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Investment Strategy & Advisory
NOI is the key number to gauge your property's value, its debt capacity, and whether it's achieving the returns you expected. For small MF or MU portfolios, this usually means a property size of 5 to 50 units. Here, growing NOI is easier and often overlooked compared to institutional assets.
When discussing NOI growth, most discussions tend to quickly resort to two levers: increase rents and decrease costs. This overlooks the substantial operational middle ground, which harbors most of the true opportunity. At NREMG, we’ve managed multifamily and mixed-use assets in Michigan, the Midwest, and other major U.S. markets for decades. We found that lasting NOI growth comes from solid systems, not just market timing.
In this article, we’ll break down what drives NOI in smaller portfolios. We’ll also explore how property management quality, lease terms, capital allocation, and commercial income can boost returns over time.
NOI = All income less all operating expenses, prior to debt service and capital expenditures. The formula is clear. The challenge is understanding that NOI comes from many small decisions made each month. This includes how fast vacancies are filled, lease terms, vendor efficiency, and whether deferred maintenance is addressed before it turns into an emergency.
In previous market cycles, positive rent growth masked underlying poor operations. So long as market rents increased 5-7% a year, a property under bad management would look like it had good NOI growth. This is no longer the case in almost all markets. Data from earlier this year indicated that Same-Store NOI growth for U.S. Equity REITs has slowed to 2.9% YOY for 2024. Expenses are rising while revenues are falling in many markets. This double pressure makes operational excellence a key differentiator, not just a sign of good business.
For small portfolio owners without a dedicated asset management team, there's a special risk: operational drift. Slight changes in lease velocity, lease rollover time, or vendor costs over six months can quietly eat up 15-20 bps of NOI margin.
The largest NOI driver of the small multifamily is typically rarely glamorous. It is a vacancy. Each day a unit is vacant is a day of gross potential rent that is lost forever. A single unit with an extra two weeks of downtime during a 45-day vacancy, compared to a 20-day vacancy in a 20-unit building, leads to around $1000 in lost revenue. This is before considering any turnover costs. The average rent for these units is $1200 per month.
Leasing Velocity is dependent upon:
Turnover is very costly. The tangible costs - make-ready costs, advertising, leasing commissions and vacancy loss - are substantial enough. The hidden costs are even tougher. Each time there’s a turn, you have to negotiate a new rental rate from scratch. This often happens when market conditions aren’t good for big rent increases at lease renewal.
Industry sources report on per-unit turnover costs of $4,000 or more. In a 20-unit portfolio, cutting annual turnover from 45% to 30% saves about $18,000 in direct turnover costs each year. This increase in NOI goes straight to the bottom line, with no capital expenditure needed.
We’ve consistently found that top-tier multifamily properties share key traits. They have quick maintenance, clear communication, and a strong resident experience. This makes people want to keep living there. There are no amenities influencing retention at this level; just basic operational performance consistently delivered.
Retention strategy is not just holding rents steady in the name of appeasement. Disciplined renewal pricing offers below-market renewals to good, long-term tenants. This helps keep them while allowing underperforming tenants to cycle out. It’s a strong way to boost revenue and cut expenses at the same time. The logic should always be tied to a comparison of turnover cost versus renewal revenue impact.
In small portfolios, operating expenses are often handled reactively, not proactively. Vendors are kept, but not tested. Insurance policies are kept and renewed on auto, without market competition. Utility costs are spent, not managed or allocated.
Operating expense ratio: Operating expenses/Gross potential rent.
The most basic health indicator for any asset. A well-managed small multifamily property usually has an operating expense ratio of 35-45%. This can vary based on the market, the asset's age, and whether utilities are included. Assets that are routinely over 50% usually show expense inefficiencies, which are more often than not corrected with active management.
Small multifamily owners often miss out on the revenue potential of their current properties. Ancillary income, not derived from rent, does not involve the significant capital expenditures of a remodel. Instead, it involves a programmatic understanding of what a tenant is willing to pay for, beyond four walls and a roof.
