How Can You Offset the Impact of Low Cap Rates on Your Multi-Family Property?

shutterstock_1027256281-cap-ratesDecember 20, 2022 - 4 MIN. READ

Rising interest rates have plunged cap rates for multifamily properties to new lows. How can you adapt and protect your ROI from rock-bottom cap rates?

Executive summary

While historically low cap rates can hurt your ROI, adding value to your properties can help offset interest rate shocks and their effects.

Going after every value-add, including increasing revenue, cutting costs, and optimizing purchasing, you can add value to your property and increase your ROI.

Adding value to offset low cap rates for multifamily properties

Value-add multifamily properties let an investor increase cash flow through operational efficiencies, renovations, and rebranding. Until recently, you did not need to build value-add for multifamily properties to maintain your ROI, as lower interest rates and high cap rates prevailed.

But the current conditions encourage adding value in several key areas. By focusing on adding value in these key areas, you can protect your ROI despite low cap rates for multifamily properties.

Increasing Revenue

In addition to increasing rent, you have several options to increase revenue and add value to your multifamily property. These options include adding services and amenities as well as increasing occupancy rates.

  • Raising Rents — The most direct way to boost revenue is by raising monthly rental rates. Annual rent increases are standard in most markets, so look to raise revenue by increasing rent when new leases are signed.
  • Maximizing occupancy —Taking steps to maximize occupancy and keep your property as full as possible is an obvious value-add multifamily property. Strategies for keeping occupancy high include loyalty programs, upgraded marketing, routine maintenance, and increased or improved amenities.
  • Adding new fee-based services —Offering fee-based services to your tenants is a great way to increase both revenue and occupancy rates. You can start with basic concierge services and get creative with more niche offerings like dog walking, private health training, or cooking classes. This will increase revenue by helping build a sense of community, retain residents, and increase occupancy.
  • Adding new fee-based amenities — While some amenities, like pools, are complimentary, some can build revenue, such as on-site EV charging. In areas where EVs are popular, on-site EV charging is a valuable amenity which will help attract tenants and increase revenue. Upgraded gyms are another great option and could bring in a sizable monthly revenue stream.

Lowering Costs

Reducing your operating costs is always a smart management strategy, especially when cap rates are low for multifamily properties. The trick is to lower costs without making your residents feel short-changed, which can negatively affect occupancy rates.

The best strategy is to increase efficiency wherever possible. Investments in efficiency create value-add multifamily properties by boosting property values while simultaneously increasing resident satisfaction.

  • Boosting HVAC efficiency — Replacing or upgrading your HVAC systems can be a powerful way to add value. Especially when weighed against older systems, new HVAC technology is much more efficient and requires significantly less maintenance. And to help you finance new HVAC systems, consider government efficiency incentives and a new form of financing called Energy Efficiency as a Service.
  • Electrifying your properties — Building electrification is one of the best means of creating value-add for multifamily properties. By electrifying everything, including appliances, and replacing expensive fossil fuels, you can cut costs and increase your property’s value. You can also market your property’s energy efficiency to attract eco-conscious tenants. Do not forget to explore available government electrification incentives, as they can help cover the cost of making the switch.
  • Installing or replacing lighting — Lighting can consume up to 11% of all the power used in a multifamily property, so installing high-efficiency fixtures and bulbs makes a significant difference in your electricity bills. Especially in older buildings, upgraded lighting is an excellent way to cut costs.
  • Reducing water usage and installing electronic meters — Water is another cost that adds up and cutting back usage adds value. Consider installing electronic water meters. New meters can shift direct costs to your residents and encourage lower consumption.
  • Making deferred repairs — Completing deferred repairs and upgrades can greatly reduce your maintenance costs. Adding double-paned windows and increasing insulation are examples of repairs and upgrades that will reduce costs. Catching up on these deferred repairs increases property values, too.
  • Reviewing and rebidding supplier contracts — When seeking quotes for larger maintenance projects and upgrades, it pays to check supplier contracts from time to time and consider asking for competitive bids. Suppliers will often lower their prices to keep your business.

Procurement and supply chain optimization

Maintaining a multifamily property requires a steady stream of parts, supplies, and equipment. Automating the purchasing of these supplies is a terrific way to lower costs and ensure you always have the parts you need when you need them the most. By collaborating with the right partner and platform, you make your job easier and add value to your property at the same time.

  • Improved discounts on equipment and supplies — Discounts are important to the bottom line because of the volume of supplies needed by multifamily properties. The right procurement platform ensures you always get the best values.
  • Automating procurement — It also pays to automate procurement. Automation increases efficiency, lowers costs, and ensures you always have the necessary items on hand.
  • Partnering with a procurement platform — A procurement platform partner makes your life easier and increases your property values. It is one of the best ways to offset low cap rates for multifamily properties.

In Summary

Rising interest rates and low cap rates for multifamily properties are far from optimal conditions for you as a multifamily owner or manager. But value-add for multifamily property can help protect your ROI.

By taking advantage of every opportunity to add value, you can reduce the impacts of higher interest rates. The right combination of initiatives to increase revenues, lower costs, and automate your purchasing with a procurement platform can make a significant impact.

Raiven can help multifamily owners boost value-add and increase ROI

Raiven can help you save money and assist in creating value-add for your multifamily properties. Our Raiven marketplace can make you more efficient while reducing costs and ensuring your supply chain is continuously optimized. We understand your needs and tailor our offerings to meet them. We offer:

  • Pre-negotiated discounts that are generating average client savings of 7-25%+ from big name suppliers like Ferguson, HD Supply, Grainger, Graybar, Office Depot, and more.
  • Supply chain alerts for price and product availability changes on the items that matter to you most.
  • Private marketplace houses all your preferred suppliers in one location for easy access to your discounts. No more bouncing around websites comparing prices.
  • AI-powered purchasing tools that find the lowest prices even when employees shop outside your network.

Raiven is your one stop shop to save time and money. Ask our clients Core Realty, Lyon Living, or Oaks Property Management what we’ve done for them. Visit Raiven to learn what we can do for you.

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