How to Reduce Your 3 Biggest Commercial Real Estate Expenses

Discover how to maximize cash flow and increase your property value by reducing the 3 biggest commercial real estate expenses.

Your 3 Biggest Commercial Real Estate Expenses

The purpose of owning commercial real estate is to make a profit. When you purchase a commercial property, you collect the income, pay expenses, pay the mortgage, and what’s left over is your cashflow, or your net profit. The higher your expenses, the lower your net operating income, which means less cashflow and ultimately a lower property value. So, the most profitable commercial investments maximize the income, reduce expenses, and finance with the best possible loan.

In this training, you’ll discover how to reduce expenses. Operating expenses are the recurring costs that support the day-to-day operations of the property, and they fall into two categories: fixed expenses which are determined annually, and variable expenses that vary month to month. From my 20+ years of experience investing in commercial real estate, the 3 biggest expenses that can hurt your cashflow the most are:

1. Utilities
2. Vacancy
3. Insurance

NOTE! The fourth major expense for commercial property owners is property taxes. In another training, I describe How to Lower Commercial Property Taxes, where you discover why you are likely overpaying on your real estate taxes and how to get them reduced.

Big Expense #1: Utilities

Utility costs have increased dramatically in the last few years, hurting everyone’s bottom line, and commercial real estate investors are no exception. This is why it’s crucial for you to get your utility costs under control and perhaps even reduced. Basic utilities include water, sewer, electric, gas, waste management, and cable, but the ones that cost commercial property owners the most are water and sewer, electric, and gas. The good news is that even though they can be a huge expense, they are also the utilities we have the most control over and therefore you can reduce them. Imagine you have a 100-unit apartment building and are paying the water and the heat for all 100 units. That’s a huge bill! How do you reduce it? We use these 3 value-add strategies:

Install Water Saving Fixtures

Install shower heads and faucets with regulators that limit the flow of water.
Fit all the bathrooms with low flow toilets and toilet leak detection.

Doing this may seem like a big expense, but it’s an investment that will pay dividends now and into the future. A leaky toilet that leaks for 30 days will cost you a hundred dollars. Now imagine you have thirty leaky toilets eating up your cashflow, dropping your NOI and decreasing your property value.

Another reason to apply this cost saving measure comes from lenders. Fannie Mae and Freddie Mac, have an incentive program that will give you a lower interest rate on your multifamily loan if you commit to purchasing water saving fixtures.

Implement the RUBS System

Another strategy commercial property owners can use to manage utility costs is to implement the RUBS System (Ratio Utility Billing System), whereby investors bill back to the tenants monthly utility costs. The reason why this is so effective is because when the tenants share the expense, they use less water, turn off the lights, and will think twice about running the air conditioning 24/7. It’s just human nature. They are more mindful of their utility use if they know they are paying for part of it.

Programmable Thermostats

The final strategy for reducing your heating and cooling costs is to install programable thermostats in common areas like hallways and lobbies. This way you control the temperature in those areas, not your tenants. In any area that you can put a controllable thermostat to regulate the temperature, be sure to do it because it’s a simple step you can take to control your commercial real estate expenses.

Big Expense #2: Vacancy

Vacancy isn’t usually thought of as an expense, but an unoccupied unit can cost you a lot of money! It’s not just the monthly income you are missing out on, you also have the turnover costs of getting the unit ready for the next tenant. Then, you will need to market the unit and don’t forget management costs. Your property manager must show the unit and screen potential tenants, and they don’t work for free. And finally it comes down to you. How much is your time worth? All this requires your time and attention. Even with a management team, you need to manage the management, which means using your valuable time to make sure that vacancies are addressed aggressively. However, there is a solution! Here are 3 proactive steps you can take to minimize vacancy expenses so your cashflow remains strong:

Focus on Tenant Retention

First, you can minimize vacancy costs by focusing on tenant retention. Nothing cuts vacancy costs like low turnover and long-term tenants. How do you keep tenants’ long term? Well, it’s basically customer service 101: maintain the property, be professional, take care of maintenance issues quickly, and provide an exceptional overall experience for your tenants.

Quick Turnover Time

Another step to reducing vacancy costs is to be proactive by turning units over quickly. To do this you need to have a system in place to fill a vacancy quickly and efficiently. When you have advance notice that a tenant is moving out, the property manager can do a pre-inspection of the unit to calculate projected turnover costs. Then they can schedule any maintenance that may be required ahead of time so that it can be done as quickly as possible. In the meantime, they can be marketing the unit to have it pre-leased before it’s ready.

Bonus System for Management

The third step is to implement a bonus system for management or leasing agents. Nothing motivates like a little cash. Our leasing agents get bonuses for finding quality tenants quickly and efficiently. So they are incentivized to make sure vacancy costs are minimized.

Big Expense #3: Insurance

The final big commercial property expense is insurance. We have a lot of great content on insuring your commercial property, like 5 Rules of Multifamily Insurance, but on the topic of expenses, what it comes down to is this:

Insurance is necessary to protect your commercial assets from potential risks.
Insurance is getting more expensive.

The cost of insurance policies has gone up exponentially; many have doubled, and some have even tripled. Some insurers are pulling out of certain markets which means less insurers and even higher prices. Compared to two years ago, it’s a new game and a new game requires a new playbook to optimize your insurance so that you are adequately insured without overpaying. Here’s how:

Shop, Shop, Shop

I used to call one or two of my brokers to get the best quote and move on. Not anymore. Now we must shop around to find the most affordable insurance. Fortunately at Commercial Property Advisors we have a nationwide database of insurers that our Proteges can access to find the best rates. Because we have investors from coast to coast, we’ve been able to collect data on insurance companies that they have used and see who has had the most affordable quotes.

Consider a Master Policy

One of our property managers manages thousands of units and he has an insurance policy called a master policy that he will insure us under. And because he has all these insurance policies underneath him, he’s able to get a good rate. So, check with your property manager and see if they have a master policy that you can get under to get a better rate.

Think Twice Before Filing a Claim

You should always consider the cost of the damages before you file a claim. If the cost of repair is less than $10,000 it may make sense to just pay for it yourself. Plus, filing a claim will increase your premium, making your insurance more expensive. It will also add to your claim history. And every time you make a claim, it increases the likelihood your insurance won’t be renewed.

Raising Deductibles

Another option is to raise your deductible. Many policies have a $5,000 deductible, and if you are thinking twice about filing smaller claims, it may make sense to raise your deductible to lower your premiums.

Maintain the Property

The final tip for reducing your insurance premiums and keep them from going up, is to maintain your property. Insurance reps will inspect your property and make note of every missing shingle or piece of siding that is coming off. If your buildings need paint, the railings are rusting, or the walkway is in disrepair, insurers will jack up your rates or even cancel your policy. So the best chance of having affordable insurance is to maintain your property.

Every Successful Multifamily Investor Has a Mentor

Every successful multifamily investor has a mentor. Get your mentor here: Commercial Property Advisors Protege Program