Ep #405 – Decreasing Expenses in Multifamily – Double Header
Here is some of what you will learn:
- Keys to increasing NOI
- RUBS (Ratio Utility Billing System)
- Reducing turn time
- Challenge tax assessment
- New bids from vendors
- Kelly Stinson – The Potty Princess
- Saving $2M on water bills
- Reducing water and sewer consumption by 30-60%
- Brad Hubbard – Flood Money
- Reducing and eliminating flood insurance
- Saving $4M in insurance costs
- Assessing risk
- Mitigating exposure
- FEMA Reclassification
To find out more about our guests click below:
Kelly Stinson, SAS click here
Brad Hubbard, National Flood Experts click here
To find out more about partnering or investing in a multifamily deal: Text Partner to 41411 or email Partner@RodKhleif.com Join us at a Multifamily Bootcamp, visit: MultifamilyBootcamp.com
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Full Transcript Below:
Mauricio – Decreasing Expenses in Multifamily – Double Header (Ep405)
Hi my name is Rod Khleif and I’m the host of the “Lifetime Cashflow through Real Estate Investing Podcast” and every week I interview multifamily rockstars. We talk about how they built incredible wealth for themselves and their families through multifamily properties. So hit the like and subscribe button to get notified every Monday when a new episode comes out. Let’s get to it. Hey guys welcome! So listen this is a special episode that I’ve never done before and that I’m gonna be interviewing a couple of people that are instrumental in helping people decrease expenses. So this episode is going to be focusing on improving the net operating income and I’m gonna start by just kind of giving you guys some tips and some strategies because as you know or maybe you don’t know but if you don’t know any increase to the net income or net operating income is an exponential increase to the value of the property. Let me give you an example. Let’s say you’ve got a hundred unit complex and you just raise the rents twenty bucks okay all things being equal if that property is trading or selling at a six cap or that’s how its valued, you’ve just increased the value four hundred thousand dollars with a twenty dollar rent bump. That’s why this is such a big deal and that’s why we freaking love this business. I’ll give you another bigger example. We’ve got an asset you probably heard me talk about the asset that got destroyed by a tornado up in Beavercreek Ohio well that’s a hundred and one unit complex and we’re gonna be able to increase the rents there five hundred dollars. Now I don’t want to tell you that’s not normal. That’s a huge home run but that five hundred dollars equates to a ten million dollar increase guys. It’s a really big deal you know so you know it’s important to focus on anything you can do to improve the NOI. Now for purposes of today’s call, we’re gonna talk about strategies to decrease expenses. I’m gonna do a different episode on increasing revenue but today I want to talk about decreasing expenses. So let’s talk about some of the strategies that you can implement to immediately decrease expenses on your on your property. The first one which is an awesome way to do it because it goes right to the bottom line is to bill back utilities if it’s possible. And so there’s quite a few ways to do that. One is to sub-meter the property or put some sort of a measurement system by each unit to check consumption. Another one is to institute something called RUBS which stands for Ratio Utility Billing System and basically there are companies that do that and again you’re just billing back the utilities. Now important thing to remember about utility bill back is that if you’re the ground breaker in your sub market like let’s say none of the other properties charge utilities and you do you’re gonna have some vacancy, doesn’t mean you shouldn’t do it but just as an aside important for you to know that now again I’m gonna I’m gonna have someone on today that’s going to talk about utility reducing utility costs and you’re really gonna like her. I’m also gonna have someone today talk about how to minimize flood insurance and so these are both really big ways to impact and reduce your expenses which again increase your net income which exponentially increases the value of your property. So that was RUBS. The biggest expense you will ever encounter is turnover and so anything you can do to reduce turnover number one okay like keep your residents happy as much as you possibly can so they don’t move or if they do move, reduce that turn time okay the unit turn time. And that’s a question you should always ask your third party property manager is how quickly they turnover units because it’s so freakin expensive like for example, if you’ve got a couple of vacancies a month in your complex and your rents say $1,000 let’s say it takes you a month to fill them that’s twenty four thousand dollars of lost income a year which had a six cap is four hundred