Magazine article Journal of Property Management

Boosting Net Operating Income

Magazine article Journal of Property Management

Boosting Net Operating Income

Article excerpt

Today, more than ever, real estate is a bottom line business. Owners and managers alike realize that the money to be made today will come from consistent cash flow, not ballooning increases in value. For this reason, improving NOI performance - always an essential part of the property manager's role-has become even more vital.

While expanding net operating income (NOI) through higher rents and greater occupancy is, course, desirable, controlling costs can contribute just as much to profits. Yet, lowering expenses does not have to be synonymous with cutting staff and services. Reduced outlays at the property can be achieved through careful, consistent cash management strategies.

Managing receivables aggressively

Occupancy is worth little if rents are not paid promptly and in full. Our firm requires rent to be paid by the first; by the tenth or the fifteenth, it is overdue.

If rents are not received by the fifth of the month, we begin calling tenants to determine if there's a reason that the rent has not been paid. Of course, this first conversation is a pleasant one because tenants don't typically think that rents are due until the tenth. Letting them know that you are aware of the fact that they have not paid reinforces the fact that your tracking and record. keeping are accurate.

In a way, these reminders serve to train the tenant that if rent is due on the first, it should be paid on the first. Because if one tenant is allowed to slide, others will soon follow. You don't want your slow-pay tenants bragging about what they got away with. We have taken over the management of properties where late payments have become a way of life, and spent the first six to nine months just getting the good tenants to pay promptly.

If on the tenth, we have not received the money, we send out a form delinquency letter and a bill for the late penalty. Then, we call again in a day or two and make a more intense effort to discover if there really is a problem. Perhaps the computer is down, or the check has been delayed at the main office. It is often worthwhile to make this call a face-to-face one with a top-ranking person in the company.

A face-to-face visit may also give you the chance to get more of the inside story from other staff members; the receptionist or some worker in the back room may give you a hint as to the depth of the problem. A personal call also gives you a chance to check out the premises, to look for packed boxes stacked in a corner or other signs of departure.

Tenants that are constantly in arrears present a more difficult problem. Of course, you must use your judgement, but a good general rule for repeating late payers is to serve a notice of unlawful detainer at the end of the first month and move to evict.

If this process does not produce the rent, move ahead with the eviction. We do not believe in tenant workouts of past-due rents. If a tenant cannot give you at least part of the payment when it is due, it is unlikely that they will be in a better financial condition two months from now. It has been our experience that only about one in ten workouts ever pays in full.

In our firm, we made our on-site managers responsible for all rent collection, as long as the tenant is in the space. In fact, managers' bonuses are calculated in part on their receivables totals, so they are motivated to either get the money or get the tenant out of the space.

After eviction, we turn over receivables to an outside collection agency, which works strictly on a percentage of what it collects. At one time, we had in-house collection people, but we found that because you have to be so nasty, employees often get burned out.

Using the outside agency and paying 30 percent of what its employees collect, we usually recoup about 20 cents on the dollar of our bad debts. However, because the collection agency bears the direct costs of attorneys' fees and judgements, we have no out-of-pocket expenses with these collections. …

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