How Optimizing Maintenance Boosts NOI

Last modified on September 20th, 2021
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When’s the last time you audited the maintenance processes – including inspections and procurement processes – at your property management company? Outside of a list of preferred contractors, there may not even be a process, which can have real consequences on a company’s net operating income, as maintenance costs can be some of the most difficult to control.

To serve resident’s needs and protect property assets, proper maintenance means regularly incurring hard costs, including people, time and materials. But it can be difficult for growing teams to accurately anticipate these costs and take the steps needed to streamline where possible. Without a process or thoughtful planning, how would your team know if they’re overpaying on parts and labor to replace a leaky faucet? Or how well they’re satisfying service requests? In addition to resident complaints, bad service request responses create turnover, which set in motion other expenses required to prepare each unit for a new resident.

Today on The Top Floor, we’re investigating the relationship between maintenance costs and NOI. Why are so many organizations missing opportunities to reduce expenses? And what solutions are out there? Tune in.

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Meet our guests:

Melissa Palmer has over 25 years of property management experience, ranging from onsite leasing and management, national training, software sales, account management and business development. She received her CAM, PLP (Professional Leasing Program), and is extremely involved with the NAA National Suppliers Council (NSC). Palmer is also an Ambassador and is on the Suppliers Council for the Apartment Association of Metro Denver (AAMD). Prior to joining Grace Hill, she owned and operated a national procurement company, where she saved her clients thousands of dollars and boosted their NOI. She joined Grace Hill in 2019 as a consultant, after restructuring her company, and came on permanently in 2020. Today, she manages Strategic Partnerships for Grace Hill and looks for opportunities to add value within our industry.

 

Stephanie Anderson is the Senior Director, Content Strategy at Grace Hill. With 15 years of property management experience, Anderson brings a wealth of knowledge specializing in revenue management, creative marketing and employee development. She was NAAEI’s 2015 Designate of the Year and CAM of the Year in 2013. She is a powerhouse speaker that shares her industry knowledge, motivates professionals to greater success and disrupts status quo with out of the box ideas and trends. She is a graduate of Virginia Commonwealth University where she majored in English Literature and Women’s Studies. She holds a Virginia Real Estate License and is certified as a National Instructor for NAAEI.

 

Rob Galligan joined AppFolio in 2020 where he leads maintenance efforts as part of our Value Added Services team. In his role, Rob works to help customers improve their internal maintenance processes through AppFolio products with a focus on protecting assets, improving tenant satisfaction, and controlling costs. Rob lives in Dallas where he enjoys spending time with friends, exploring the local cuisine, and going outdoors.

Episode transcript

Megan: When’s the last time you audited your property management company’s maintenance request process, including inspections and procurement processes? For many, outside of a list of preferred contractors, there may not even be a process, which can have real consequences on a company’s net operating income, as maintenance costs can be some of the most difficult to control.

Proper maintenance means regularly incurring hard costs, including people, time and materials. But it can be difficult for growing teams to accurately anticipate these costs and take the steps needed to streamline where possible. Without a process or thoughtful planning, how would your team know if they’re overpaying on parts and labor to replace a leaky faucet? Or how well they’re satisfying service requests?

Today on The Top Floor, we’re investigating the relationship between maintenance costs and NOI. Why are so many organizations missing opportunities to reduce expenses? And what solutions are out there? Kicking off this conversation is Melissa Palmer.

Melissa: So I’m Melissa Palmer. I am the business development manager for Grace Hill. I manage all of our strategic partnerships and basically that just means we are looking for companies that work together with us on content, technology integrations, subject matter experts, that those types of things that we can put better programs together for our client base.

Megan: So let’s start with what might be an obvious question. What exactly is the relationship between maintenance and net operating income?

Melissa: Yeah, it’s … such a broad question, but really the easy answer is that no matter what kind of maintenance program you have, it’s going to affect your net operating income.

