Browsing: multi-family investing


  1. Prices are Falling — Prices for apartment buildings are steadily dropping. Many apartment building owners paid way too much for their properties over the past few years and now their properties are worth less than what they owe. Apartment buildings are starting to show up as foreclosures across the country and it is further pressuring prices to the downside.
  2. Forced Appreciation — You don’t have to wait for real estate prices to go back up to increase the value of your apartment building investment. You can increase the value of you apartment building by increasing the rents, cutting your expenses or by making physical improvements on the property.
  3. Less Competition — Many investors are under the false impression that owning an apartment building is more difficult than owning single family homes, therefore their is less competition for prime properties.

As investors, we’re always looking for ways to increase the value of our properties. Most of us are familiar with the more conventional ways of doing so: decreasing expenses and increasing income. What if I told you it was possible to increase income without raising rents or decreasing expenses? Let’s explore a few ways that is possible.

Increasing Value with Vending Machines

If you own a fairly large complex, it would make sense to install a vending machine. Assuming you’re an expert of your market, you could effectively target your tenants by placing products you know your tenants would want in the machine. The best place to put your vending machine is in an area that generates a solid flow of tenants; the laundry room or near the pool (if you have one and your property is located in warmer markets) are two good choices. Even modest vending revenues increase the property’s value significantly. Assuming the property is in a 6% Cap rate area with yearly vending revenues of $720, you would have increased the property value by $12,000! Not too shabby given our modest revenue assumptions.

Tapping rarer, but more lucrative, value potential


As real estate investors, we know that the value of commercial buildings is determined by dividing its Net Operating Income (NOI) by its Capitalization Rate (Cap Rate). By definition, Value = NOI / Cap Rate. In other words, the property’s value is greatly magnified by relatively small increases in Net Operating Income. To illustrate, for a given Cap Rate (say 6%), every extra dollar in NOI increases the property’s value by $16.67 (=$1.00/0.006). In low Cap Rate areas like San Diego, that means there’s a huge opportunity to increase your building’s value dramatically!

Factors Affecting NOI

There are a number of obvious things one may do to positively affect the NOI of a property: raise rents, cure vacancy, decrease expenses. Well, what do you do if your building is 100% occupied at above market rents, and the property is so efficiently managed that you can’t think of a way to decrease expenses? Should you accept the status quo and simply keep up the good work? You could, but where’s the fun in that? You would be overlooking the unlimited number of ways to optimize not only your property’s NOI, but your returns as well.