When I first became a licensed Realtor many years ago, I began to work towards what I thought was the next big step – getting my Real Estate broker’s license. As many of you may know, doing so entailed that I take many Real Estate investing and appraisal courses. It was at one of these courses where I first heard the phrase ”the highest and best use of property,” and I didn’t fully quite understand the topic, that was until I found myself a few years later in a situation where I was looking to increase the value of one my rental properties. So instead of just sitting idle, I decided to get creative and revamp the house to generate more income then ever before. This creativity has even carried onto not only my residential ventures, but also with some of my commercial deals as well.
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Residential Real Estate
When looking to get creative with any residential property, there are always multiple factors you have to look at, like: is there any extra space indoors? Could one bedroom be split into two without an incredible amount of rewiring or rerouting plumbing? Could one room be switched for another to create more space? Could you do both? I know I did at one of my rental properties, where I had a 3-bedroom house with a dining room, kitchen and 2 bathrooms. As far as kitchens go, the room it was in was small, so I decided to turn the dining room into a larger kitchen and make the original kitchen into an additional bedroom. The costs for doing so were minimal since the house needed a kitchen anyway and I was able to get an additional $200/month for rent for the additional bedroom! Now you don’t always have to shift around rooms either, I’ve cut bedrooms in half and turned attics into lofts in more properties than I can count.
There is also another great way to add revenue to your residential rental, and that’s if you have enough extra outdoor space. In fact, my best rental properties aren’t even houses at all, they don’t have most utilities, and the tenants don’t live there. They’re actually garages! I built four commercial size garages behind the first duplex I ever bought. I had some extra ground that wasn’t really being used for much, so I decided to place some pre-fab garages. Not only did I almost double the value of the property and cash flow like crazy, I had fewer tenant headaches.
Commercial Real Estate
I once bought a three story, six unit, commercial apartment building with three efficiencies and three two-bedroom units. It was a total nightmare. The efficiencies had high turnover, the building only had one heater, and the tenants were constantly fighting. The turnover and maintenance were killing me. The Township wanted a trash dumpster put in (because it was considered a commercial building) and they were charging exorbitant inspection fees per unit. And let’s not forget the commercial mortgage with a five-year balloon on the property, along with the required commercial insurance, was getting ridiculously expensive as well. So, I weighed my options and got the bright idea to combine the units and separate the utilities. I changed it into three-unit apartment, each with four-bedroom two baths, with their own laundries. Then I refinanced to a regular residential loan on a triplex. I didn’t need the dumpster or commercial insurance anymore and I only had to deal with three tenants instead of six. My turnover decreased since I had stable families move in (instead of the transient people that tended to cause more problems with neighbors) and maintenance went down drastically (with only 3 kitchens instead of 6).
But you don’t always have to rearrange properties to maximize profits; many people I know get creative from the get-go. A good friend of mine 1031 exchanged his residential units for a large commercial building just outside of Philadelphia. Instead of renting out the whole building to one tenant, he turned it into a shared commercial space and made a little business out of it. He would charge $450/month per office room so smaller scale businesses could now have office space right outside of Philadelphia for much cheaper than if they had to rent a larger unit. Tenants could choose to operate onsite with multiple rooms or be offsite, with either option they share a lobby, conference rooms, and they even share my friend’s two employees: a receptionist and a clerk who sorts mail, faxes, etc. These employees will handle calls and mail just like your own receptionist would at a large-scale company. He even leases televisions in the lobbies where other companies in the building could advertise – which is especially beneficial because most of the companies in the building were related to a similar industry. And since it’s right outside of Philadelphia’s city limits, it eliminates the city wage tax for both my friend and his tenants!
So no matter what the deal, there is usually an interesting way to make income if not more income by doing something besides traditionally renting it out. It’s like when people ask me if I’m afraid of competition in my note business, and the answer is and will probably always will be “no, because I’ll just be more creative.” I’m a firm believer in studying the great developers who have gone before us to gain great ideas and inspiration. A hero of mine, William Zeckendorf, wasn’t afraid to take risks and get creative. Zeckendorf, who was known for working with architects I. M. Pei and Le Corbusier, developed the land in which the United Nations building now sits in New York City, as well as Century City in Los Angeles. The United Nations building area was a slum before Zeckendorf, and he took huge risks developing the property (even going bankrupt in the process!) but that didn’t stop him. He went against the grain, and if you want to get the highest and best use of your property you may have to do that too.
So be bold, get creative!
And if you have already, tell me, what’s the highest and best use of your Real Estate?