Melissa: So for example, if you don’t have any kind of preventive maintenance program, specifically like changing AC filters, checking Freon, companies are going to end up spending more capital dollars on replacements and other costs in repairs that could have easily been avoided if they would have checked those units periodically. So there really is, it’s a broad question, but you end up saving money in the long run, if you have a good preventative maintenance program.

Stephanie: That’s a great question. In fact, I think many people don’t think of the two as going hand in hand as much as they probably should.

Megan: Speaking is Stephanie Anderson, the senior director of content strategy over at Grace Hill. Additionally, she was the industry operations manager at the National Apartment Association.

Stephanie: When we think of NOI, it’s a calculation used to analyze the profitability of income generating real estate investments. So to calculate NOI, we’re going to subtract the operating expenses from the revenue generated by any property. So operating expenses include all of the costs associated with operating the property, which of course maintenance is a large part of. Maintenance expenses can prove to be the most difficult to control hard cost. While property managers and other leadership individuals are trained on financials, maintenance is often left out leaving a lack of knowledge for how they work greatly together to affect the bottom line.

Megan: Maintenance technicians often don’t understand how the small choices they make on a day to day basis add up and affect the company’s bottom line. But do C-suite leaders understand the impact of maintenance costs?

Melissa: I think that they’re aware. I mean, obviously they’re intelligent people, they’ve gotten to their place in life because of that, but I think sometimes they’re far removed from everyday details that affect a property’s NOI. They’re looking at the budgets and they’re looking at the bottom line, but they’re not really deep in the weeds of how to help a property in that area or why they’re over maybe in a specific category.

Megan: And here is Stephanie.

Stephanie: Ooh, okay. So this is a good question. I think from a financial perspective, C-suite leaders understand how maintenance costs affect the bottom line. They’re looking at it on a statement. They obviously can do math and I think that they have a good understanding of that. Where I think it gets to be a little bit of a gray area is when there’s concerns over a company, let’s say their bonus structure that they have in place and it’s specifically based off of NOI numbers. This is where corners seem to be cut in the maintenance department when numbers need to be decreased for expenses. And that then leads to deferred maintenance and lack of asset preservation.

So yes, I think they have an understanding of it, but sometimes it’s hard when you’re not physically in those shoes doing that position day in and day out to fully understand how cutting a corner or reducing an expense can really grandly affect the bigger picture of things.

Megan: Clearly maintenance can be one of the most challenging costs to control. But why is that?

Stephanie: I always like to say you can plan for everything and still miss something. Repairs are going to be estimated. Cost of supplies change, emergencies come up that could require additional contractors. I always think about emergencies that happen in the middle of the night or on the weekends and there’s additional costs like on-call fees for late nights and things like that that we don’t necessarily budget into.

Megan: Outside of unforeseen costs is another factor that makes maintenance difficult to tamp down. This one’s a bit more big-picture and abstract, so we will let Stephanie do the explaining.

Stephanie: There’s also a really big lack of proper training in the industry. Qualified technical ability is not necessarily paid as what it should be in our industry when you compare it to other industries.

So when you think about those that are in the mechanical field, plumbing and so forth, they then come into our industry. We expect them to either have those certifications already or basic understanding of training. When they go to these other companies, they’re paid a higher rate for that. So I think the training goes along with it, with paying higher, the whole conversation of staff versus contractors. That’s always a big one too which is really hard to determine. If your teams are trained properly, can they then make informed decisions on whether a staff member should complete a contractor and what are the implications for cost for both of those? So you can kind of see that there’s a lot of variables that happen based on each little decision that’s made that could then add up to a larger cost.

Megan: Alright, so by now we can see how missed opportunities to control maintenance costs are missed opportunities to improve net operating income. So what are the solutions? How can property managers rein in their maintenance processes? Here are Stephanie’s top three. Number one.

Stephanie: Obviously I think training’s a big thing. I kind of mentioned it earlier. In order to complete repairs, you have to have right training in place for your staff. And not just the right initial training, but continuous ongoing training because if employees switch properties or you get new systems in places like appliances or HVAC systems, you have to be able to continue that ongoing knowledge for your team so that they understand the difference in services for each product that they have.

