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Ways to Create Extra Apartment Revenue – Yield Management – by Jim Baumgartner

Posted on 30. Mar, 2012 by in all, Magazine Articles

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It is no mystery that the past few years have been tough on the multi family industry.  We are seeing pockets of recovery while other regions are still suffering.  Despite overall vacancy issues, you often will see certain floor plans or views maintain high demand.  This is where market rate properties can boost revenue by practicing yield management.
I first started practicing yield management when I worked with a client that primarily owned hotels.  They taught me a lesson that I would never forget.  When occupancy is high, the prices go up.  When occupancy is low, prices drop.  Basic right? The key, however, was to look for opportunities to grow revenue even when overall occupancy is down.
I was curious as to what Wikipedia had for a definition and really like what they had to say – there are three essential conditions for yield management to be applicable:

¢  That there is a fixed amount of resources available for sale.
¢  That the resources sold are perishable (there is a time limit to selling the resources,
after which they cease to be of value).
¢  That different customers are willing to pay a different price for using the same amount
of resources.

Airlines jumped on yield management after deregulation.  In essence, they cannot manufacture more seats just as we cannot add more rental units.  Hotels quickly jumped on this trend as well.  We all sell space for a specified time frame.  We have a time limit”and if we don’t maximize that time we lose money.
There are software programs available that will help you to do this; however, if you want to experiment without the investment, gather your front-line team, take a look at your property and ask, Which styles always rent the fastest?  Every property has apartments that rent quickly.  This is an opportunity to create revenue where there was none before.  Push the rents on those styles.
Create a base price.  This may be as simple as taking your current pricing and adjusting from there.  However, if upon review you find that some unit styles are always full and you have occupancy issues on others, you may have a pricing problem.  If you aren’t already doing so, do a market analysis to compare your pricing with your comps.  Are their rents higher or lower than yours?  (You can look at rents per square foot; however, most customers do not take the time to analyze this.  They are more concerned with What do I get for my money and how much will it cost me each month?)  Are their amenities better or not as nice?  Is the location comparable?  Put yourself in your customers’ shoes.  Be as unbiased as possible.  If you were your customer, how much would you pay?  As a result of this exercise you will discover where you can push rents and perhaps where some should be pulled back a bit.

Increase rents for value items.  Increase the base price for amenities such as fireplace, vaults, extra windows, upgraded finishes (appliances, carpet, remodels, etc.), which floor it is on (top floor is generally premium”unless you do not have an elevator, walk-outs are a premium due to convenience for dog owners and active residents) and views (pool or nature views).  (One of the benefits of going through this exercise with your team and manually adjusting rents is that everyone understands the reasoning behind the pricing and can therefore explain it to their customers.  This has been a frustration with yield management software.)
Invariably, when we have gone through this process we have ended up creating the equivalent of several units’ worth of revenue.  So, on a 100-unit site, we have ended up with revenue generation equivalent to 103 to 107 units (based on former average rents).  At the high end you can end up with almost an extra month’s worth of revenue per year!

You will also find that you have enough income to more than offset reduced rents on the apartment styles that typically do not move quickly.  This gives you the benefit of a lower ˜loss leader’ for advertising purposes as well.  There is also snobbery on the upper end of the market so this increases your total range and broadens your appeal to a larger slice of the market.
At the end of this process you may find that you love the extra income that yield management brings you.  (Undoubtedly your ownership will!)  At that point you will want to look at the benefits of utilizing a yield management software versus doing it yourself.  There are pros and cons to both.  Regardless of which you choose, you will grow your asset and hopefully increase bonuses and your career growth!  Seize the opportunity!

Jim Baumgartner is Senior Vice President of RentSoda, a consulting company offering apartment marketing, business & operations consulting as well as industry-specific training. For more information visit www.rentsoda.com or email jim@rentsoda.com.  Reprinted with permission.