Income is only one part of the equation when it comes to improving NOI, with the second part being on the income side. It's no secret the biggest way income can be improved is through resident retention. This key component also has a dramatic impact on the expense side...but there is more. Many of the factors of minimizing expenses we understand, but you may not have practices in place to fully reap the rewards. Others involve capital improvements to lower expenses which we will also cover. So what are the greatest aspects of controlling expenses?
- Employee Turnover: Turnover of your team members can be costly in more ways than one. In addition to the cost of advertising, hiring search firms, having testing in place, placing a team member in a position at a higher salary than the previous person, background and credit checks and other expenses, the training piece can also be costly in both time and finances. This is where consistent training as a motivational tool can play a positive roll in keeping great team members, not to mention making them more productive which also impacts the bottom line. There is a hidden factor we don't always think about and it is familiarity. Your residents get to know the staff, feel confident in them, and if we build relationships as we should will leave to them feeling they are in a stable environment. A revolving door of team members does not instill that confidence and can have an impact on resident retention.
- Inventory Management: I cannot count how many shops or offices I have seen while either managing or consulting which gave the appearance of disorganization. With disorganization comes ineffective ordering and maintaining inventory levels. Having shelves with labeling showing what is there and displaying PAR numbers to reflect what stock should be on hand is something few properties practice. Only maintaining stock of any item for immediate needs through a PAR system keeps ordering to a minimum and organized. If there are boxes of unopened inventory or items just thrown on shelves haphazardly, how do you know what you really need. If you also have a system of maintaining proper inventories you won't run out of an item. This means your team won't be scrambling to one of the big box stores or the local hardware wasting time and money to get something needed to take care of a service request or turn. Having the items needed for quick repair or replacement also leads to higher resident satisfaction because the request is being handled timely and efficiently. Inventory management is not restricted to the shop but also to the office. Office supplies should also be organized with PAR levels established. If an item goes below PAR, you know you need to order. I have an inventory spreadsheet I developed which will automatically flag when an item is below PAR and should be ordered. Taking a physical inventory twice a month will keep appropriate levels and remind the team when something needs to be ordered.
- Inspect What You Expect and Training Contractors: I wrote an entire article on this for Units Magazine entitled "Communicate, Don't Complain." Replacing contractors is a pain and time consuming, not to mention expensive and in more ways than one. You hired the painter, cleaner, carpet cleaner and it's a quick turn for a new resident with not a lot of time between the old resident leaving and the new one coming in. They finish and the next day is when the new resident is arriving so you send someone to inspect. Paint is not the best and cleaning isn't detailed. The edges on the carpet got missed and to top it all off the new resident arrives at ten AM in the morning...not good. There are several components to what could have and should have been done to prevent or minimize the challenges. First, anytime a new vendor is used you physically show them what the expectation is and what areas are commonly missed. I am betting very few management companies have this practice in place. Second, you inspect what you expected. Every team member including the groundskeeper or porter should have a unique understanding of what is a quality product and what is not so anyone can be used for inspections. Especially with a new contractor you do spot inspections and always do the first service they have done for you in detail with them. Hold them accountable just as our residents hold us accountable.
- Improvements Which Impact Expenses: I get owners cringing when I bring this subject up until they are sold on the result. Just like selling a budget which is one of my favorite seminars I like presenting, selling an improvement for a future reward is the only way you will get an owner or upper management to see the light. Perform a cost benefit analysis on changing carpet out with laminate or tile. I guarantee you if presented properly with real numbers and facts it will make sense, but only if you show a real return on investment. Let's just say you are paying $1,300 for a two bedroom apartment with a basic carpet including pad and installation and the average covered area in the apartment is 800 square feet. You decide to look into laminate and can do for $2. Two components to this scenario as well. First, who follows up and tracks to verify warranty for stains and wear consistently, then actually holds the installer and manufacturer responsible for what they tell us? Second, plain and simple, our residents don't treat the apartment like if they owned it. Third, I don't care what they tell you the carpet never has the life expectancy they tout (No offense to those carpet companies I have worked with over the years). Ten year stain resistant and wear warranty...right! If we held them to the warranty they would soon be out of business, at least in our business. If I can show an owner where in less than two cycles the laminate pays for itself and the facts be what they are, I'm installing laminate. Guest what, you also don't have to clean the carpet at turn or need to offer as a renewal incentive. Last there is the "puppy factor," as I call it. Don't think I need to go much further on that one.
- How about inspecting each and every apartment home before renewal. How will this save on expenses? Please tell me you're not actually asking this question. Trust me, I have seen my share of apartments you went into and thought, "OMG, they live here." And yes, they are doing it to your asset! Do you not think their general upkeep also doesn't haven an impact on how they treat your dishwasher, tile, refrigerator, HVAC, and other features?
I could go on further and cover other areas but you get the hint. It's not rocket science and but it is common sense. I believe they should change the phrase from common sense to "occasional sense," as that is more appropriate. Each year we are asked for the NOI to improve and that fact is never going to change. We work in a business and for owners and investors. The reality is, it is our obligation and the expectation so we might as well face it and not complain each budget season or be surprised when we are asked to show improvement in the coming year.
Now go lead.
