How to Maximize Your Multifamily Cash Flow

David Cohn
Aug 9, 2021
Multifamily Loans

A multifamily building can be a reliable source of steady income if appropriately managed. So how do you maximize your cash flow from such an asset? Here are some simple yet effective ways to make your multifamily more profitable while positioning it for future success.

Review your property’s performance to find opportunities.

It’s important to regularly compare your multifamily building to similar properties to see underperforming and why.

There are two crucial financial key performance indicators to look at when reviewing your property’s performance relative to similar buildings.

The first is your cash flow. Compute your gross monthly cash flow by multiplying the number of units you have by the monthly rent. Then, subtract all expenses from the total—including property tax—to get your actual cash flow.

It’s essential to keep in mind that the condition of the units, the amenities you offer, and the overall quality of the building will allow you to charge premium rent and increase your cash flow.

The second financial key performance indicator to look at is your net profit margin. This is essentially your net operating income expressed as a percentage of your total revenue.

The 2020 national average in the United States was 59.3%.How does your building stack up? Is your vacancy rate higher compared to other multifamily properties of the same quality in your area?

Are your expenses markedly higher? You also want to assess things like facility management, brand and reputation management, and of course, customer service.

Seeing how your commercial multifamily loan is performing today can help you spot any gaps in its performance and ultimately uncover opportunities that will allow you to maximize its cash flow.

Refinance if it makes sense.

It might be a good time to consider refinancing if interest rates decrease. Even a ½ percentage point reduction in interest rates can make it worthwhile to pay closing costs on a brand-new mortgage.

On the other hand, if the adjustable period on your current loan is on the horizon, you might see a 1% to 2% increase in your rate.

Therefore, this might be a reasonable time to get a new loan if the refinance rate is at least 50 basis points lower than your current rate.

But before you rush out to refinance your loan, do the math on the breakeven point. Divide the total cost of refinancing by the monthly savings you expect to get from the new loan to see how many months it will take you to recover the cost.

Also, make sure that your current mortgage does not carry a prepayment penalty because this might eat up most of the savings.

Finally, you can consider talking to a broker for advice if you’re not sure if commercial mortgage refinancing is beneficial in your case.

Look at all your expenses to uncover savings.

Go back to the information you have collated from strategy 1 (performance analysis) to identify opportunities to save money and time. You can also go over your expense statements in the past three years to see exactly where your money has gone.

Once you have all the data, think about whether it makes sense to do the following:

  • Start accepting online payments to make financial accounting and reporting more efficient.
  • Outsource non-core processes such as procurement, IT, and accounting
  • Install thermostat timers to reduce cooling and heating expenses
  • Do simple upgrades—such as just switching to energy-efficient bulbs—to cut costs.
  • Do some preventative maintenance on top of bi-annual inspections to fix electrical or plumbing issues before they get worse.
  • Accept online leasing applications to attract more tenants.
  • Switch to paperless transactions
  • Use online and software technology, including enterprise resource planning solutions, to manage and analyze your property and back-office tasks.

These ideas should inspire you to think of more ways to optimize expenses and make your processes more efficient.

Offer extra services to enhance the resident experience.

It’s amazing how many tenants are willing to pay more to enjoy value-added services and amenities. Some of the most successful multifamily buildings start with the market rent and offer al carte services such as the following:

  • Housekeeping
  • Laundry services
  • Trash concierge
  • Pet fees
  • Storage
  • Parking / covered parking
  • Furnished units
  • Small garden plots

Extras like these have the potential to increase your net operating income by about 10%, and such an increase ultimately boosts your cash flow as well as the building’s market value.

Do note that the needs and preferences of renters tend to change over time.

For example, people were willing to pay extra for fitness facilities before the pandemic, but that has changed. Likewise, many tenants nowadays are not so keen on paying extra for communal areas.

Staying on top of what your target residents are looking for will allow you to invest your money where it counts. To figure out what value-added services your tenants might want, you can do a quick survey and ask them directly.

Improve your building’s appearance.

Well-maintained and visually appealing multifamily properties can charge premium rents and attract higher-quality tenants. Increase the building’s exterior appeal by striping the parking area, improving the signage, lighting, or landscaping.

Don’t forget to upgrade the units, too. Even the simplest improvements—such as modern faucets, new cabinet doors, and shiny hardware—can go a long way in making units feel fresher and more modern.

In addition, make it a point to clean your units before showing them. Most tenants equate cleanliness with value.

All these tips will put you on the right track to maximize revenue and minimize vacancies. They all add up to increasing your cash flow and, ultimately, your multifamily building’s profitability and the overall value of your commercial real estate portfolio.