So having well-trained staff will not only help the maintenance teams to diagnose repairs easier, but it saves money when we can know to replace a part instead of an entire item. Or again, when I mentioned earlier, if you can fix things in-house versus calling a contractor, those things are definitely going to save money.

Megan: Number two.

Stephanie: I would say the second thing would probably be turnover expenses. Turnover is something that is really expensive in general, which is why we always focus on resident satisfaction because if we can keep a resident there, we’re really not having that extra expense of turnover. But when I say turnover expenses, let’s just kind of focus on carpet and paint, for example. So determine what could be done in-house versus a contractor. So do you have a painter on staff or do you have a contractor that comes in to paint? And who supplies the paint? Can we supply it at a national level and get a discount on that or are we paying the painter who may be a smaller company to then purchase the paint at a higher rate and then bring it in?

Megan: Here’s an expert tip. Don’t wait until the last minute to discover what needs to be fixed. Once you’ve got a move-out date, start planning.

Stephanie: Inspecting apartments prior to a resident moving out. That’s a big thing knowing in advance what needs to be done in the apartment for the pending turnover before it’s actually in the turnover stages. That’s really big with vacancy costs because why would you not want to fix something when a resident is currently living there versus when you’re no longer collecting rent on the apartment because it’s now vacant?

So there’s all these different pending questions you have with turnover, but ultimately I think when you start to look at your turnover expenses and the hard costs, you’ll also then think about expenses like replacement costs in the future, vacancy costs, and future resident turnover. So it’s important to really dig into that a little bit more.

Megan: And number three.

Stephanie: And then I would probably say the final thing would be energy-efficient appliances. This is kind of a tricky one … because oftentimes we will hear companies or owners be extremely hesitant about reviewing the cost of energy-efficient upgrades because they’re looking solely at the initial capital required to do that investment, but you have to think about it as an investment. So while it can feel counterintuitive to spend more to decrease your costs in the long run, it’s exactly what you’re doing when you’re going forward with energy-efficient appliances or even any of the smart home technology that’s out there.

Megan: Among solutions for better managing maintenance costs, implementing a procurement strategy can lead to big savings. But as Melissa Palmer points out, there are three big, overarching things to consider when designing your strategy.

Melissa: So giving the brief overview, really, it consists of about three overarching things. And so one would be negotiating supplier contracts across all of your portfolio. So this really allows you economies of scale in discounts for volume purchasing … And if we can kind of adopt that same philosophy when we are thinking of purchasing with multifamily properties, it’s very similar. The second thing would be standardizing products. So when companies have multiple properties across the country, they might think that they’re not able to get those economies of scale. However, it’s not true.

So you can use the same flooring. You can use the same paint, generally speaking across all 50 states. So standardizing is definitely going to save time in decision-making for your property teams, as well as giving you that negotiating power with the supplier partners … And then thirdly, I would say compliance and follow-up is huge. You can implement these programs all day long, but if you don’t have any follow-up or understanding if the properties are doing what you want them to do, you’re not going to save any money. So, my advice in this area would be to work closely with the supplier partners on reporting. And then also if you’re working with another group purchasing organization, they can help you with reporting to make sure that you’re auditing usage and compliance.

Megan: At face value, procurement is such a powerful way to bring down hard costs related to maintenance. So why don’t all property management companies have a consistent strategy for procurement?

Melissa: That’s a great question, Megan. So probably two major ones, but one is, there’s a high turnover in property management. And so you’ve got managers that come in or regional managers that come in and they have their own way of doing things. And so they might think they could do a little bit better than what has been implemented with a company. And so many times because of turnover, those programs get left behind, so somebody will come in and bring in their own suppliers and things like that.

