Ancillary Income’s Contribution to the Bottom Line
- Jun 27, 2011
Consider this idea: AT&T or Comcast provides tech support for apartment residents’ laptops on an as-needed basis. Making that sort of service available to residents also provides a possible source of revenue-sharing opportunity for apartment owners. Ancillary income expert Andrew Smith says some telecom companies are, in fact, looking into the possibility of offering this type of service in apartment communities.
The “Big Four” of ancillary income sources today remain: cable/satellite TV, telephone, high-speed Internet service and water submetering, says Smith. However, new possibilities for revenue streams are continually coming into existence. Still, owners need to be aware of the time-tested sources of ancillary income, and not just novel possibilities.
Whether from new or old sources, the difference ancillary income can make to the bottom line is significant. Smith, who is owner and president of Ancillary Services Management LLC, says the income his clients can make from ancillary income is unlimited, depending on the location and type of the property, the providers available in the services offered, and what is defined as ancillary income.
The biggest bang for the buck, according to Smith, comes from submetering utilities. “There is nothing else out there that will help the apartment owner’s bottom line more,” says Smith. Passing the cost of water to residents can reduce apartment owners’ utility bills by as much as 80 percent. If other utilities are included, the amount can be even higher. After submetering, Smith finds that the next biggest bottom-line booster comes from revenue sharing with telecom companies, followed by laundry ancillary income.
Working with local merchants
One commonly neglected area of ancillary income derives from striking up relationships with local businesses such as nail salons, pet walking services, hair stylists and pizza shops. “This is an untapped market that no one touches because it is too property-focused and dependent on great managers with energy,” says Smith. There are many possible arrangements that can be struck with local merchants, with seemingly endless possibilities for creativity: merchants can advertise in community newsletters or link to community Websites; flyers can be placed into the welcome packages; the leasing offices can include a booklet of local businesses. These arrangements, according to Smith, can yield $10 to $15 per month.
Apartment owners can, and should, think about every product and service as a possibility for generating additional income. “Everything the resident may want or need in the community is an opportunity to create a marketing program,” says Smith. “For example, when the resident moves in, what do they need? The first thing they might do is go to Bed Bath and Beyond to get a bucket, trash cans, bedding. There is an opportunity right there; discounts or rebates can be provided to the residents, and you can drive residents to the store.”
Of course, apartment owners also may not want to go overboard in the commercialism and turn everything into an opportunity to make money. “We look at ancillary income as icing on the cake, as supplemental to our rental income. We do not want to charge residents too much. The main point of why we are here is to run apartments,” says Linda Willey, director of ancillary services for Camden Property Trust.
Ancillary income can run into the thousands of dollars per quarter, says Jim Carrillo, portfolio director of The Towbes Group, an apartment company that owns and manages a portfolio of about 2,200 units in Ventura and Santa Barbara counties in California. Carrillo acknowledges the income can be “significant.”
The Towbes Group owns its own washers and dryers in the laundry rooms. “We do not see the value of the laundry company taking 40 percent of the profits and giving you 60 percent, especially when we are using our own utilities anyway,” says Carrillo. “It provides good income to the laundry companies. If we can maintain the machines ourselves, we’ll make 100 percent on the washers and dryers.” The company buys the equipment wholesale and considering the returns, the cost is “almost nominal,” says Carrillo. Also, in-house maintenance technicians know how to service machines, and that keeps servicing costs down.
The Towbes Group also offers bundled cable, television and Internet services to its residents, in effect executing the contracts for the residents. Residents pay roughly a 15 percent premium over what the company pays the telecom provider. “These bundled services can be a top source of revenue,” says Karen Mims, portfolio manager at The Towbes Group. The company also charges a pet fee of $45 per month for some of its market-rate properties, on a case-by-case basis. “Generally, folks are okay with paying pet rent,” says Carrillo.
In addition, The Towbes Group rents out carport spaces that have been built into the communities. The standard charge is $15 per car space per month. The company also rents out lockers and storage spaces, as well as in-unit washers and dryers with hookups. “The business of renting appliances is made easy for the clients,” says Mims. Residents are charged about $50 a month, a $10 mark-up from what the company pays the vendor. The Towbes Group offers to paint one accent wall the color of the resident’s choice for $150. And the company has begun to open its properties to short-term corporate rentals at a markup of about 20 percent per unit over the rent, says Mims.
‘They charge for everything’
Residents may not mind that they are charged for ancillary services as long as they believe they are receiving high-quality services, points out Carrillo. “We know we have to back up what we provide for residents with service,” he says. “If we do not back up with good service, it will be easy for the client to say ‘they charge for everything.’ If you back it up with service that is part of your core value, most people will be fine with the charge.”
Apartment companies also need to anticipate the future when planning for ancillary income. Camden’s Willey notes that the use of land lines for phone service, especially among the younger urban demographics, has plunged. In some properties, the usage has fallen from about 70 percent to as low as 10 percent to 15 percent of residents. That trend has caused Camden to modify its telecom packages and emphasize cable and high-speed Internet. “We try to look outside the box to what the resident needs-—in the future,” says Willey.
In terms of emerging ancillary income opportunities, Smith says that data technology provides a huge area of untapped potential. Telecom services, for example, may in the future extend to alarm services. “Everyone is trying to figure how broadband can generate revenue,” he says.
Another idea still being explored is selling ad space in apartments. Advertisements behind glass cases—similar to those that enclose movie ads in cinemas—can be placed in common areas such as the clubhouse or the laundry rooms for a fee—for example, ads for Gatorade can be situated in the fitness center, and ads for Whisk detergent can be slipped into the laundry rooms. However, Smith surmises that it may only be companies with larger portfolios that can provide enough eyeballs to view the ads to make the arrangements worthwhile. Smith says he heard that an apartment company with a large portfolio earned $20,000 to $30,000 in a three-month test. “Most of the time we’re talking about maybe $25 to $30 per month per ad space.”
Gift codes are also making an appearance in the multifamily industry as an ancillary income idea. Two former Equity Residential executives recently founded ResidentGifts, a company that purchases gift codes at bulk discounts and passes the savings to apartment companies. Apartment companies replace their existing cash incentives programs—everything from free rents to referrals—with those gift codes. The cost of the gift codes are anywhere from 5 percent to 70 percent of the face value of the gift code (the discount is split 50-50 with ResidentGifts, and there is no fee required to subscribe to the program). Additionally, apartment owners recover the value of gift codes that are not redeemed, and the revenue from that is again split 50-50 with ResidentGifts.
According to Gerry Wiatrowski, ResidentGifts co-founder, a pilot program with three apartment companies indicates the total savings to the apartment owner can be as high as 12 percent.
Always keep an eye on the resident, advises Willey. “The main focus is for services that residents like and desire. If the residents are unhappy, they will talk. You do not want someone moving out just because they had bad cable service.”
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