thousand dollars in value it’s a big deal guys okay but if you you know you cut down that turn time you massively increase your net operating income and again it equates to value, very very important. So you want to do everything you can to minimize turnover to begin with by you know creating a culture in your community, having community events you know treating your residents like gold you know there’s so many little things you can do to make them feel cared about and certainly you want to fix anything that’s legitimate right away. You want to follow up if and make sure it’s fixed to their satisfaction but you want to build community and whenever you do that you minimize people don’t want to leave. If they’ve got friends and people, they’ve connected with in the community. So it’s very very important to do that. All right so let’s talk about other ways to decrease expenses and again I’m gonna be interviewing two people today. This is an unusual podcast. I’m actually have two interviews on this podcast to help you with decreasing expenses. So another way to decrease expenses is to install motion lighting in common areas you know put in LED lighting you know one of the ladies I’m having on today, she’s gonna talk about water saving methodologies but that’s a big way to save money and Fannie Mae has something called the green program where you know if you do enough of savings you can actually get an increase, I’m sorry an interest rate decrease. So you know it can be very very profitable to save energy. And then another thing is with residents if they cause a damage or they’re the cause of a repair, you charge them right at the time of that repair for that repair okay very important. Another thing is to challenge your tax assessment okay and there are attorneys and companies that will do that for you but you should challenge that every year. Another thing is put your insurance, really put all your vendors out to bid every year insurance being one of them. You should always get new bids and you should you know get new bids on your vendors because there’s something called vendor creep you know where they’re bill just happens to creep up and that’s a you know that’s an issue. So anyway so I wanted to give you guys a few tips ahead of time and now we’re going to move into the interview portions of this particular podcast episode.
Rod: Welcome to another edition of “Lifetime Cashflow through Real Estate Investing”. I’m Rod Khleif and I am thrilled you’re here and as I said earlier, we are having this session, this episode is all about saving money as an operator. And the lady we’ve got on today is a huge step in that direction. Her name’s Kelly Stinson and she’s with SAS which is a water conservation company and it’s kind of funny she’s got a nickname which I’ve heard previously which is really caught on in the last couple years. She’s called the Potty Princess and so she’s out there bringing awareness and education in the whole arena of saving money on your freakin water bills and we’re gonna dig into all that. So now in the last year alone she saved owners two million dollars on their water and sewer bills and let’s see it at a five cap that’s forty million dollars in value just from saving some money on water bills. This is a big deal guys so pay attention. Kelly welcome to the show
Kelly: Thank you so much for having me I’m excited to be here
Rod: Absolutely! Now let’s dig in to this, to the exciting topic of toilets
Kelly: That’s exactly what everybody wants to talk about right? Nobody ever thought that you can make a ton of money from toilets. So it’s the hidden secret of operating expenses on your property
Rod: Wow well let’s talk about how okay so let’s say somebody buys an apartment complex and what are you able to do? what’s possible? And guys, remember this is just one piece of where you can save money but this is a big one. So what are you able to do?
Kelly: Yeah absolutely so with the water conservation piece as our owners are going in and they’re purchasing these value add properties and they’re doing these fabulous renovations on interior so that way they can get some rent increases, most often though the toilets are overlooked during those renovations. They pull in, they lay new flooring, they put in new plumbing fixtures, but the toilets are there for 30 years and what a lot of owners don’t recognize sometimes is that those toilets and inefficient humming fixtures like the showerheads and the bath faucets, are actually taking up a considerable amount of consumption on your water and sewer bills. So you have this unique area where you can reduce that water and sewer consumption anywhere by thirty to sixty percent and how that equates to the owners is that that’s gonna save on their water bill twenty to forty percent and that’s huge
Rod: Yeah let’s use an example. Let’s say someone’s got say a hundred thousand a year in water bills which guys is really not unusual. What’s possible?
