For owners of multifamily buildings, reducing operating expenses (or opex) is essential for maintaining profitability and improving your net operating income (NOI). 

With rising costs in the industry, it’s becoming increasingly important to find ways to cut down on expenses without negatively impacting the resident experience. Especially in regions where costs are rising at the highest rates, every dollar saved can help to offset costs in other areas. 

In this guide, we'll explore key strategies to help multifamily owners streamline their operating costs while maintaining high standards of living.

You can look forward to learning about:

• What’s included in operating expenses
• Why it’s vital to track operating expenses
• How to analyze your opex spending
• Key strategies to reduce expenses

What are operating expenses?

Operating expenses are the ongoing costs required to run and maintain a multifamily property. These costs encompass everything from property management to utilities and insurance. While some expenses are unavoidable, a proactive management strategy can help minimize them.

Types of operating expenses

There are two different types of categories that operating expenses fall into. 

Fixed costs are those that remain constant regardless of occupancy. Some examples include property taxes, insurance premiums, and salaries for permanent staff. 

Variable costs are those that can fluctuate depending on occupancy, tenant needs, market conditions, weather, or a variety of other factors. Common variable costs at multifamily properties include utility bills, repair expenses, and marketing costs. 

Operating expenses vs. capital expenses

Not all expenses that you have as a property owner will be categorized as operating expenses. 

Opex includes all of your day-to-day expenses, while capital expenses are the more significant investments that provide long term benefits and increase property value. 

Some examples of capital expenses (or Capex) include roof replacements, HVAC system upgrades, or major renovations. Typically, these are capitalized on the balance sheet and depreciated over time. 

Why you should track opex

Why is it important to keep tabs on trends for your operating expenses? Opex can quickly eat into profit, even in high-demand markets.

This is exactly what’s happening now in the multifamily industry. Rising operating expenses are putting a bigger and bigger strain on owners, even when occupancy is high. According to Globest, operational costs for apartments grew by 8.6% year-over-year in Q2 2023. These trends are continuing to rise throughout 2024, given the growing costs for things like utilities and insurance. 

Viewing all your expenses underneath a magnifying glass can help you identify areas where you can be more efficient. During times of uncertainty, keeping your operating expenses low shields you from some amount of risk.

Your operating expenses also directly tie into your Net Operating Income. Lower opex means you get to keep more of your gross operating income. The outcome? Increased property value, improved ability to secure new loans, easier time attracting new investors, and an overall healthier property. 

What’s a healthy opex number?

That being said, you may be unsure whether or not your operating expenses are too high. Especially since they often rise from year to year, and this will vary by location, property size, property class, etc., it’s impossible to nail down a single “good” number. 

Instead, it’s more productive to interpret your opex in terms of a ratio. 

The Opex Ratio

In order to determine how healthy of a balance you’re striking between costs and profit, you’ll want to calculate your expense ratio, which demonstrates how efficiently your property generates income. 

So for example, if you bring in $100,000 per year in total revenue, and you have $30,000 in operating expenses, you’d have an opex ratio of 30%. So think of it in terms of dollars. 

For every dollar you bring in, $0.30 is eaten up by operating expenses, leaving you with $0.70 of profit. 

This is a really helpful tool when investors are looking to compare buildings that may be dissimilar in many ways. Even if revenue at each property may differ greatly, an opex ratio gives you a common comparison point. For example, if apartment A has a ratio of 20% and apartment B has a ratio of 45%, this is an indicator that apartment A is more efficiently generating revenue.

It’s often helpful to benchmark this against industry standards. Typically, 35-45% is considered to be a good expense ratio. Of course, this may vary depending on a variety of factors including the property’s age and location, but it’s a good rule of thumb.

Breaking it down into key expense categories

If your expense ratio is higher than average, or if you’re generally trying to lower your expenses, it’s crucial to break it down into distinct categories. 

When you separate out these categories and hold them up to industry standards, it makes it easier to identify key areas where you may need to do some troubleshooting and pinpoint specific opportunities for savings. 

Here are some common expense categories, along with the average portion of yearly net income for a property:

• Property management and administrative costs - 8-12%
• Utilities - 15-20%
• Insurance - 1-3%
• Marketing - 3-10%

Some additional expense categories include:

• Legal and accounting 
• Maintenance and repairs 
• Property taxes

Tracking and analyzing historical costs

Viewing your expenses at a single moment in time is often not the best way to identify areas for improvement. Instead, by zooming out a bit and tracking expenses over time, you can identify trends, inefficiencies, and any unusual spikes in costs. 

When you analyze historic costs you can:

• More easily budget for the long-term
• Spot inefficiencies and unexplained increases—i.e. A sudden spike in water usage may point to plumbing issues
• Track the ROI of cost-saving measures by comparing costs over time
• Identify opportunities for savings—i.e.constant increases in energy costs may prompt you to install LED lights. 

