Cost reduction through technology
There are a number of ways that a property can save operating costs through proper integration of an internet network. This could be through building automation, more efficient rental collection processes, and eliminating IT redundancies.When properties are wired with Internet, they can enjoy a number of technology advancements that not all properties can have the benefit of. These technologies include wireless monitoring of key mechanical systems throughout the property, such as air conditioning condensers and elevator maintenance. As more automation and green technologies come about, many are relying on wireless Internet access for their communication and optimization. With a wireless Internet network, the property can take advantage of the savings and efficiencies these systems offer.
Some Internet providers also allow the integration of their rental portal to the property’s systems. This could allow the property to post community activities or alerts. The community activities could further enhance the participation of residents and help attain the goal of higher resident retention. On the alert side, the system could alert residents of an emergency situation.
With some companies, the Internet portal can be integrated with rental payments. This can either be manually integrated or automated with property management software. This allows the property to turn off or slow down Internet service for renters that haven’t paid their rent. Affecting the lifeblood of these residents, their Internet service, ensures action from them.
Nearly every property now relies on Internet access for their property staff as well. If a property is offering the service to its residents, then in most scenarios that same Internet connection can be used to provide service to the staff. This reduces Internet costs to the property that could be as little as $50 per month or as much as several hundred or thousand dollars per month. In some scenarios the Internet provider can go one step further and assist in management of the property’s IT network, further reducing costs.
Marketing effect
Furthermore, offering Internet services assists in marketing the property, making it easier to fill apartments. Within senior housing, 90% of incoming residents consider WiFi to be a highly desirable amenity (survey conducted by Mather LifeWays, Ziegler and Brecht Associates). With that being the case in senior housing, imagine the demand in traditional multifamily properties where internet usage is several times higher currently. Some potential renters are currently pre-screening in their apartment search by looking for apartments that include Internet with the rent, which is why nearly every apartment search website has Internet as one of the selectable amenities. By offering Internet, it increases the potential audience that the apartment listing is reaching. Potential renters will also factor this into their overall budget. While a property with Internet may be listed for $10 or $20 more per month, the resident sees the value as $50. This makes the overall property cost $30 to $40 less than the competition without Internet.
-
- More renewals because you are controlling their utility cost increases:Lower cleaning and apartment turn costs
- Fewer apartments to fill:Lower marketing costs
- Meets requirements of more renters:Overall utility cost-conscious rentersRenters looking for InternetThis leads to a larger population looking at the properties, making it easier and quicker to rent
- More renewals because you are controlling their utility cost increases:
- Benefits for property owners that offer Internet services:
Higher net income = higher valuation
With every reduction in cost or increase in revenue, it positively affects the net income for the property. Property valuation can be a function of the CAP rate, which is directly affected by the net income. An increase of $5 per month per unit on a 150-unit property with a CAP rate of 6% can result in an increase in valuation of $150,000. While in contrast, the cost of the network may have only been $30,000 to install. That is a return on investment of 500%.
There are a number of ways that a multi-family property can recoup their investment in an Internet network. Below are some formulas that the property can complete to determine how they will break even or create net profits from the system, with or without increasing the rent.
Marketing cost: What is your cost of finding a new renter for a unit? (factor in marketing costs, lost rent, labor costs of marketing and screening applicants, tours, painting and generally rehabbing the unit for a new occupant)
Equation 1:
_____ number of residents per year that may renew because their utility costs didn’t increase
MULTIPLIED BY
$____________Marketing Cost
= $_________ renewal savings to property
Equation 2:
___________Total prospective renter population for your community
MULTIPLIED BY
(_____% of potential renters that don’t look at an apartment if it doesn’t have internet; keep in mind this number will be increasing with the Echo-Boom Generation
PLUS (add these two percentages up before multiplying it by the population)
_____% of renters that include internet in their utility budget and your property is now cost effective for them)
=________ new renters that will consider your property that didn’t before. Take this number and divide it by your current potential renter population. This gives you the increase in efficiency of your marketing campaign. You can take this efficiency increase and multiply it by your Marketing Cost to get your Marketing Savings = $_____________
Equation 3:
________ Cost of internet from incumbents ($40-50 is a safe assumption)
MULTIPLIED BY
__________Number of units in your building
=$_______________Costs that your residents are currently comfortable paying per month, which could be an increase in rent in the future if you are offering internet service yourself.
Total Economic Effect of Internet:
$__________Equation 1 results
+$__________Equation 2 results
+$__________Annual cost of Internet to the office
+$__________Operating, maintenance, utility and technology savings from Internet
+$__________Equation 3 results: Rent elasticity increase (Since you are saving residents on their Internet costs, you have a greater room to increase rents without effecting occupancy and renewals. This is the total annual revenue from those rent increases).
-$__________Cost of providing the Internet service
=$__________ Total Annual Net Income effect of adding Internet
Property Valuation Increase
$__________ Total Annual Net Income effect of adding Internet
DIVIDIDED BY
____% CAP Rate for market
=$__________ Total Property Valuation Increase
How much does your property stand to gain by adding Internet service to your portfolio?
