In the previous column, we discussed how asset management is changing the way we viewed purpose-built rental apartments. Using a data-driven approach, asset management allows building owners and managers to diversify and increase their revenue streams while at the same time finding efficiencies and reducing operating costs. The improvement on their bottom line allows building managers and owners to leverage their properties and expand and diversify their portfolios.
The opportunities for asset management on the revenue and expenses side are tremendous. The first step is thinking outside the box in considering what’s possible.
For instance, under the old model, owners used their buildings primarily to collect rental income. Ancillary income was often limited to party room rentals, parking fees or coins collected from laundry machines. Managers cashed cheques and that was all.
These are far from the only services that tenants use when renting apartments, however. Some tenants take out rental insurance. The benefit is obvious: a small monthly fee protects them against the unexpected and insurance companies benefit from an ongoing revenue stream. However, contacting individual insurance brokers is largely an activity taken on by the tenants themselves rather than the building owner.
There’s no reason why a building owner couldn’t get into the rental insurance business directly. You can still contract a private insurance company in order to eliminate the risk, but offering rental insurance to all tenants as part of their lease ensures that all tenants are insured. Shared risk means lower costs for all tenants while providing more revenues to the insurer.
These efforts aren’t without costs, but building owners who look for similar opportunities to provide services for tenants will be rewarded by increased rents per square foot. It’s simply a matter of finding out what services generate the highest return for their efforts.
Managing your expenses
On the expenses side, we’ve already mentioned that asset management asks that you take a fine-grained look at your costs and identify places where costs can be reduced or pushed off to the tenant. An obvious example is the question of whether to meter individual units — charging costs for such utilities as electricity, water and heat directly to the tenant rather than shouldering the cost for the whole building and dividing that cost through all tenants’ rent, regardless of their individual use.
Again, such an effort comes with cost. Metering every single unit promotes efficiency and moves your utility costs off your balance sheet, but installing meters for every unit is a substantial capital cost and utility companies often charge an individual per-meter fee, even as they reduce the overall consumption charge thanks to the more efficient use of the various utilities.
So, which opportunities to grow your asset provide the biggest boost in revenue or the biggest reduction in expenses? Which opportunities require the most investment and which deliver the biggest return?
A lot to think about
This is where the data-driven approach of asset management becomes most important. Asset management requires that all improvements be measured so that the effectiveness of each improvement is assessed to ensure that building managers and owners are making the best use of their investments.
That’s a lot of data to sift through. And for building owners and investors who are used to the old ways of managing their properties, this sea change can be a little difficult to wrap their heads around. Fortunately, there are ways to make the task easier, and people whose job it is to make that task easier and more effective for you.
In our final column in this series, we’ll talk about the asset manager and the role that he or she has in growing the value of your asset.
Derek Lobo is the founder and CEO of SVN Rock Advisors Inc., a real estate brokerage with over 30 years of experience in helping investors make the most out of buying, selling, and renovating purpose-built apartment buildings. Learn more about SVN Rock Advisors Inc., Brokerage on their website at www.SVNRock.ca.