I want to tell you about ‘Other Income’ which is the third item that makes up Effective Gross Income (EGI).
Scheduled Gross Income
-Vacancy
+Other Income
=Effective Gross Income (EGI)
The question at this point is; what exactly makes up ‘Other Income’? There are quite a few things that fit this category. Some of the more popular Other Income items would be income from laundry, vending machines, storage units, parking, late fees, pet fees and utility reimbursement. Let’s go through these one by one.
Laundry – There are two ways you could receive income from laundry. The first way would be to own the equipment yourself. You collect all the income, but you’re also responsible for all the maintenance on the washers and dryers. Overall, you should make the most money with this method. However, a lot of owners don’t want the hassle of maintaining the equipment so they use a laundry equipment servicing company. These companies will place the equipment, take care of all the maintenance and collect all the income from the units, then split the income with you. You don’t have to worry about anything, but you will get less income overall.
Vending Machines – Depending on how many units you have at your complex, it may make sense for you to have soda and candy machines on site to generate more income. Just like with the Laundry, you could purchase these machines and maintain them yourself or you could ‘partner’ with a vending company to take care of everything and split the profit with them.
Storage Units – In some complexes you might have basement areas that aren’t good for much. There could be no windows or perhaps it’s just unfinished. For whatever reason, you just can’t turn them into rentable apartment units. Instead of leaving this space unoccupied, you could section off several storage areas then rent out those spaces to your tenants to generate more revenue. Some owners will even build exterior storage units or turn unused garages into storage areas. This is just another way to increase the NOI which will also increase the value of your property.
Parking – With most properties, parking is usually a given, but in some cases were off-street parking may be scarce, you could number your available spaces and offer them to your tenants for $10-$25-$50 to even $100 per month, depending on what the market will bear. With other properties with ample parking, you might be able to make more money by charging for covered parking. Covered parking in areas that get a lot of snow or extreme heat from the sun like Phoenix and Las Vegas could command premiums for people that don’t want to clean the snow off their cars or have their skin seared from their bones by sitting on a seat that’s 150+ degrees!
Late Fees – It’s inevitable that you will have tenants that pay late. You might as well profit from their tardiness. Personally, I don’t use the Late Fees when I’m evaluating a property for purchase as I don’t want my tenants to pay late at all. In some areas where I own properties, the max we can charge for late fees is only $25! Whether its one day or 30 days, it doesn’t matter, we can only charge $25! How quickly will that whopping $25 be used up if I have to hire someone to knock on their door or call them on the phone or post a ‘3-Day Pay or Quit’ notice? Pretty darn quickly. However, once I own or if I’m trying to sell a property, I certainly do use the income to increase my NOI.
Pet Fees – If you’re going to allow pets in your units, you might as well profit from that too. I don’t care what someone says about how good their dog or cat is, they inevitably will pee or poop on the floor, or tear up the window coverings, or scratch a hole in the carpet or the back of a door. I had one of my SFH’s where the renter’s dog couldn’t see out the window so it chewed up the faux wood blinds trying to move them out of the way. You can discriminate against pets under most circumstances, so if you don’t want any issues with pets urinating in your units, then just don’t allow them. You could also charge your tenants non-refundable pet deposits and monthly rental fees too. This might help offset the pain of repairing any damage the pet has caused. You can even use this money to offset any damage the tenant has caused! I mentioned earlier that you discriminate against pets and choose not to allow them in your units under most circumstances. There is one circumstance in which you have to allow someone with a pet into one of your units (assuming they pass the financial qualifications) even if you’re entire complex is supposed to be pet free. That circumstance is when that pet is considered to be a ‘Service Animal’. What does that mean? The animal helps the tenant in some way, shape or form. It could be a seeing-eye dog, hearing dog or in some cases, a miniature pony that helps the tenant combat stress. If the tenant has one of these service animals you CANNOT charge them an extra pet fee per month nor can you charge them a pet deposit.
Utility Reimbursement – Some complexes you may be interested in purchasing could be considered an ‘All Bills Paid’ complex. This means that the owner pays for some or all of the utilities. This can be very common in certain areas of the country. Especially, where you have credit challenged tenants. Some of these tenants have credit that maybe good enough to allow them to rent a unit from you, but it may not be good enough to satisfy a utility company to extend them credit for gas and/or electric service. In other cases, the tenant has no credit at all because they have no Social Security number. They shouldn’t even be in this country. It’s up to you if you choose to rent to them. In any of these cases, you can either increase your rents to offset the fact that you’re paying the utilities on behalf of the tenants or you can ‘bill back’ the tenants for their portion of the utilities based on several factors. You could base it upon the square footage of their unit compared to the entire square footage of the complex, you could base it on the number of bedrooms or bathrooms or both, or you could even base it upon the number of occupants. A common phrase you’ll hear associated with charging the tenants for a portion of the utilities you pay for them is Residential Utilities Bill-Back System, commonly known as RUBS or RUBBS. This allows you to offset the higher than normal utility expenses you’re incurring on behalf of your tenants. With utility prices going up almost every year, it’s a good idea to get your residents to pay their fair share.
These are just some of the main ways you can generate Other Income. Some not so common ways of generating Other Income, could be to see if a cell phone company would want to put a cell tower on your property and pay you a monthly commission and/or setup fee. Or, perhaps, if you’re on a major road or freeway, you could offer to put a banner on sign of some type on your property to generate advertising revenue. Check with your code enforcement department to determine if you can do that on your property before you do it. Otherwise, you may find that the fine is greater than the income the sign is generating for you. You might also be able to get a cable or satellite company to offer you a commission in exchange for being an exclusive provider of their services on the property. There are other ways to generate Other Income, but this ‘lesson’ is getting rather long at this point so I’ll get back to the gist of the lesson.
The bottom line is to find ways to generate more income for your property, which, in turn, will cause your NOI, Net Operating Income, to go up. When your NOI goes up the value of your property goes up too. Exponentially!!! Next ‘lesson’ I’ll start taking you through the major expenses you’ll have on your property and how that affects your NOI. Once you finish learning about the Operating Expenses, I’ll show you how both the Income and Expenses affect your NOI and how this number, when you learn to control it, will help you become WEALTHY!!
Anthony Chara