In order to effectively analyze your costs, you’ll want to make sure that you’re reliably tracking your expenses from month to month, which involves selecting the right software and putting the right strategies in place. 

Strategies to reduce opex

Once you have a clear picture of your expenses over time, there are several steps you can take to reduce them. The following strategies will help you identify areas for improvement.

Invest in energy-efficient systems

Utilities are one of the biggest culprits of rising operating expenses; in the past year, for example, the cost of electricity rose by almost 30%. So while this has been a major source of the problem, the good news is that any conservation steps taken here will make a large impact. 

While making upgrades to your existing infrastructure to have a more energy-efficient property requires some capital expenses, the savings to your operating expenses often makes it well worth it. 

LED lights, for example, typically pay for themselves within a year in the setting of a home, and for use in larger areas like parking lots, it could take much less time to break even. Given the long lifespan of these lights, it becomes a pretty easy decision. 

Energy-efficient models of appliances like a refrigerator, washing machine, and dishwasher also offer a potential for energy savings. You could either swap them all out at once and sell the old models, or take a more staggered approach and replace them as the old ones need repair or tackle certain floor plans one at a time. 

For more large-scale improvements, you could consider upgrading your HVAC system with energy-efficient units and implement programmable thermostats. If you’re in an older building, you may also consider replacing insulation or windows to reduce heating and cooling costs, whether it’s just in common areas or in all of your units. 

Take steps to conserve water usage

One of the easiest ways to reduce your water bill is to regularly conduct maintenance to prevent leaks, but we’ll touch more on that in the next section. 

Low-flow toilets, faucets, and shower heads are great swaps to make to save some water. Low-flow toilets, for example, can save anywhere between 20-60% of water usage for residential use and much more for commercial use. 

If you have extensive landscaping, you may be spending a lot of money on water to maintain it, especially if you live in a dryer area. The food news is that you don’t have to sacrifice curb appeal to save some water. There are several water-saving landscaping practices that you can use, like xeriscaping (which involves using plants that require very little water) or drip irrigation. 

Employ smart maintenance systems 

After property management and utilities, maintenance comes in as the third biggest cost for multifamily properties. This includes both routine maintenance as well as unexpected repairs. 

The best way to lower costs for repairs is to prevent them from happening in the first place. By staying ahead of potential issues, you can avoid costly repairs and unexpected breakdowns, extending the lifespan of essential systems and equipment. Typically, preventative maintenance saves properties around 12-18% per year. 

Consider scheduling out a preventative maintenance plan for all of the major systems that keep your property up and running. This plan should help you to consistently and systematically evaluate all aspects of your property. 

This checklist from Second Nature can serve as a great guide for what to evaluate:

• Structural maintenance: Regularly inspect the building’s foundation, roofing, and exterior to catch any cracks, leaks, or damage early.
• Electrical systems: Ensure that wiring and electrical systems are up to code and functioning safely.
• Plumbing and water systems: Regular checks on pipes, faucets, and drains can prevent leaks and water damage, which can quickly escalate into larger, more expensive issues.
• HVAC systems: Clean and inspect heating, ventilation, and air conditioning systems regularly to ensure they run efficiently and extend their lifespan.
• Appliances (if you provide them): Inspect and service any appliances in tenant units to keep them operating smoothly and efficiently.
• Lawn and outdoor areas: Regularly maintain outdoor spaces to prevent issues like overgrown landscaping or damaged sidewalks.
• Pest control: Prevent infestations before they occur by scheduling routine pest control services.
• Safety and security systems: Check fire alarms, carbon monoxide detectors, and security cameras to ensure they are functioning correctly.
• Interior checks: Inspect common areas, hallways, and stairwells to address wear and tear.
• Miscellaneous: Include less obvious areas such as garages and waste disposal areas in your inspections.

Some of these items may be scheduled on a monthly, quarterly, or yearly basis, and others you may want to train your staff on to check up on in their day-to-day routines. 

Digitize your maintenance requests

Digital maintenance tracking systems can help streamline communication and minimize response times. By using property management software to track and monitor maintenance requests, you can ensure that issues are handled quickly and efficiently, reducing downtime and preventing small problems from turning into expensive repairs.

These platforms also allow tenants to submit requests easily and track the progress of their maintenance issues. So not only does this help your team to work more efficiently and cost-effectively, but it also gives you a boost to your resident experience. 

Modernize your parking operations

Parking can notoriously take up a considerable amount of staff time. With outdated systems like spreadsheets and rentable items, we often see building staff spending 10-15 hours per week managing parking. Modern solutions like Parkade can cut this down to one hour or less per week, allowing management to redistribute these efforts elsewhere.

For example, at one of our partner portfolios, 9 associates were spending 4 hours each per week managing parking before Parkade. This time was spent assigning/reassigning parking and dealing with residents and guests parking in the wrong spaces. After implementing Parkade's system, those same associates now spend only 15 minutes per week on parking.

