When investing in multifamily apartments we, at Syndication Capital, practice the value-add investment strategy. Meaning, we purchase underperforming multifamily apartments and increase its value through interior and exterior renovations, as well as by reducing operating expenses. In this series, I’ll identify 6 actions to take to increase the value of any multifamily apartment property thereby putting more money in you and your investors pockets.
If your rents are below the market average, you and your investors are losing out on some pretty sizable returns. Raising the rents is a must in order to maximize ROI. Periodically conduct market surveys, create rental comparable reports, and stay abreast of neighborhood rental trends.
Pro TIP: One way to know your apartment rents are undervalued is if you rarely have vacancies. This may sound counter-intuitive, but think about it, if the reputation of your apartments is that its the best deal in the area that may mean in tenant speak that it has the cheapest rent in the area.
Couple of caveats, when raising the rent tenants typically expect noticeable improvements or a valid reason for the increase. Also, go slow. Don’t make a gigantic increase over small step by step incremental increases. The point is, be justifiable, professional, and don’t scare your tenants away.
I pointed out how tenants expect noticeable improvements when raising rents. This post speaks to that concept, but more in detail. Property improvements can add value in more ways than one. Upgrading units with new appliances, paint, lighting, flooring, etc, as well as giving the landscaping an attentive face lift allows for rent increase. Improved exteriors and interiors will give tenants a sense of prestige value and potential tenants will be attracted as well, seeking a new updated living experience. In fact, adding value can possibly move an apartment into a higher class, say going from a C Class apartment property to B Class one.
Reducing operating expenses will increase the net operating income in the same way as raising the rents does. When the NOI goes up so does the property’s value. Conduct an expense audit to seek, find and destroy those expenses you can do without or cut. In my experience, this is where a good property manager can be worth her weight in gold. If she manages a lot of units she hopefully has the experience of knowing which expenses can be cut and which can be eliminated. For example, if the property manager can put all of her owners’ properties under one blanket insurance policy instead of each owner having a separate policy, owners can reduce their insurance expense tremendously by being under the PM’s bulk rate and paying less for the same if not better coverage.
Depending on the age of the apartment property, utilities can be a hefty expense for apartment owners who are stuck paying all the residents’ utilities due to the property not having individually metered units. However, there’s a way to offset those expense without raising rents by billing the expenses back to tenants, thereby reducing expenses which increases the bottom line. A R.U.B.S. (Ratio Utility Billing System) program allow owners to bill tenants back the cost paid out for their usage of trash, water, gas, and electricity. This bill back fee can be determined by a tenant’s unit square footage, the number of occupants in a unit, or a combination of both. The best part, the owner does not have to invest any money to implement the program and it can be started immediately.
Another example, let’s say you have a gas heated property that’s warmed with boilers, but the electricity is individually metered and the tenant pays. To cut expenses, you could shut down the boilers and install electric baseboard heaters in each unit.
Only thing certain in life is death and taxes. We’ve all hear that before. When it comes to owners paying apartment taxes it is just as certain as with any other type of owned real estate. However, what you may not know is the taxes can be argued against if you think they are too high. In most cases, when you and your investors buy an apartment property it will be for more than what the seller paid for it. Because of that, the taxes on that property will be different post purchase. When the taxes are reassessed (the reassessment is determined by the market value a.k.a. purchase price) it can be a shock. To possibly lower the tax bill it is smart to present a case to the tax accessors board of appeals, make sure you get an specialized attorney for this, and a property appraisal, to argue the bill is too high and needs to be more manageable.
I’ve seen this one happen a lot of times. Just like any big entertainment company or sport franchise that mismanaged, new management comes in and saves the day, by increasing revenue, optimizing performance, implementing new effective ideas and philosophies, and jolting the organization with positive energies. The same happens with mismanaged apartment properties. Bringing in a right, new property manager can add tremendous value to a property’s bottom line. Whether its new ideas, on how to increase income, reduce expenses without harming operations, enhance the tenant experience, or giving the property a welcoming or inviting feel for prospective tenants. All of it can contribute to the increase of the property’s value.
Are you interested in learning more about creating turnkey passive income and generational wealth through multifamily apartment investing? Visit syndicationcapital.net for more information and our FREE PASSIVE INVESTOR E-BOOK.