Melissa: So I think that a big thing is going to be training, onboarding new employees and having a clear and concise training and onboarding plan. So that those new people coming in know that you have that plan and that they don’t have to bring in their own ideas or supplier partners. You have a purchasing guide, you have those types of things that are already embedded in your company’s policies and procedures. And so it’s very clear that they don’t have to reinvent the wheel. They can use what is already been put in place for them. That’s the biggest thing. And the other thing is pay your bills on time.

So I think that if you have any issues with paying invoices, can cause accounts to be shut off. And so then properties have to scramble and maybe they have to go down the street to the hardware store and pay three times the price for something that they had already negotiated a price on.

Megan: Stephanie and Melissa have both shared some great ways you can start bringing down operational costs at your properties — developing a procurement strategy, better training, and energy-efficient appliances. But one area we haven’t covered yet is the value of more frequent, proactive inspections.. Generally speaking, maintenance teams tend to be stretched thin, so aligning workers and residents behind more inspections, which, let’s face it, requires a ton more coordination, feels like a hard sell. But cracking the code and getting a handle on maintenance costs requires greater visibility into a property’s material needs. And that’s a challenge for any team. Traditionally, it’s up to residents to submit a work order when something needs fixing. But a majority of residents don’t have expertise in things like electrical work, plumbing and so on — and might fail to report issues, which aren’t discovered until they move out, which means it can take more time to turn the unit for the next resident — not to mention, unnoticed issues may become worse over time, and more expensive to fix than if they had been caught early. So reining in unwieldy maintenance costs also requires that teams become more hands on with their properties, empowering them to anticipate upcoming expenses and provide preventive maintenance. Here’s Stephanie.

Stephanie: It’s really about planning for time, planning for resources, and planning for expenses. So for instance, I mentioned earlier pre-move out inspections. You’re getting a firsthand opportunity to go into an apartment with a resident present, let them know upfront what items are going to be charged for for anything that’s self-induced outside of minor wear and tear, and it’s really impactful that you are able to start planning the process before the resident ever moves out.

So if cabinets need to be replaced, if carpet, countertops, a lot of things that take more money and take more time in the turnover process, you can really start to plan that. Then you can notify your teams to have a more accurate representation of when someone could actually move into that apartment. That way you’re losing less vacancy costs. And maintenance inspections in general, not just pre-move out, but if you’re doing quarterly inspections, it’s an opportunity to make additional revenue for your company. Are you seeing pets or additional occupants in the home that shouldn’t be?

And then I think that it just helps you to preserve the asset long term. So when you go into budget season for your next year, you really want to come forward with notable expenses that you feel like are really going to impact your budget so that you can plan accordingly for that. And of course, you’re never going to prevent everything. When you think about your bottom line for NOI, it is difficult to predict it, but the more prepared you are with your planning through things like inspections, you’re really going to set yourself up for success.

Megan: These benefits affect the bottom line of your business — but in order to realize them, your whole team, including on site technicians, needs to understand and embrace these changes. Here’s how to align your whole organization behind proactive inspections.

Stephanie: Oftentimes I think we get into a culture of: we do a task to say we’ve completed it and to check a box. And while that is important from the compliance side, it’s not realistic when they understand the grand scheme of things when we talk about financials and NOI. It’s really important to explain to them that if they’re not doing these things, this is what the repercussions are. And those repercussions later lead to issues with deferred maintenance, issues with the assets not being preserved, issues that then turn around to we can’t lease the apartment because there’s too many problems or we’ve deferred maintenance too long where we don’t have enough capital in the bank to pay for these repairs. When you start to really dig in and explain it to the teams, I think it does help them to understand the importance.

And I think that you need to set deadlines too for the teams. So instead of just leaving it open-ended as to what type of inspections they do and when, it’s important to say, okay, we’re going to do an exterior building inspection. It needs to be done by the 30th of every month. When you set clear expectations for the team, they know that they have X amount of time to do the task at hand. So if you don’t say, okay, you have to just do it on this specific day, you don’t overwhelm the teams with the, “Oh, no, I had an emergency leak and a fire and all these other things going on. There’s no way I could get to it.”

