Rent Roll with Lease Charges: Exploring Ancillary Income
The rent roll analysis series's third and final chapter covers ancillary or "other" income items. You can check out the first two chapters here:
Part I: Deciphering a Rent Roll with Lease Charges: Multifamily Investment
Part II: Multifamily Rent Roll: Analyzing Move-In & Lease Expiration Dates
While the rent roll in the "lease charges" format may be more complicated to analyze, it more than makes up for it with the sheer bulk of data included that often goes ignored in a more "simple" format.
This extra data comes in the form of "ancillary income" and could include the following charges (among others):
Parking
Pets
Storage
Utilities
Amenities
If you're willing to extract the "other income" codes from the rent roll, you can uncover all kinds of interesting facts about the property.
This insight could help you understand the project and underwrite the upside more accurately.
The most significant benefit of collecting ancillary charge codes from the rent roll is comparing the subject property's charges to comparable properties in the submarket. You must complete a rent comp survey to understand how various ancillary costs compare to your competition. After that, you can determine if the charges are under/overpriced.
Contents
Parking Income
Parking can be a huge revenue source for apartment owners. After rent, it can be the most significant income stream, especially for newer properties in urban locations. With parking, the most important thing to figure out is:
Percentage of total parking spaces are leased
Monthly parking charge
Different pricing options (covered vs. undercovered or single vs. tandem)
Are there any parking discounts (parking concessions would be logged on the rent roll just like recurring rental concessions)?
How do these bullets compare to the submarket? Are parking prices lower? Is occupancy better? If so, there may be an opportunity to raise parking rent.
Pet Rent
Property managers that allow tenants to have pets will have a much deeper rental pool than property owners who do not. It's common for managers to charge residents with animals both:
Pet deposit (non-refundable)
Pet rent
The pet deposit covers wear and tear caused by the animal once the lease term expires. Pet rent is a monthly fee levied upon the pet(s) that the resident will pay each month. With pet fees, we want to figure out the following:
Percentage of units that have pets
Monthly charge by the animal (primarily cat vs. dog)
Breakdown of cats/dogs on the property
A standard charge might be $30 for cats per month and $60 for a dog with a limit of two pets. I've seen properties that have branded themselves as the "pet-friendly option in the submarket," including dog parks, animal washing stations, complimentary treats, and marketing catering to pet owners.
Is pet income more significant at the subject property than other comparable properties? Do you want to maximize pet revenue? Is there potential to do so?
Storage Income
Secured lockers for residents to put their golf clubs, fishing gear, bikes, and other bulky accessories that may not fit in the unit could be a massive perk. Similar to parking, we'd like to know the following:
Percentage of total storage lockers are leased
Monthly storage charge
Different pricing options (6x6 SF vs. 10x10 SF)
Are there any storage discounts?
How do these bullets compare to the submarket? Are storage prices higher? Is occupancy worse? If so, there may NOT be an opportunity to raise parking rent.
Utility Bill-Back
It's common for the property manager to bill back residents for their utility usage. Sometimes this will be a flat fee or a more sophisticated formula based on unit square footage and the number of occupants.
It's essential to understand:
Number of occupied units that pay a utility fee
Utility charge by unit type (smaller units will generally pay less than larger ones)
Pulling and analyzing utility billing data is more critical in older asset classes. Utilities will often be included for residents because there isn't separate metering (gas, water, trash, etc.).
Owners often try to implement a ratio utility billing service (RUBS) and phase in a utility charge to residents as leases expire. RUBS can help hedge inflationary water and gas usage and also help promote better conservation efforts from the resident base.
It will be tough to sustain a RUBS charge if other properties in the neighborhood give utilities away for free.
Video: Concessions & Other Income Tutorial
The first half of this video is dedicated to concessions. Other income is the focal point starting at the 15:29 mark.
Amenity Charges
I've seen new properties charge a broad amenity fee that gives residents access to communal amenities such as:
Fitness Center
Rooftop Lounge
Business Center
Communal Wifi
It's essential to know what that charge is, whether or not other comparable properties have a similar process, and what percentage of renters are paying the monthly amenity fee.
Summarizing Other Income
This article details:
Different kinds of ancillary income properties may charge for
What to look for with each potential income steam
How to extract and analyze that data (video)
The next step would be to take your data and compare it to the comparable properties in the submarket to determine if there is any more upside. Maximizing ancillary income could not only have a significant impact on monthly cash flow, but it is also likely to have an even more significant impact on the residual value of the property when you sell one day.
Don’t forget to review the whole Rent Roll Series:
Part I: Deciphering a Rent Roll with Lease Charges: Multifamily Investment
Part II: Multifamily Rent Roll: Analyzing Move-In & Lease Expiration Dates
