Financial Conditioning

Earlier today I was responding to a post on MultifamilyInsiders.com related to increasing rents, adding services, and dealing with "unhappy campers."  In the discussion I thought about how we as an industry have not done a very good job of conditioning and educating our managers and teams related to the financial aspects which are key to success.  While the issue was more targeted to dealing with residents unhappy about change (new services and being charge for them), there were underlying parts of this challenge encouraging me to update my blog.

First, we must do a better job of helping our leadership and management teams understand the financial aspects of our business.  While some companies and regional managers do a good job, I believe we have overall failed to capitalize on key information which can make them more effective in reaching goals and objectives.  Ask a room full of property managers what NOI means, how it is associated with a properties value, and how do you use it in calculations, and I guarantee you there will be some seasoned managers that struggle with the answer.  Remember that increasing revenue or income is only part of measuring our success, and other factors must be considered when looking at NOI and the bottom line.  As an example, in the situation discussed on the site a property was in a market that was doing well and able to increase rents with great occupancy.  Occupancy was around 95%, and they were raising rents anywhere from $40 to $100.  They were facing an additional increase of $18 per apartment while introducing a trash at the door pickup service.  As a result, a group of around forty residents had presented a petition related to the increase and new service.  Naturally, they were not "happy campers" and wanted to voice their opinion.

So, where does this take us?  It takes us to the financial equations and what is called the equilibrium or balance point between income, occupancy, expenses, and what is tolerable based on perceived services from a resident standpoint.  Naturally market conditions will also play a factor and need to be analyzed and monitored.  Basically, where is the cost benefit of an action that has a potential to increase revenue and is not an expense burden?   If my property decides to raise rent by $80 at renewal and the average turnover for the community has been 60%, where is it cost effective for me to drive higher rents versus the offset expenses related to turnover?  Remember that raising rents by $80 per month will generate $960 in new revenue based on a twelve month lease.  To justify or find the benefit to this approach I have to look at what my costs would be if the resident did not renew including painting, cleaning, carpet cleaning, maintenance services, marketing, vacancy loss, etc.  Then there is the incidental costs which can include carpet replacement, appliance upgrades, etc., which might have to be considered.  An example of this would be a resident that has lived in an apartment for four years and if they moved out possibly would require carpet replacement to adequately market the unit.  If they renewed  however, we might get another year or two out of the carpet.  If turnover increases from the baseline and my cost to turn an apartment including hard and soft costs is $2,000 (current national average is over $3,000), now I am trying to justify an increase in revenue of $960 for a cost of $2,000.

Balancing this is not taught, and if it is not taught it is not used as beneficial information.  Another key factor is the use today of lease rent optimizers.  Some programs are revenue driven, some are occupancy driven.  Not sure if any of them factor in turnover expenses, however, that will be a question I ask in an email I will get out tomorrow.    If not, this is a situation that may have exposure to the bottom line.  It may increase revenue or occupancy, but have a reverse impact on Net Operating Income and Cash Flow.  Educating our teams at the sites on the impact and effect on the bottom line is easily taught.  It's like Newton's Law, "for every action there is an equal or opposite reaction."  The decisions we make have consequences, and in some cases we believe they are progress when in fact they can have the opposite effect.  Condition your teams, so they understand this theory and they will have reach new goals for the future.