Instead you’re saying, “Okay, plan accordingly. You work your schedule out to make sure that you can get these inspections done in this period of time.” And then make sure you’re documenting those results so that others can go back and look not for just the compliance side, but when they start thinking about that data we spoke about earlier and how we look at that data to make informed decisions moving forward.

Megan: Sounds like a ton of coordination, right? But stay with us. We can’t stress enough that better managing maintenance costs begins by gaining greater visibility into a property’s needs, which stems from teams becoming more hands on. But workers can’t be everywhere at once, and growing headcount costs doesn’t help if your goal is to drive NOI. To accomplish more with the people you already have in place, teams can enhance their communication and how information travels from one party to another, closing gaps between properties and maintenance workers. We’re speaking, of course, of digitizing the maintenance process. Here, Stephanie highlights a few of the benefits, from your residents’ perspective:

Stephanie: I think that when you digitize service requests in general, there’s an opportunity to also allow it sort of like a resident portal, so that residents can enter it on their own without having to wait and call the office during office hours. So if at 11:30 at night and I noticed that there’s an issue in my apartment, I don’t have to email a staff member or leave a message for their office. I can actually just enter it on a resident portal. So that is a great way when we think about technology.

I think outside of that too, when we talk about follow-up, I think it’s so important for residents to know if I’m at work all day and I’m not in the apartment, it’s great for me to be able to get some sort of notification in whatever capacity that looks like for your technology to let me know that someone actually came and addressed the issue in my apartment or someone did come, but there’s a part on order, or even following up with a survey, so to speak, of was this done to your satisfaction? To me, that technology allows residents kind of the inside look at what’s happening and communication is truly what they really want for resident satisfaction. So it just makes sense.

Megan: Clearly, online systems offer benefits for residents, but it goes beyond that — companies who aren’t taking advantage of technology platforms to digitize their work order process are actually leaving money on the table.

Stephanie: Believe it or not, there are still owners and management companies out there that are not using a technology platform for their service request … It’s really important when updating your service request process to include technology as a partner on that and to make that a standard in place. It’s important when we think about not just putting in the service request and thinking about how it gets to the team member to then go and repair or fix an issue.

So that means that if we find out more information about Ms. Smith’s apartment issue, you can go back in and add that into the system at any time versus searching for a piece of paper to add it to it. So that means that your office staff can gain as much information as possible to then be able to share it with the maintenance team so that they can efficiently go to an apartment with the tools that they need or the information at hand that they need to be able to make the most of their time while they’re in there.

Now, outside of that, there is really important data that we can analyze when using a technology platform. We can think about how many service requests are we doing on a given day? How long are they staying open? Are there any critical issues in terms of resource and maintenance team members and how much they have on their plates and how much we’re contracting items out? Again, it kind of all goes back down to we need to look at our teams, our staff, how much we’re putting on them and see where we can make changes moving forward.

And I think the first step to doing that is really to set up what your standard policy is as a company to what is classified as an emergency. So if your toilet is clogged and you have a three bathroom apartment, then no, that’s not an emergency, right? Because you have two other working toilets. If your air conditioning goes out but it’s 30 degrees that night, no, that wouldn’t be an emergency. So I think having a set list and that way there’s no gray area. When the maintenance technician receives a phone call from a resident saying that there’s an emergency, it’s very easy for them to say yes or no. It’s not, oh, let me check with my manager. Oh, well, it’s midnight. Let me see if I can get out there. It’s, yes, there’s a flood in the apartment that’s required for me to go out. I’ll be there within 30 minutes, or no, you have an issue, again, with a toilet that’s not working, but you do have another toilet that you can use and we’ll be by during regular business hours the following day.

So I think that that standardized list really just takes out any questionable areas and allows everyone to be on the same page, mostly to where you can notify residents when they first move in as part of their leasing process to give them a copy of what’s classified as an emergency and so that they have an understanding going into it what that expectation is, and then they can make plans accordingly.

Megan: Standardization of the service request process is major — having these lists in place empowers teams to respond to situations more efficiently within the guidelines of company policies, and quickly discern what is or is not an emergency to better serve residents.