Translating these hours into dollars, the team uncovered that Parkade was now saving them a minimum of $2,925 per month in staff time alone. 

Partner with reliable vendors

Building long-term relationships with trusted contractors and service providers can also help to reduce repair costs over time. By developing partnerships, you can negotiate fixed rates or volume discounts for services like cleaning, landscaping, and pest control.

Having a reliable set of vendors ensures consistent quality of work and helps prevent costly service delays or emergency callouts. It also helps to know that you’re getting a quote you can really trust if you’re in a pinch. 

Review staffing levels and efficiency

It’s essential to regularly review whether your staffing levels match the needs of your property. Overstaffing leads to unnecessary payroll expenses, while understaffing can result in poor service and deferred maintenance, which could cost you more in the long run.

One strategy to maximize staffing efficiency is to cross-train employees. This approach reduces the need for additional hires and keeps your team agile in addressing property needs. It can also be valuable to employees as it gives them an opportunity to learn new skills. For example, if you have a leasing agent who has lots of free time during slow seasons, you could train them on social media posting, or on event planning for the community. 

You also want to check to see if there are any areas where your staff time isn’t being used most efficiently. Some common thieves of staff time are things like rent collection, parking, tenant screening, and maintenance requests. There are several options to automate many of these processes, freeing your team up to handle more high value tasks.

Outsourcing vs. in-house staff

Many owners are faced with the decision of whether to outsource or hire in-house staff for tasks like maintenance, landscaping, security, or cleaning.

Here are the key considerations you want to think through to decide if you will experience cost savings, and if so, if those savings may end up costing you in other ways.

When deciding between outsourcing and using in-house staff, it’s important to consider the trade-offs:

• Predictability: In-house staffing costs tend to be more predictable, but outsourcing specific tasks (like maintenance, cleaning, or landscaping) may reduce overall costs if they’re needed on an irregular basis, even when service fees are taken into account. 
• Expertise: Outsourcing gives you access to experts, especially for specialized tasks like security or HVAC repairs, but controlling service quality can be more challenging.
• Flexibility: Outsourcing provides flexibility in adjusting staffing levels to meet fluctuating demand. For instance, some properties hire extra leasing specialists only during peak seasons in areas with high student populations. However, having an in-house team offers a different kind of flexibility since it allows you to respond to changes in demand quicker. 
• Resident Relations: In-house staff generally form closer relationships with residents, which can lead to higher satisfaction and retention. Outsourced workers, however, often provide specialized skills that in-house teams may lack.

If you do go the outsourcing route, it’s essential to negotiate service contracts based on your specific needs to avoid paying for unnecessary services and ensure flexibility during busy periods.

Employee retention and training

High turnover rates can significantly increase operating expenses, not only due to the costs of hiring and training new staff but also due to the inefficiencies caused by new employees learning the ropes. When you take into account all expenses required to replace an employee that leaves, it could take 1.5-2X the previous worker’s salary. So it’s in your best interest to try to get the right team members from the jump and to keep them as long as possible. 

In the multifamily industry, turnover rates are unfortunately much higher than the average; at 33%, it’s 11% over the national average. To minimize turnover at your property, offer competitive compensation, attractive benefits, and a positive working environment.

Part of a more positive working environment goes hand in hand with some points we made in the section above. If your team is bogged down with tedious tasks—like manually handling parking management—their overall employee experience will be negatively impacted. Giving your residents more self service options at key moments can benefit you, your team, and your residents. 

Training your staff can also increase productivity and reduce errors, leading to lower operational costs. For example, maintenance staff trained in preventive measures are more likely to catch issues early, preventing larger and more expensive problems later on.

Go paperless

Ditching as many paper processes as you can—or ditching them entirely—can be a major cost-saver for your operational expenses. That’s why many multifamily properties are making the decision to go paperless. 

According to an AIIM market survey, businesses that go paperless improve staff productivity by 30%. And to double down on the value of a paperless switch, McKinsey found that 59% of businesses that went paperless reported achieving a full return on their investment within 12 months, and 84% saw payback within 18 months. 

Some ways to go paperless include:

• Using digital documents and record-keeping systems to reduce paper, printing, and storage costs. 
• Implementing electronic signatures for leases and contracts to reduce printing and mailing costs.

Operating expenses are just one part of NOI

Ultimately, the goal of reducing operating expenses is to raise the overall Net Operating Income (NOI) for your property. To get your NOI in the best shape possible, you have to attack it from both sides—reducing your expenses and generating more revenue.

Ready to dive a bit deeper into the topic? Now that you’ve got a clear plan to reduce opex, check out our guide on how to calculate and improve your NOI.

‍

_

^{The content in this guide is solely for educational purpose and should not be considered legal or financial advice.}