Key Performance Indicators

What is a key performance indicator?

Key Performance Indicators

Key Performance Indicators (KPIs) in multifamily management are measurable values that assess the performance and success of a multifamily property or portfolio. Property owners, managers, and investors employ KPIs as crucial reference points to gauge a property’s financial health, operational efficiency, and progress towards its set objectives.

While KPIs are tailored to each multifamily property based on its unique goals and priorities, some widely-used multifamily KPIs include:

Occupancy Rate: Represents the ratio of occupied units to the total units available. It sheds light on the property’s aptitude for drawing in and retaining tenants.

Economic Occupancy: Measures the revenue made from occupied units as a percentage of the potential income if all units were occupied at market rates.

Net Operating Income (NOI): Calculates the property’s profit by subtracting all operational costs from its total revenue, not counting debt service.

Maintenance Response Time: Quantifies the duration between a tenant’s maintenance request and the response. Swift responses play a pivotal role in tenant satisfaction.

Collection Rate: Compares the amount of rent collected to the overall rent due, providing insight into the success of rent collection efforts.

Tenant Turnover Rate: Indicates the proportion of tenants who leave the property over a defined timeframe. Elevated rates might signify challenges in tenant retention.

Operating Expense Ratio: Compares total operational costs to total earnings, aiding in evaluating property management’s efficiency.

Lease Trade Out: Refers to the substitution of a current lease with a more lucrative one. This might entail renegotiating with the present tenant for better terms or locating a new tenant willing to commit to a higher rent.

By meticulously monitoring these KPIs, property stakeholders can make well-informed decisions, pinpoint areas of improvement, and ensure the property’s sustained success.

Capital Expenditures

Key Performance Indicators

Capital Expenditures (CapEx) are substantial investments made by property stakeholders to enhance, maintain, or augment a property’s physical state and long-term worth. Unlike routine operating costs, CapEx involves significant, one-off expenses.

In the realm of multifamily apartments, CapEx often encompasses:

Property Renovations: Comprehensive makeovers of units, communal zones, or the entire property to elevate its allure and functionality.

Roof Works: Repairing or overhauling roofs to safeguard structural health and avert moisture issues.

HVAC Systems: Modernizing or replacing the heating, ventilation, and air conditioning units for heightened efficiency and resident comfort.

Plumbing and Electrical Updates: Revamping these systems to comply with safety norms and construction codes.

Exterior Enhancements: Augmenting the property’s visual appeal via landscaping, painting, and other visual upgrades.

Structural Fixes: Tackling any structural damages or issues that might jeopardize the property’s stability.

Energy Efficiency Upgrades: Incorporating features like LED lights, improved insulation, and energy-efficient windows to slash utility expenditures.

Amenities: Introducing or improving facilities like gyms, communal spaces, or playgrounds to entice and keep tenants.

Recognizing their pivotal role in preserving and increasing a property’s value, owners and investors meticulously strategize and allocate funds for CapEx within their broader investment plans. These outlays often influence the financial forecasts for the property, playing a crucial role in estimating potential Return on Investment (ROI).

Owing to their hefty nature, CapEx decisions are taken after thorough scrutiny. Considerations include the property’s age, state, market dynamics, and the anticipated ROI from the improvements. When executed judiciously, CapEx ensures a property stays competitive, remains appealing to tenants, and consistently yields robust rental income.

Lease Trade Outs

Key Performance Indicators

Lease Trade-Out: This refers to the process where an existing lease is replaced with a new agreement, usually at a higher rental rate. This can be achieved either by renegotiating terms with the current tenant or by sourcing a new tenant prepared to pay more.

Why it Happens: Lease trade-outs are initiated when:

• The market dynamics change favorably.
• There’s heightened demand for rentals.
• The property gains increased value from renovations or other enhancements.

Steps in Lease Trade-Out:

Rental Market Analysis: Property managers review local rental market conditions. They’ll consider factors like comparative rental rates, demand levels, and unique attributes of their property.

Renegotiation with Current Tenant: If there’s a belief that the present tenant might agree to a higher rent, the landlord may propose a lease renegotiation.

Seeking New Tenants: If the existing tenant declines the increased rate, efforts to attract new tenants commence. These tenants are often those who value the property’s specific attributes enough to pay a higher rent.

Transition to New Lease: If a new tenant agrees to the heightened rate, the existing lease can be legally terminated after adhering to any stipulated notice periods. Subsequently, a new lease reflecting the updated rate is drawn up.

Advantages & Considerations: While lease trade-outs can boost rental income, especially in a bullish market, it’s imperative for landlords to balance this gain against maintaining tenant satisfaction. This ensures consistent occupancy and sustained profitability for their multifamily property.

Operating Expenses

Key Performance Indicators

Multifamily Apartment Operating Expenses:

1. Property Management Fees: Costs paid to management entities for daily operations, tenant interactions, and maintenance oversight.
2. Maintenance and Repairs: Expenditures for routine maintenance and repair works, including utilities like plumbing, electrical, and HVAC.
3. Property Insurance: Insurance premiums covering potential damages, liabilities, and other risks.
4. Property Taxes: Taxes levied by the local government based on property valuation.
5. Utilities: Costs for services like water, electricity, gas, and waste disposal in communal areas.
6. Landscaping & Groundskeeping: Maintenance of lawns, gardens, and shared spaces.
7. Administrative Expenses: Expenditures for office operations, such as supplies and staff salaries.
8. Marketing & Advertising: Promotion costs to attract potential tenants.
9. Pest Control: Services to prevent or manage pest infestations.
10. Security: Costs related to ensuring tenant and property safety, whether through personnel or systems.
11. Reserve Funds: Allocations for anticipated repairs, replacements, or capital upgrades.

It’s crucial for stakeholders in the multifamily apartment sector to keep a close watch on these operating expenses. Balancing them while ensuring property quality is pivotal for the financial well-being and sustained success of the investment.

Net Operating Income

Key Performance Indicators

Net Operating Income (NOI):

NOI is a key financial measure that showcases a property’s profitability, excluding the effects of debt service. It gives insights into the income left after all operating expenses are covered.

NOI Formula: NOI = Total Rental Income + Other Income – Total Operating Expenses

Where:

• Total Rental Income: Income from occupied units and any other property-related sources, like parking or laundry.

• Other Income: Additional revenue not tied to rent, such as service fees.

• Total Operating Expenses: All costs for property management and upkeep, like taxes, insurance, utilities, and maintenance.

A positive NOI shows the property earns more than it spends, indicating profitability. In contrast, a negative NOI implies costs exceed income. For investors, NOI helps compare various properties based on their operational efficiency, sidestepping the influence of financing. It’s especially useful for comparing differently sized or financed properties, focusing purely on performance.