One of the great aspects of being an apartment building owner is the ability the owner has to increase value in a variety of different ways. All of these methods for increasing value will not apply to every apartment building, however, I would venture to propose that there is not one apartment building in any state in this country that could not use at least one of these methods to create more value very easily. If you compare this ability to other investments like stocks or bonds you can truly begin to realize why so many fortunes have been built by investing in multi-family properties.
Forced Appreciation — Forced appreciation is any repair made on commercial real estate that “forces” the value of the property to appreciate.
Cosmetic Repairs:
Making cosmetic repairs makes the property more appealing to potential tenants while also keeping current tenants happier. Repairs that can have a dramatic impact on appearance include painting exterior walls, painting interior walls, repairing the landscape around buildings and replacing aged, dirty and worn out appliances.
Raising Rent:
This may seem like an obvious way to increase the value of an apartment building but it is truly surprising how many rental buildings are charging rent that is 10% to 20% below market rates. Many smaller apartment building owners manage the property themselves and thus find it easier to keep rents below market to retain tenants. This theory is flawed in practice because it doesn’t take into consideration that, nowadays especially, many people will move from an apartment for reasons having nothing to do with the rent. For example, many people relocate for better job opportunities in another city.
Replacing Utility Equipment:
If an apartment building owner is paying the electric bill for common area lighting he or she can save a lot of money every month by simply replacing all of the lighting fixtures with energy efficient bulbs.
Article Author:
Ted KarschTed has written 60 articles for us.
Visit Ted's Website: http://www.apartmentbuildinginvestor.com
Joshua Dorkin
Charles Feldman
Ted Karsch.
{ 5 comments… read them below or add one }
Curb appeal is the first place to start. When it comes to apartments they already have a negative reputation so it is easier to rent or lease apartments to people when the building looks good.
Maintaning rental property and staying currnet with market rate, as in $’s per sq ft, is the best way to get the most out of your investment.
Amen to the paragraph on raising rents! Investors must realize that multi-family buildings are appraised based on an income approach. If you don’t raise your rents to keep pace with the market, you are not allowing your building to appreciate.
It is extremely important that you reset your rental rates every time a lease comes up. If you don’t, you risk not being able to refinance the building when you need to on the terms and at the loan amount you want.
Ted,
Is there a standard for ratio of expenses to income.
Raising rents in rent controlled areas is a joke. Some cities only allow 3% (Los Angeles) which doesn’t even cover the cost of utility increases. There are so many vacancies here that people are once again offering free flat screen televisions, low or no move-in costs, etc. Unfortunately, with the competition, we have to lower the rents, as small mom and pops, to get someone to rent. We just can’t compete with what the larger complexes are offering, as well as not having the amenities they do.
DO NOT buy in rent controlled areas. These cities have inspections and REAP programs where they take your building away and allow the tenants to pay one-half of their rent until their ridiculous violations are cured. Seems LA City wants to eliminate affordable housing by forcing owners into bankruptcy.