It doesn’t quite qualify as finding money under the couch cushions, but it comes close: When property managers and maintenance staff at an RMK Management property in Chicago began noticing significant wear and tear on the carpets, RMK executive vice president Diana Pittro came up with a quick solution.
“This is a property with a younger, grad student–type demographic, sometimes their first apartment, sometimes a shared apartment,” Pittro recalls. “We were noticing when they left, or when we were on a work order, that the carpets were getting trashed. Not necessarily stained, but the nap and color were getting soiled. So I bought four vacuum cleaners, and now they can rent them for $10 for three hours, and it works great.”
Of course, RMK isn’t making money hand over fist with the program, but the company, which manages 7,000 units across Chicago and Minneapolis, is realizing an added incremental revenue stream to the property while cutting down on eventual cap-ex to repair the carpets. In essence, the residents are paying RMK in order to maintain the carpets themselves.
As apartment operators emerge from the recession, similar ancillary-revenue programs—from telecom marketing agreements to pet deposits—are generating some serious pocket change in addition to the increased rental rates the market is ready to bear.
“Ancillary revenue is anything outside rental revenue: from various application and key and pet fees to national agreements with business partners, rooftop agreements, and advertising opportunities,” says Barney Pullam, vice president of business process for Chicago-based Waterton Residential, which owns and manages 14,000 units. “There is opportunity to max out these offerings coming out of the recession. There’s a correlation between ancillary fees and market rents, and as the market starts turning around, we need to keep focused on these fees and begin raising them, as well.”
Slow but Steady
To that end, Waterton is trying to incrementally increase application fees while also encouraging its on-site business providers (think laundry equipment, vending machines, and trash services) to do the same. “There’s no reason application fees today should be $25, and confidently moving them upward or getting away from waiving those fees, as we might have done over the past two or three years, is proving to be a pretty steady income stream,” Pullam says. “The approach we take is not to take a large jump on a fee, but if you can push an application fee up $5 or $10, or raise the washer-and-dryer fees by a quarter, it can add up. It may sound minuscule, but those incremental increases do help out, and renters don’t necessarily see it that much. They won’t be overly concerned with that kind of jump.”
Indeed, incremental bumps to ancillary-revenue programs is one way to increase net operating income at a property as consumers continue to shop rent price to rent price cost comparisons. “Since prospective residents are still heavily focused on comparing the base rent to the base rent, it does our clients no good increasing rental rates and incorporating additional services if prospects are not taking these into consideration during their review,” says MarySusan Wanich, chief operating officer for Dallas-based Riverstone Residential. “Residents want the choice of additional services, and we’ve found they’ll pay for these services when offered, especially if they know that their base rental rates are still competitive with those of their neighbors and friends.”
That’s led Riverstone and its clients to offer an ever-expanding universe of ancillary-income opportunities across the 162,182 units under the firm’s management, including programs for parking fees; clubhouse rentals; storage space; vending-machine revenue sharing; business referrals to drinking-water vendors and appliance and furniture rentals; utility billing; cost-recovery programs for vacant units; resident insurance marketing fees; advertising fees from local businesses; door-to-door trash services; Wi-Fi services; and telecom programs, to name just a few.
Know Your Resident
Just how much can be generated from an ancillary-revenue program ranges from a couple of bucks for vacuum rentals to hundreds of thousands of dollars for renegotiated telecom marketing agreements (see “Getting Wired,” above). Success with any program, operators say, comes down to tailoring programs appropriate for your resident demographic and thinking creatively about how to leverage underutilized community spaces or otherwise tap into an underserved resident need.
At another RMK Chicago-area community, Pittro has remodeled a basement storage locker area into a wine cellar, eliminating the cost of planned in-unit wine chillers, socially activating a community common area, and pulling in some rental revenue to cover costs. “The wine cellar isn’t for everybody—I think we’ve only rented 25 percent of the spaces so far—but it’s still successful,” Pittro says. “And it’s a way to get incremental revenue from an otherwise overly discerning resident base. So it’s become a nice perk on a classy building as much as a revenue generator.”
With as many services as it offers, Riverstone has found some of the greatest traction with some of the simpler and fee-nominal programs in its suite of ancillary programs. “Door-to-door trash services have really taken off as one of our programs offered in the past few years. With more properties moving to compactor services and recycling on site, the drop-off locations for our residents’ daily trash needs are becoming more and more inconvenient,” Wanich says. “We’ve found more residents are willing to pay the equivalent of $1.00 to $1.50 a day for four days a week (plus one for recycling) for doorstep service to avoid dealing with that bag of garbage.”
And while the improving economy has a lot of renters more willing to ante up for ancillary services, particularly those that have a real or implied resident value, Wanich cautions against a full-bore approach to leveraging ancillary programs, particularly at higher-end properties, where operators are likely better off incorporating (and communicating) their universe of services into base rent. “At higher-income properties, there’s a little more austerity in the fact that what they pay for is all-inclusive, and the clientele doesn’t want to be nickel-and-dimed,” Wanich says. “They want to enjoy all of the amenities without seemingly paying extra or being inconvenienced by incremental charges.
“Across the board, if you’ve overpriced a service, you’ll hear complaints,” she notes. “If you’ve underpriced it, you’ll have a lot of takers. The key, as with setting rents, is finding the right balance between satisfaction and demand.”