How Maximizing Energy and Water Efficiency Can Increase your NOI
When it comes to multifamily properties, there are endless ways to add value and improve your return on investment (ROI). Many investors will focus on conventional ways of increasing income, such as raising rents, but fail to also consider opportunities to decrease expenses, like maximizing energy and water efficiency.
Performing an on-site energy and utility audit can help you determine where you can address problems and best apply cost-effective solutions, in turn decreasing your expenses and increasing your net operating income (NOI).
Here’s why you should perform an energy and utility audit:
It Increases Your Property’s Value
When it comes to multifamily property investments, every dollar you decrease in expenses or increase in income adds value to the property. For this reason, many investors are now considering how a property’s energy and utilities perform into their asset valuation.
Investors who perform an energy and utility audit can create a data-driven strategy to improve net operating income (NOI) and increase property value.
Even the smallest improvements brought to light by an energy and utility audit can make all the difference. For example, here’s how a 5% decrease in expenses can have a monumental effect on your multifamily property NOI and asset valuation:
- If you have a property that produces $900,000 in gross annual income but has $360,000 in expenses, your NOI would be $540,000. With an 8% capitalization rate, this property would be valued at $6,750,000.
- Now, if you had the same property that produced $900,000 in gross annual income but you decrease the expenses by 5% to $342,000, your new NOI would be $558,000. With an 8% capitalization rate, the same property would be valued at $6,975,000.
In this example, our property asset value would increase by a whopping $225,000 by simply decreasing your expenses by $18,000!
It Improves Your Occupancy Rate
Not only will performing an on-site energy and utility audit help you determine where to lower expenses, but it can also help you improve your occupancy rate.
Most tenants want to save money and enjoy better living conditions. Providing them with an energy-efficient place to live with lower utility bills will give your property a competitive advantage. This is why, when compared to other comparable properties, energy-efficient buildings have higher asset value and better tenant retention.
It Protects You Legally
Performing an energy and utility audit will not only help you reduce your multifamily property operating expenses, but it can also help protect you legally. An audit can ensure that your property’s utility meters, like gas and water, are measuring correctly. This is highly important.
Take, for example an apartment owner in Texas, who was sued for passing along inflated water and sewer charges to renters. Whether the property owner knowingly or unknowingly billed the tenants incorrectly, it is illegal nevertheless.
In this instance, the owner had to pay the tenant three times the amount of any overcharge, a civil penalty equal to one month’s rent, attorney fees and court costs. Had the owner conducted a prior audit instead, which is relatively inexpensive, he could have avoided these legal costs and headaches.
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- Texas Water Code: Apartment owner sued for passing along inflated water, sewer charges to renters