kelly: Absolutely I am here to bring education
and awareness anyway we’re already out Rod: Well I know you’re very helpful so her
email address is [email protected] and she’s very accommodating and will add
value to you if you need it which is why I wanted her on the show and why she’s coming
to LA. So Kelly thanks so much for being on the show it’s great to see your smiling face
again and I’ll see you in just a short while Kelly: Yeah thank you so much I’ll see you
in a couple weeks Rod: All right take care okay. So as I was
saying we are continuing with our podcast about saving money as an operator a multifamily
operator today and we’ve got a guy that I’m really excited to have on because his way
of saving people money it really is kind of, it kind of stands alone it’s not something
I’d heard about before meeting Brad. So his name’s Brad Hubbard. He’s an engineer and
he’s a Certified Floodplain Manager, author of a book called “Flood Money” it’s been
on numerous shows and podcasts and his company’s called National Flood Experts okay and basically
Brad specializes in reclassifying high-risk flood zones on properties into low-risk which
has saved his clients over four million dollars in flood insurance premiums okay. I just want
you to hear that, just the premiums and increased values on properties over fifty million dollars.
Brad welcome to the show brother! Brad: Thanks Rod. I appreciate it! Rod: Yeah so you know for those people that
don’t understand what I just said. Can you dumb it down I guess like you had to do for
me the first time we talked so please Brad: All right sure so basically what we
do is take a look at any property that is rated as an AE or VE anything in a high-risk
flood zone area you know they have a loan on the property, they’re required to carry
flood insurance on the property, we take a look at them from an engineering aspect from
an engineering point of view too see is that right? Should it actually be in a flood zone
because when FEMA draws their Maps they’re very broad brushed with everything. So we
take a look to see if there’s anything we can do if we can move it from that high risk
to a low risk that removes the requirement to carry flood insurance in the property any
excess and EBI makes flood insurance more affordable if they still want to carry it
but yeah that’s what we do. We just try to get a move from a high risk to a low risk
area based on engineering data Rod: Okay so give me some examples of some
of the things that you’ve either seen or done in your positioning when you’re, and what
you do is I assume you evaluate the maps, you evaluate the property, and then you create
some sort of Appeal with FEMA is that is that correct? Brad: Yeah that’s pretty much it so what we’ll
do is when we have a client that has a property they’re either maybe they’re owned in or operating
it or they’re looking to purchase it. We’ll take a look a real deep dive into the flood
maps any flood studies that are available any elevation data that we have on the property
to see if we have a case. If we do have a case and we think that it’s either wrong or
there’s something else out there that we can do we’ll create an entire petition to FEMA
to get them to change the designation for the flood zone. So yeah that’s pretty much
what we do Rod: And guys just those you listening, if
you’ve never paid for flood insurance it can be significant Brad: You’re lucky Rod: well you’re certainly you’re lucky but
it can be big dollars and as you guys know you know anything that saves you know money
and increases your NOI is an exponential increase to the value so like brad has said here you
know he’s saved just his clients 4 million in annual premiums that equates to 50 million
in value in and so you know this is a big deal and so do you ever have them do anything
physical or is it all the evaluation? Brad: There are cases where we will have them
do something physical. So the property doesn’t quite qualify the way it is we’ll say you
know if you do this here or this there, bring in some dirt, bring in some mitigation factors,
you know we can find other ways aside from its just mapped wrong to you know what if
you do this, it’ll change your entire rating. We’ve done that multiple times it comes more
into play on high-rise type buildings or commercial like with flood proofing and things like that
but on the multifamily side usually it’s dirt or adding a berm or a way to either divert
the water or keep it from getting to the building but yeah there are cases I’d say maybe 10-20
percent of the time where you know what you need to do this in this to the property once
that’s done, then we can go through this process to get them removed or changed Rod: Yeah and guys here’s something else that’s
kind of exciting. If you encounter a property that’s for sale that when you when you get
the P&L there’s a big dollar for flood insurance and you bring in Brad to mitigate that or
greatly reduce it, you’ve just automatically increased value on a property. So you know
if you’re evaluating a property like that, it might make sense to engage Brad or at least
have a conversation with him. Now how do you how do you price what you do? Brad: Sure yeah we price it based on the first
year savings whatever we’re able to save our client on that first year that’s our fee and
typically they get that money refunded to them or at least a very high percentage of
it. So it’s pretty much almost zero dollars out of pocket for our client and then obviously
you get the returns year after year and your your 20x on NOI right now with the multifamily
market. Rod: Right right right well and the other
thing obviously is to determine whether or not the properties really at risk of ultimately
being flooded like we’ve got an asset in Louisiana that you know is historically had some flooding
and so you know so you’ll do a risk assessment as well? Brad: Absolutely you know that’s part of it
is you know in our review we’re gonna see what is the true risk of flooding obviously
everything is modeling and you know they’re, it’s not an exact science it’s all prediction
stuff but it does give you a better eye of the risk that you’re undertaking you know
on a property and there have been times where a client will send one to me and you know
I’ll say this is nasty and it’s only going to get worse and I wouldn’t recommend investing
in this because you know your flood insurance is fifty grand now but fast forward three
years you might be at a hundred grand does it still work with your underwriting? Rod: Oh wow no kidding okay well very important
then. So yeah so guys I mean this is kind of a no-brainer if you’ve got a property that’s
got flood insurance in my opinion what’s your website Brad? Brad: It’s just nationalfloodexperts.com Rod: Okay so there you go and is there anything
I haven’t asked you? I mean it’s pretty straightforward you go in, you mitigate, you assess risk,
and then you do everything you can to have them reclassify the property yes? Brad: Yeah that’s really it you know what
we’ll do is we’ll try to get it reclassified. If we’re not able to do that we’ll look at
historical data is there any other way that we can save money on flood insurance you know
we won’t write it but we’ll partner with their insurance agencies to try and just anything
we can do to squeeze it an extra dollar out for our clients that’s you know that’s pretty
much what we do and yeah you know it’s like you said that everything it’s free on the
front end for our clients to review it Rod: The price is right Brad: No-brainer Rod: Right love it, no I love it man and in
guys so if you’ve got a property with flood insurance this is a no-brainer. Well listen
Brad I really appreciate you being on this on this show and thanks for your time and
I know that we’ve got a property I actually want to send your way right now Brad: Send it over Rod: So yeah so alright thanks Brad take care Brad: Thanks a lot Rod I appreciate it Rod: You bet