But standardization also has benefits when it comes to data & insight. As anyone who has ever run a report can tell you, gathering clean data is a near-constant struggle. Here, automation can make a big difference . Guiding us into this discussion is Rob Galligan, AppFolio’s director of maintenance services. Rob highlighted how an automated service request process eliminates redundant tasks, creates a consistent process and standardizes data from work orders.

Rob: And so by standardization, I mean not only how the work order is written, how it’s formatted, but that is definitely an outcome. And it might sound a little simple, but if these work orders are not consistently formatted, it just opens up a lot of opportunity for error, or lack of understanding from whoever’s reading it, and that can lead to a bad outcome.

And just being able to automate, to be able to have a standard and consistent process is what’s really going to be able to one, diagnose the problem correctly, because there’s not a lot of margin of error when there’s fire or catastrophic flooding. It needs to get done. It needs to get done correctly.

So you reduce the margin of error, but then you also have a very consistent process to follow. And ultimately it’s ensuring that the maintenance that is going to get done happens timely, in a timely way, and that it happens in the correct way.

And in addition to automation, machine learning that improves that automation continuously … And by machine learning, I guess I’ll caveat that, we’ll still always have humans as the agent on the other end of the phone, on the other end of the text, reading the portal. But with machine learning, they’re being given basically a second set of eyes.

And so that second set of eyes is going to help them say like, ‘Hey, this should be classified as urgent because of X, Y, Z.’ And so for a human who’s just dealing with many, many maintenance orders or work orders every day, they can get … maybe a little fatigued, and having that consistency and that second set of eyes to help them do that, being able to prompt that this is a faucet issue and they should check X, Y, and Z. They may forget that, but with our system, it’s always going to prompt it. And so that’s a huge value add, and I think a huge booster to NOI, but then also having a lot of pieces automated after that whole process, once the work order is created, being able to automatically email or automatically text people, both internally at the company that can handle the maintenance, external vendors, is much faster. It’s much more efficient.

And other features we have that are being introduced are new avenues for communication. And by this, I mean when a work order, will enable a kind of a SMS conversation between the resident, the vendor and the property manager, and what I really is it kind of puts the onus of the work on the resident who wants to have it done as quickly as possible, and the vendor who wants to get the work done as quickly as possible, because the faster they do the work, the faster they get paid.
Rob: And so really aligning incentives to, for scheduling. Not putting the burden on the property manager, who has a lot of other things going on, but still allowing visibility for them to see what’s going on and kind of interject or intervene if there are problems that require their attention.

Megan: At so many companies there isn’t a robust conversation about the relationship of maintenance expenses and NOI. With so much work needed to keep properties running day to day, it’s easy to overlook opportunities to improve communication between teams, training and hiring practices, and procurement strategies that can lead to big savings. These changes will require a shift to long-term thinking, starting from the top down. For example, let’s think back to that leaky faucet we brought up in the beginning – to understand the true cost of not fixing it, it’s important to keep in mind long-term expenses – such as those stemming from resident turnover because tenants were dissatisfied from a troublesome work order process. By using some of the strategies we’ve covered today, such as shifting your team’s mindset to start thinking about the big picture when it comes to maintenance, and thoughtfully introducing technology to support this vision, you can begin to affect your company’s bottom line — and your residents’ experiences.

Special thanks to our guests, Stephanie Anderson and Melissa Palmer of Grace Hill, as well as AppFolio’s Director of Maintenance Services, Rob Galligan. And thank you for joining us on The Top Floor.

Sean: Thanks for listening to The Top Floor and remember to join us here monthly for each new episode. For more information about today’s guests, visit our industry insights page at appfolio.com. And to view the latest property management insights as they’re published, follow Appfolio on LinkedIn, Twitter, and Facebook. Don’t forget to subscribe to The Top Floor on Spotify, Apple Podcasts, Stitcher, or wherever you listen. We’ll see you next time.

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