Ancillary income opportunities common to small portfolios that are routinely left on the table are:
Investors have found that a systematic audit of ancillary revenue streams can help. By testing current programming against market comparisons, older, unmanaged assets can gain an extra $30 to $80 per unit each month. At a 6 cap, an additional $50 per unit per month NOI in a 20-unit building creates $200k of added value to the asset.
Property owners of mixed-use assets (a building with residential space above shops or offices) should view the commercial area as a separate property. This part needs its own asset management strategy.
NNN and modified gross structures in ground-floor commercial leases can help recover expenses from tenants. This recovery can significantly reduce building operating costs in mixed-use developments. NOI calculations for a well-leased commercial ground floor differ from residential ones. Lease terms are usually longer, often between 3 and 7 years. There are also guaranteed rental increases and CAM (common area maintenance) clauses, which residential leases typically lack.
At NREMG, we evaluate commercial and residential income separately for mixed-use acquisitions. They are managed independently. The residential part should focus on occupancy and turnover. The commercial part needs to emphasise lease quality, tenant credit, and escalation discipline. There is added NOI by running both individually, rather than if they were to be run as one.
It’s not all CapEx that grows NOI. Small portfolios often underperform. This happens because they don’t distinguish between the two types of CapEx. One type stabilises or preserves value, like fixing deferred maintenance.
At NREMG, our philosophy is simple: make sure the capital you invest will pay for itself. You can do this by looking for lower operating expenses, higher rents, better tenants, or less vacancy. Do this before you commit your funds. Any capital that can't be clearly linked to a calculable NOI outcome or a necessary capital preservation requirement must be put on hold until it can.
This is even more important with small portfolios that do not have significant reserves of capital. An ill-spent $5,000 in a 12-unit property is not as forgivable as an ill-spent $5,000 in a 300-unit property through the benefit of scale. Each dollar must be earned.
For investors wanting to grasp the value of a current asset or the growth potential of a target property, NREMG offers detailed asset-level NOI analysis. This analysis is based on real operations, not just pro forma assumptions.
Any of these drivers can work alone, but they work best together. When managed as a system by an operator with the right infrastructure, data, and market knowledge, their impact grows.
For owners of smaller portfolios, the need for professional property management is clear. Increased Net Operating Income comes from fewer vacancies, lower turnover costs, better vendor rates, strict cost controls, and maximised extra revenues. This growth far outweighs management fees, especially for long-owned or under-managed assets.
In markets like Detroit, Ann Arbour, and Grand Rapids, where NREMG manages properties, we typically see a 10-25% increase in NOI within the first 12-18 months. This happens by applying good operating practices to properties that aren't reaching their full potential.
Passive NOI growth by market tailwinds is over for most markets. The assets and portfolios that win this next cycle will be run with institutional-level execution regardless of size. For the small multifamily and mixed-use owner, that precision is now within reach more than ever. It does not demand 5,000 units. It demands a system, an implementation process and a partner with the knowledge to find where an asset is dropping performance.
Contact us to learn about the acquisition and disposition process for optimizing NOI. You can also ask about our underwriting standards or how our property management platform boosts NOI for portfolio owners.
NOI stands for Net Operating Income. It is the total revenue from a multifamily property minus all operating expenses. This does not include debt service or capital expenditures. NOI is the key metric for operating a property. It helps with valuation, cap rate calculation, and risk-adjusted returns. NOI = Gross Rental Income + Ancillary Income – Operating Expenses.
To improve NOI without raising rents, consider these options:
Previously, a same-store NOI growth rate of 3%-5% per year was considered healthy for stable, multifamily properties. Average same-store NOI growth for US equity REITs was approximately 2.9% in 2024. For small, undermanaged portfolios, NOI can rise by 10% to 25% in the first 12 to 24 months with professional management. This can be achieved through operational improvements and doesn’t require major capital investments.
Tenant turnover affects NOI in several ways:
Mixed-use properties can stabilise net operating income by combining residential and commercial or retail income, if set up correctly. Commercial triple-net leases offer steady, long-term income. They also let you recover expenses through the CAM charge. On the downside, commercial vacancies usually last longer. They also need a different leasing strategy. The best approach to maximizing mixed-use NOI is to control the residential and commercial portions separately.
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