Kelly: Yeah so we take a conservative measure on it and they’ve got a hundred thousand dollar-a-year water bill on their property. Let’s say we’re gonna reduce that water consumption and reduce the water bill by forty percent so that’s gonna be a $40,000 a year savings we take that across with a 5% cap rate that might be most common with your network and at that point you’re looking at an asset value boost of $800,000
Rod: $800,000 for putting in toilets guys okay that’s why I wanted her on the show. Th is is a big deal and so let me ask you this you know you can change out the toilets you change out the shower faucets the actual bathroom faucets. I don’t know maybe the kitchen, I don’t know what all do you do
Kelly: So yes we are a nationwide service provider. We focus solely on water conservation that’s our sweet spot. That’s where the company was founded 20 years ago and with that our crews will come in they will remove and install ultra-high plumbing fixtures around the toilets, the showerheads, the bath aerators, and your kitchen aerators. Okay so we’re looking at reducing consumption in each of those areas and in addition to that, prior to any consulting that we’ll do with any of our property owners, we will actually complete a 100% full assessment on the property and document the current interior flow rates of each of those plumbing of fixtures but we take it one step further because if your owners go through and they upgrade all of these plumbing fixtures and they start to see the reduction in their water consumption through that but they’re not shoring up those additional leaks that they might see, then they’re still leaving money on the table or you know in my world you’re still flushing water down the toilet or flushing money down the toilet right. So we’re providing you a total punch list of hey these are the faucets that are leaking at the base these are your tub diverters that are spitting out five gallons a minute when your showerhead is you know spitting out 1.25 gallons a minute and this is all an opportunity where the cost of water and sewer is continuing to rise across the country. We have such varying rates I mean like Atlanta has some of the highest water and sewer rates in the country
Rod: Yeah we’re about to go into contract on an asset they’re actually but so that’s good to know now let me ask you this, I mean you just said something very interesting you know we all have used those shower diverters that are still spitting water out and of course you’re not getting showered with that water and it’s just going down the drain very interesting point. Now let me ask you this what sorts of leaks should a property owner really pay attention to? What should they be looking at them? Maybe there’s some surprises in that question
Kelly: Yeah great question. So on that as they’re looking at a property or they might have within their portfolio today and they’re walking through some things to look for is walk into a residence bathroom and turn the shower on and pull the tech diverter to engage the showerhead and you’ll be surprised that you made that showerhead may not be attached properly and could be leaking or the actual temp diverter is again spitting out water at the same time so while you think you have all these you know special water saving devices, in actuality you could be increasing your water usage by five to seven percent and that is every single penny counts on LOI
Rod: Sure it absolutely does. Okay so I would guess now I assume you do other asset classes besides just multifamily?
Kelly: We do so we focus also around hospitality which I seems to be you know very popular now in
Rod: Hotels you bet yeah
Kelly: Yeah so hospitality, student housing as well as government housing or military housing okay but multifamily is really where SAS’s sweet spot is and when we’re talking about that two million dollars in savings that we’ve delivered to our owners that’s specific to multifamily
Rod: Well that’s why I wanted you at my bootcamp. So I’m excited to see you again in LA and we met at somebody else’s event and like you know I’ve got to get you to my bootcamp because this is something everyone should do that’s a multi-family owner. Now I’m assuming you know obviously on a brand new A product you’re not going to be able to do a lot because they’re typically built you know with that in mind today but I would guess correct me if I’m wrong than anything from a be asset down to a D, it would make sense to do this yes?
Kelly: Yeah I would say that about ninety percent of the projects that we’re engaged on are anywhere from a B to a low C Class asset. The A-class, we do have opportunities in there and we certainly have installed in A class but for new development they’re typically already suspecting in the most efficient technology.
Rod: Yeah okay okay now what what happens, there’s a good question, what happens if you’ve got a property and they’ve already instituted RUBS you guys heard me talk about rubs earlier in this session you know a Ratio Utility Billing System where the water gets billed back to the residents or a portion of it. Can you do any anything in that sort of a scenario?
