If you’re a multifamily property owner or manager, you know that maximizing Net Operating Income (NOI) is imperative for a sound investment. As utility costs rise and tenants preferences become more complex, discovering effective solutions to lower expenses and increase property value is critical. Utility submetering is underutilized and can be the most impactful tool to both increasing property value and lowering your operating costs. Below we’ll explain why submetering can be more than just an upgrade. It can be the difference maker when it comes to a more valuable asset.
What is Submetering?
Submetering is the practice of installing individual utility meters for each unit within a multifamily property. Instead of the entire property receiving one master bill for water, electricity, or gas, submetering allows for the precise measurement of each tenant’s actual consumption. This facilitates billing tenants directly for their usage, rather than relying on less equitable methods like Ratio Utility Billing Systems (RUBS) or absorbing all utility costs into the rent.
The Direct Impact of Submetering on Your NOI
Net Operating Income is calculated as your property’s total income minus its operating expenses. Submetering positively influences both sides of this equation.
- Significant Reduction in Utility Operating Expenses: This is the most immediate and impactful benefit. When tenants are responsible for their individual utility consumption, that expense is largely removed from your property’s operating budget. In many markets, utilities represent one of the largest controllable operating expenses. Shifting this to individual tenant responsibility can translate into tens or even hundreds of thousands of dollars in annual savings for larger portfolios.
- Example: If a 100-unit property previously covered an average of $50 per unit per month in water costs, submetering could remove $60,000 annually from the owner’s expenses. This $60,000 flows directly to NOI.
- Promotes Utility Conservation (The “Conservation Effect”): When residents are aware of and responsible for their own utility bills, a natural behavioral shift occurs – they become more conscious of their consumption. Studies consistently show that submetered properties experience a significant reduction in overall utility usage, often between 15-30%. This conservation:
- Further reduces your common area utility costs: Less overall consumption can mean lower bills for common areas, landscaping irrigation, etc.
- Decreases wear and tear on infrastructure: Reduced demand can prolong the life of pipes, pumps, and other utility-related equipment.
- Stabilized and Predictable Utility Expenses: By transferring the variable cost of tenant utility usage, your property’s utility expenses become more predictable and manageable, primarily consisting of common area usage. This predictability is invaluable for budgeting and financial forecasting.
- Enhanced Property Value: This is where the magic of NOI truly shines. Property valuation in commercial real estate, including multifamily, is often determined by capitalizing the NOI (Value = NOI / Capitalization Rate). Every dollar you add to your NOI through submetering can translate into a significantly higher property value.
- Example: Using the $60,000 NOI increase from above, and assuming a conservative 6% capitalization rate, the property’s value could increase by $1,000,000 ($60,000 / 0.06).
Additional Benefits Supporting Long-Term NOI Growth
While the direct financial impact is compelling, submetering offers further advantages that contribute to a stronger, more profitable property:
- Fair and Transparent Billing: Tenants appreciate paying only for what they use. This fairness can lead to increased tenant satisfaction, potentially reducing turnover and its associated costs (vacancy, make-ready expenses, leasing commissions).
- Early Leak Detection: Advanced submetering systems can provide granular data, helping to quickly identify unusual spikes in consumption that may indicate leaks within individual units or common areas. Addressing leaks promptly saves water, prevents costly property damage, and avoids inflated bills.
- Attracting and Retaining Responsible Tenants: Environmentally conscious and financially savvy tenants are often attracted to properties that promote conservation and offer fair billing practices.
- Improved Budgeting for Capital Improvements: With utility expenses under better control and NOI maximized, capital can be more effectively allocated to other property enhancements and value-add projects.
A Strategic Investment for Growth
The transition to submetering involves an initial investment in meters and installation, and potentially ongoing service fees for billing and maintenance. However, property owners consistently find that the payback period is relatively short, and the long-term ROI is substantial, primarily driven by the direct increase in NOI and subsequent property valuation.
Unlock Your Property’s Full Financial Potential with Water Systems
Understanding and navigating the technical, regulatory, and billing aspects of submetering is crucial for a successful implementation. At Water Systems, we specialize in providing comprehensive submetering solutions tailored for multifamily properties. Our expert team can help you analyze your current utility expenses, design an optimal submetering system, and manage the installation and ongoing billing processes seamlessly.
Ready to see how submetering can significantly boost your multifamily property’s NOI?
Contact Water Systems today at 1-866-537-1500 for a free, no-obligation quote. Let us show you the path to reduced expenses, increased property value, and a stronger bottom line.
