Operational improvements offer building owners the opportunity to improve cash flow by increasing efficiency. For value-add investors in particular, who are often purchasing undervalued Class-B and Class-C assets with the goal of making smart capital improvements to maximize returns, identifying ways to make a building run more efficiently is a critical first step. When considering how to improve the efficiency of your real estate investment properties, consider these key areas.
Improving energy efficiency
While installing LED lighting may make your building appear brighter and new windows may enhance the curb appeal of your building, both upgrades also help to improve energy efficiency and reduce operating expenses. Similarly, converting from oil to gas heating can also reduce heating costs, as can updating a building’s overall HVAC system. If you are unsure which improvements will yield the greatest returns, investing in an energy audit for the building can help to prioritize improvements. It is also prudent to research any incentives and state-funded programs that may be available to help underwrite these expenses.
Increasing collections and raising rents
Beyond making capital improvements which can increase the market rent of a unit, investors can maximize returns by increasing collections. Automating rent payments is one way to achieve this objective. While automating collections may require upgrading record keeping and property management software, it streamlines processes and helps to improve cash flow for a property. It is also important to maintain an open line of communication with brokers regarding rent comps to ensure you are aligned with market rents and obtaining maximize value from your assets.
Leveraging tenant reimbursements to reduce out-of-pocket expenses
Lowering out-of-pocket expenses improves cash flow and helps makes properties more attractive to future investors. One way that investors can offset their operating expenses is by charging tenants for parking, storage, and pets. For retail properties, another viable option is charging tenants for common area maintenance (CAM) which can encompass costs for snow and trash removal, sidewalk and parking lot maintenance, and common electric usage (such as lamp posts and hallway lighting).
Restructuring leases can also help improve a building’s operational efficiency by reducing the owner’s out-of-pocket operating expenses. For example, under net leases, as opposed to gross leases, retail tenants agree to pay their pro rata share of building insurance, real estate taxes, and maintenance costs in addition to rent and other expenses such as utilities. Investors should also keep up-to-date with market conditions and understand any associated lease restrictions.
Increasing a building’s operational efficiency adds value by improving the quality and performance of the asset. For investors who are looking to maximize returns, improving operational efficiency is key to success. By exploring opportunities to not only increase efficiency but reduce out-of-pocket expenses, investors can improve cash flow and make their assets more attractive to future investors.
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