Kelly: Yeah so this is a perfect example as to why so many of our owners have overlooked the water conservation piece because they’re like, that’s not really hitting my operating expenses. I’m rubbing it back to the residents. Take a look at it from this side, I have spent an extensive amount of time this year in working with our current owners and their residents to understand why those residents are not selecting their property to sign a lease or they’re not renewing their lease. So here’s a couple of things right, if you have a property in a certain area and let’s say you’re rubbing back you know 80 percent into that unit or it could be by the number of residents in that unit. If their total costs out of pocket between all of their utilities and the rent is exceeding what a competitor product across the street is offering, that’s certainly a red flag. You need to look at that. Why is it that that competitor across the street is able to rub you know rub back less or reduced amount of money. So with RUBS, if you’re rubbing back take this into consideration for your residents you may be able to two things, you could reduce the amount that you’re rubbing back to the resident and increase the rent. So it’s still even if you haven’t hit your you know top-line rent increases in the area or you’re actually reducing your entire water and sewer bill so you could actually potentially rub back to them even more but it’s the percentage-wise but it’s a reduced amount okay
Rod: That makes sense that makes sense or you can be more competitive in your marketplace now that totally makes sense. So Kelly let me ask you this, let’s say you go into a unit and you’re doing your replacing everything the toilet, the bathroom, faucet or maybe just the aerator, the kitchen faucet aerator did I miss something oh the diverter what could what could a person expect to pay per door for example to make these upgrades and maybe there’s a range or whatever but I’d like to get an idea
Kelly: On average provided that we can stick a drop trailer on the property and put the dumpster on the property and we don’t have to shuttle it back and forth, its $275 a bathroom and that includes all of the material, all the project management, all of the labor, your trailer duster everything associated out the door. So it’s very affordable because
Rod: That is very reasonable
Kelly: Yes. If you walk to the home depot, it’s gonna be like a hundred and seventy dollars for the toilet alone
Rod: Yeah and you’ve got labor you’ve got labor or everything, no that’s very reasonable I expected to hear more than that so that’s awesome
Kelly: The best part about this though is that I have a huge passion for giving back in this particular space because when I started in this organization two years ago, I found that there’s very limited resources that are reliable for education and analysis around water conservation in the properties. So one of the ways that we give back is we will, on the front side we will help owners analyze their property in what we call a pre proposal. I will have a discussion all day any day if you own a property already, if you’re underwriting a deal, if you’re just running a deal analysis, I can quickly run an ROI for you to see if this is water conservation that you can underwrite into your new asset
Rod: Love it love it love it especially on an asset that you’re considering that yeah no I love it. So guys her website is SASconserve.com and those either of you going to LA, she’s gonna be there, her smiling face will be there
Kelly: The Potty Princess will be
Rod: The Potty Princess will be there. Now do you want to give your email address? I want to caution you to be careful what you wish for I’m happy to put it out there if you want
Kelly: Absolutely I am here to bring education and awareness anyway we’re already out
Rod: Well I know you’re very helpful so her email address is KStinson@SASconserve.com and she’s very accommodating and will add value to you if you need it which is why I wanted her on the show and why she’s coming to LA. So Kelly thanks so much for being on the show it’s great to see your smiling face again and I’ll see you in just a short while
Kelly: Yeah thank you so much I’ll see you in a couple weeks
Rod: All right take care okay. So as I was saying we are continuing with our podcast about saving money as an operator a multifamily operator today and we’ve got a guy that I’m really excited to have on because his way of saving people money it really is kind of, it kind of stands alone it’s not something I’d heard about before meeting Brad. So his name’s Brad Hubbard. He’s an engineer and he’s a Certified Floodplain Manager, author of a book called “Flood Money” it’s been on numerous shows and podcasts and his company’s called National Flood Experts okay and basically Brad specializes in reclassifying high-risk flood zones on properties into low-risk which has saved his clients over four million dollars in flood insurance premiums okay. I just want you to hear that, just the premiums and increased values on properties over fifty million dollars. Brad welcome to the show brother!
Brad: Thanks Rod. I appreciate it!
Rod: Yeah so you know for those people that don’t understand what I just said. Can you dumb it down I guess like you had to do for me the first time we talked so please
Brad: All right sure so basically what we do is take a look at any property that is rated as an AE or VE anything in a high-risk flood zone area you know they have a loan on the property, they’re required to carry flood insurance on the property, we take a look at them from an engineering aspect from an engineering point of view too see is that right? Should it actually be in a flood zone because when FEMA draws their Maps they’re very broad brushed with everything. So we take a look to see if there’s anything we can do if we can move it from that high risk to a low risk that removes the requirement to carry flood insurance in the property any excess and EBI makes flood insurance more affordable if they still want to carry it but yeah that’s what we do. We just try to get a move from a high risk to a low risk area based on engineering data
Rod: Okay so give me some examples of some of the things that you’ve either seen or done in your positioning when you’re, and what you do is I assume you evaluate the maps, you evaluate the property, and then you create some sort of Appeal with FEMA is that is that correct?
