We’ve talked before about the relationship between NOI, market CAP rate, and property value. There are many ways to increase the value of an residential or commercial real estate investment. One of the ways we can drive appreciation is to utilize a system called ‘RUBS’ which stands for Resident Utility Billing System. This is a tremendous way to not only increase your quarterly cash flow distributions, but also to increase the value of the property. In this month’s Harbor Drive Investor we’re going to take dive into the RUBS strategy and how you can benefit from it.
What Are RUBS?
Resident Utility Billing System (or RUBS), is a strategy many investors use on an apartment investment to recapture some of the utility expenses of the property from the tenants. We typically see this in B & C class communities that are a bit older. Many properties that were built in the ‘70s and ‘80s were constructed with a ‘Master Meter’ system for measuring water & sewer usage on the property. That means there is one water meter for the entire property and it’s impossible to measure water usage on a tenant-by-tenant basis without installing expensive individual metering equipment. On ‘Master Metered’ properties, the water district will send the landlord one bill each month for the water usage on the entire property to be paid. As you might imagine, the annual water bill on a 100+ unit property can be very expensive.
How Does It Work?
It’s becoming increasingly common today that investors will bill the tenants back for the property’s water/sewer usage. That method of expense recapture is commonly referred to as RUBS. There are a variety of ways that this can happen. Some investors will bill back residents based on unit size (1 bedroom unit, 2 bedroom unit, etc.). Some investors will bill back based on number of tenants living in a unit. And others will install special (expensive) equipment in each unit that will measure exact water usage. However you do it, this is a great opportunity to raise your cash-flow, and increase the value of your property (Hooray!).
Why Doesn’t Every Investor Do This?
Beat’s me…. However, it’s a great opportunity for the Harbor Drive Investor Community to take advantage of some ‘low hanging fruit’. Believe it or not, we still come across deals on a regular basis that have not fully integrated the RUBS strategy. That is an opportunity for our investors that we can take advantage of. There is one caveat. There are certain markets out there (though not many) where all the surrounding apartments (comparable properties) do not use RUBS. Therefore, part of our due-diligence before using the RUBS strategy is to be sure that the comps are using some kind of RUBS system before we underwrite this strategy in our modeling.
Give Me The Numbers!
Ok, now for the million-dollar question (our favorite)! How does this affect the bottom line?? I’ll use an example of a 100-unit apartment building that we are looking at for potential acquisition. The property has 50 1BR units and 50 2BR units and they are not using a RUBS system. Our plan after acquiring this deal will include executing a RUBS system that will be fully integrated by the end of 24 months in which we will be charging $35/mo on the 1BRs and $45/mo on the 2BRs. Now for the exciting part! At the end of 24 months, we’ve successfully implemented our RUBS strategy. Now we are collecting an additional $1,750/mo for all the 1BR units and an additional $2,250/mo for all the 2BR units totaling an additional $4,000 per month of additional cash-flow or $48,000 per year! This means more cash-flow for you and our other investors in the deal, plus we’ve just increased the value of the property. For this example, I’m going to assume we are in a 5.5% CAP rate market, therefore the additional $48,000 of annual revenue has just raised the value of the property by $872,727!!
WATCH: In the video here below, HDH co-founder Rob Overstreet talks a bit more about this concept!
RUBS is just one of the many great strategies we use to raise our investors’ cash-flow and increase property value! You can see why we are so excited about the passive real estate investing and all the amazing wealth creating benefits it can provide you and your family!