Have you ever wondered why the big players in residential real estate investment don’t focus on single family homes, but instead buy apartments? There are several reasons for this, but the big one is control. Owners of larger multifamily property (5 units and greater) can control the value of their property to a much greater predictability compared to single family and small multifamily (2-4 units).
In apartments, the options on ways to increase the value of the property are only limited by the owner’s creativity. In this article, I will list just some of the endless ways to add value.
Before we jump into the list, let’s do a quick rundown on how properties are valued.
1-4 Unit Property
These properties are valued based on the comparable sales approach. This means if a 3-bed, 2-bath home in similar condition to your 3-bed, 2-bath in the same neighborhood or one very similar sold for $X, then your 3-bed, 2-bath home is also worth $X because that’s what the market has determined your property is worth. When you hire an appraiser, this is precisely what he/she is doing. They find comparable sales “comps” and use them to give your property a value.
5+ Unit Property
These are valued based on the income they produce. Everyone buying these types of property are buying them to make money, so that is the universal focus. To find their value, you find the net operating income (NOI). NOI is simply all the money you made minus all your expenses, not including the debt service payments. We don’t include the debt service because it can vary from one owner to the next. In other words, NOI is all the income the property can produce minus all the expenses the property requires to operate, regardless of who the owner is. Once we have the NOI, we divide it by the capitalization rate for the area. The cap rate is the rate of return the market has determined is adequate to deploy capital for this type of property.
If this is how apartments are valued, then we can see that if you are able to decrease expenses or increase the income, then the value of the property will go up. Even if you save one dollar, the value of the property goes up. If you want a more detailed explanation of how we find value on apartments, check out another article I wrote here.
If every dollar you decrease expenses or increase income adds to the value of the property, shouldn’t we all be trying to do that in any way possible? The answer is yes, but often owners only focus on the obvious, conventional ways, such as raising the rent. That is a good one, but as I mentioned before, the list is only limited by the owner/manager’s creativity. Below is a list of just some of those less conventional ways to add value to your apartment building.
Before you skim over the list and think, “No thanks, that will only earn me about and extra $500 a year — not worth it,” know that this incentive isn’t the extra $500 in cash flow — it’s the increase in value. If your property is a 6% capitalization rate, that extra $500 a year adds $8,334 to the value of your property. Find 10 ways to add $500 a year income and 10 ways to decrease your expenses $500 a year, and you will have added $167,000 to what your property is worth.
12 Creative Ways to Add Major Value to Apartment Buildings
1. Sub-Meter Utilities
We have all driven past that apartment building in the middle of winter where the tenant has the windows wide open, heat blasting. We also all know the tenant who never reports that their toilet is constantly running because they don’t pay for water. Depending on the mechanics of the property, sub-metering can be one of the largest value-add activities.
2. Washers and Dryers
The number one amenity currently added to rental leases are washers and dryers. This could add $40-75 per month to your income.
3. LED Lighting
If you are a long-term buy and hold investor, LED lighting in common areas is a no-brainer. First, it uses so little energy, you save on the utilities. Second, the bulbs last 25 years, so you aren’t paying maintenance to change them.
4. Vending Machines
Yep, the income produced from a vending machine can increase the value of your property. I have seen these in several settings: 1) in common areas, such as placing a drink or snack vending machine in a gym area or around the pool, 2) in common area laundry rooms that have laundry and other household essentials in them. Think single serving detergent, stain remover pen, carpet stain remover, fabric softener. The best part is you don’t have to buy the machine. Just like with coin laundry, many companies will place and service vending machines, and you get a percentage of the income.
5. Garage Parking
People can and do pay more to park their cars or have additional storage in a garage. Adding an additional charge for garages is common and can be worth building garages in some instances. A less expensive substitute would be carports.
6. Prime Parking
We all have done it — you turn into a parking lot and yes! — the front and center spot is open for you. Tenants will pay to reserve those special spots. Pop a few signs in the best spots that say “Reserved Premium Parking for Rent.” This will add more income to your bottom line, and the value of your property will go up.
Although this one is pretty conventional, I thought I’d list it anyway. By renovating the interiors, common areas, or curb appeal you can increase demand, which will allow you to push rent rates up.
8. Trash Pick-Up Service
Do you have a full-time maintenance man on the property? Why not utilize him for custom services? A friend of mine had a resident who hated carrying her heavy trash bags to the dumpster. He then offered for the maintenance man to come pick up her trash outside her door two times a week and walk it to the dumpster for $20 a month. Other residents saw this and asked for the same service. Now it is an option for all his residents. The handyman makes his rounds twice a week and collects. Residents love the option.
9. Pet Rent
If you’re allowing pets and not charging for them, you’re missing out. I have seen pet rent as high as an additional $100 a month.
10. Storage Units
Have you ever lived in an apartment? Is there ever a good place to put all those boxes of old books, your bike in the winter, or whatever else you want out of the way? Well, most people are this way, and that’s why they are willing to pay for what is essentially an extra closet. For our units, we charge $19 and $29 respectively for 15 sqft and 30 sqft storage closets that were built into an old, unused laundry common area.
11. Cable Bill Kickback
In larger complexes, owners can sign exclusives with cable providers and receive a small kickback from when residents sign up for the service.
12. Renegotiate Expenses
As investors, we often focus on how to make more money. Just as important is how to spend less. In apartments, the operating expenses will include quite a few expense accounts. Landscaping, snow removal, cleaning, management, maintenance, dumpster fees, and many more items are all things you can look at for ways to decrease operating expenses. It could be as simple as calling around for quotes on grass cutting or calling the dumpster service and renegotiating the monthly fee.
In today’s market climate, multifamily is very competitive, and adding these unconventional value-add tactics is a great tool to have in your belt when they fit your property.
What I really want to stress is the value added to the property more so than the extra cash flow. Cash flow is good, but the value can be captured through refinance or sale. Multifamily allows control, and although everyone knows cash flow is king, creativity is a close second. With creativity and control, amazing wealth can be built in multifamily.
Apartment investors: Anything you’d add to this list?
Be sure to let me know with a comment!