Brad: Yeah that’s pretty much it so what we’ll do is when we have a client that has a property they’re either maybe they’re owned in or operating it or they’re looking to purchase it. We’ll take a look a real deep dive into the flood maps any flood studies that are available any elevation data that we have on the property to see if we have a case. If we do have a case and we think that it’s either wrong or there’s something else out there that we can do we’ll create an entire petition to FEMA to get them to change the designation for the flood zone. So yeah that’s pretty much what we do
Rod: And guys just those you listening, if you’ve never paid for flood insurance it can be significant
Brad: You’re lucky
Rod: well you’re certainly you’re lucky but it can be big dollars and as you guys know you know anything that saves you know money and increases your NOI is an exponential increase to the value so like brad has said here you know he’s saved just his clients 4 million in annual premiums that equates to 50 million in value in and so you know this is a big deal and so do you ever have them do anything physical or is it all the evaluation?
Brad: There are cases where we will have them do something physical. So the property doesn’t quite qualify the way it is we’ll say you know if you do this here or this there, bring in some dirt, bring in some mitigation factors, you know we can find other ways aside from its just mapped wrong to you know what if you do this, it’ll change your entire rating. We’ve done that multiple times it comes more into play on high-rise type buildings or commercial like with flood proofing and things like that but on the multifamily side usually it’s dirt or adding a berm or a way to either divert the water or keep it from getting to the building but yeah there are cases I’d say maybe 10-20 percent of the time where you know what you need to do this in this to the property once that’s done, then we can go through this process to get them removed or changed
Rod: Yeah and guys here’s something else that’s kind of exciting. If you encounter a property that’s for sale that when you when you get the P&L there’s a big dollar for flood insurance and you bring in Brad to mitigate that or greatly reduce it, you’ve just automatically increased value on a property. So you know if you’re evaluating a property like that, it might make sense to engage Brad or at least have a conversation with him. Now how do you how do you price what you do?
Brad: Sure yeah we price it based on the first year savings whatever we’re able to save our client on that first year that’s our fee and typically they get that money refunded to them or at least a very high percentage of it. So it’s pretty much almost zero dollars out of pocket for our client and then obviously you get the returns year after year and your your 20x on NOI right now with the multifamily market.
Rod: Right right right well and the other thing obviously is to determine whether or not the properties really at risk of ultimately being flooded like we’ve got an asset in Louisiana that you know is historically had some flooding and so you know so you’ll do a risk assessment as well?
Brad: Absolutely you know that’s part of it is you know in our review we’re gonna see what is the true risk of flooding obviously everything is modeling and you know they’re, it’s not an exact science it’s all prediction stuff but it does give you a better eye of the risk that you’re undertaking you know on a property and there have been times where a client will send one to me and you know I’ll say this is nasty and it’s only going to get worse and I wouldn’t recommend investing in this because you know your flood insurance is fifty grand now but fast forward three years you might be at a hundred grand does it still work with your underwriting?
Rod: Oh wow no kidding okay well very important then. So yeah so guys I mean this is kind of a no-brainer if you’ve got a property that’s got flood insurance in my opinion what’s your website Brad?
Brad: It’s just nationalfloodexperts.com
Rod: Okay so there you go and is there anything I haven’t asked you? I mean it’s pretty straightforward you go in, you mitigate, you assess risk, and then you do everything you can to have them reclassify the property yes?
Brad: Yeah that’s really it you know what we’ll do is we’ll try to get it reclassified. If we’re not able to do that we’ll look at historical data is there any other way that we can save money on flood insurance you know we won’t write it but we’ll partner with their insurance agencies to try and just anything we can do to squeeze it an extra dollar out for our clients that’s you know that’s pretty much what we do and yeah you know it’s like you said that everything it’s free on the front end for our clients to review it
Rod: The price is right
Rod: Right love it, no I love it man and in guys so if you’ve got a property with flood insurance this is a no-brainer. Well listen Brad I really appreciate you being on this on this show and thanks for your time and I know that we’ve got a property I actually want to send your way right now
Brad: Send it over
Rod: So yeah so alright thanks Brad take care
Brad: Thanks a lot Rod I appreciate it
Rod: You bet