Regardless of whether you are just starting your journey into multifamily investment real estate, or a seasoned professional with many units in your portfolio, operational costs are a constant area of focus. Rising operational costs are having a vastly different impact on returns depending on size of the property, its age, and its location. 

Operational expenses are typically grouped into two categories: non-variable and variable.  Non-variable costs are defined as those that you have limited or no control over such as property taxes, insurance, and utilities.  Variable costs are those that change over the course of the year and can be easily influenced by the decisions you make. Some examples of variable costs are repair and maintenance, landscaping, pest control, turnover costs, renovations, and marketing and advertising. These costs can all be shopped, and you can decide which vendor to use based on price and quality. 

One of the primary threats to multifamily investment returns is rising insurance costs. Insurance premiums for this industry have significantly increased over the last two years, dating back to early 2021 and intensifying in 2022. Multifamily investors have reported 40-50% increases in premiums, and in certain cases, insurance premiums have doubled. Moreso, apartment owners are also faced with increased deductibles and self-insurance limits. The combined impact? Not only are apartment owners realizing a lower net operating income, but they may also face the inability to secure financing for new investments. Higher deductibles will require larger capital reserves, forcing some property owners to sell.

Factors driving insurance premium increases

Insurance professionals are attributing the following factors to the change in premium rates:

• — Natural disasters have become more frequent and more damaging, causing major losses for insurers.
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• — Inflation and supply chain challenges have dramatically increased the cost of building materials. These costs shift to the insurer in the case of a claim. Hence, increased costs result in increased rates.
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• — Properties with unfavorable claim history.

 

How to mitigate rising costs

Property owners should develop and implement a loss prevention strategy to negotiate deductibles and minimize premium increases.

• — Simply put, maintain your property. Monthly or even weekly preventative maintenance schedules are critical to minimizing costs.
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• — Have a documented risk management plan. Owners who show reduced hazards and efforts to minimize the frequency and severity of potential claims, have a greater chance of securing a lower rate.
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• — Improvements to the property: additional lighting, gating the property or installing security cameras will improve tenant safety and reduce the risk of liability claims.

 

Economies of scale minimizes the negative impact

One of the most effective ways to minimize the rising costs of operating multifamily investments is by owning multiple properties.  The ability to spread operational expenses over several properties and units can be substantial compared to a single property with a few units.  Many larger operators with 100+ units have not experienced the same increases in insurance costs as those owners with only a few properties or units.  The benefit economies of scale have on the operational costs for investors can be advantageous in maintaining costs and/or minimizing increases. Larger operators have only reported standard 10-15% increases in expenses like insurance premiums.  In contrast, single property operators and/or owners with a few rental units have reported 40-50% increases in those insurance premiums over the last 12-18 months.  

The importance of persistent monitoring of your portfolio

Operational costs are a major component to any investment real estate asset. Having a consistent approach to monitor trends that will impact expenses can be a key contributor to maintaining positive cash flow throughout the life of your investment. Market conditions are constantly changing and so too are the costs associated with investment real estate. It is important to consult with a knowledgeable commercial real estate professional who can detect deficiencies in your operations and help identify the most appropriate steps to maximize income. 

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Dustin Ilic, CCIM is a Multi-Family Investment Advisor with the Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $580 million in transactions across the United States. Dustin specializes in multi-family property acquisitions and dispositions for owners in the Central Valley and Central Coast markets. He can be reached at 559.890.0319 or dustin@visintainergroup.com.