Multifamily properties allow investors to enjoy a steady monthly income from resident rent and profits from appreciation when selling the property. Investors can maximize these profits at the project’s termination through forced appreciation. Here are some key ways to increase the value of an apartment building.
Kent Ritter is an experienced multifamily investor and operator helping you to build real wealth through real estate syndication. Learn More
How to Value an Apartment Building
Whereas residential properties use market comparisons to assign value, income-producing properties very much rely on net operating income to determine the market value.
The capitalization rate, or cap rate, gives investors a quick view of the potential ROI for a property:
- Net Operating Income (NOI) / Capitalization Rate = Market Value
How to Increase the Value of an Apartment Building
Increasing the net income of an apartment building can increase the property’s overall value. This is called forced appreciation, because as you increase the net operating income (NOI), you increase the value of the property. You can control the property value of multifamily properties, unlike residential property whose value is dependent on solely on the market. Creating new income streams, adding amenities and services, reducing costs, and property renovations are some of the top ways to add value. Let’s take a closer look at each:
Create New Income Streams
Rental income is the most obvious and significant income source for an apartment building, but it does not have to be the sole stream of revenue. As people increasingly value their time, apartments have the opportunity to provide services to make life easier for their tenants—at a cost. Another way to view this is that apartments can redirect dollars that the tenants would otherwise spend elsewhere, like a laundromat, to their own pockets.
Monetize Parking
Buildings with any available space for tenant parking are sitting on an untapped income stream that can be customized to fit the demand of the local market. For example, offering limited covered parking at a premium creates new income in less-dense areas where parking is not an issue. Required fee-based permits for additional cars or options to buy temporary spots for guests can also bring in extra income. Buildings that already charge for parking can increase revenues by creating a tiered system that makes the most convenient spaces the most expensive.
Add Vending & Laundry Machines
A fee-based parking system may require additional infrastructure and staff management, but the implementation of vending or laundry machines are much lower maintenance. Vending machines in particular are usually wholly maintained by the vending company, and coin-operated laundry maintenance can easily be contracted out.
Add Internet & TV Service
This is one of my favorites, because it does not add an additional financial burden to the residents. They are already paying someone, but we are able to provide a better service for less cost through our partners programs. We pay the upfront cost to run the internet to the property and wire the units, but the ROI is significant.
Add Amenities & Services to Increase Rent
Rent increases are crucial for increasing income, but those increases must come with something in return to attract and retain tenants willing to pay higher rates. Consider adding value for the tenants through improving or creating amenities and other services.
For example, tenants can more easily justify a building with higher rent if that building’s fitness center replaces their need for a monthly gym membership. Dog parks, pools, coworking spaces, spas, and game rooms are all great amenity ideas to attract high-paying tenants.
Tenants also want services that improve their quality of life. Some ideas include adding a 24-hour secure package and mail room, valet trash service, electronic payment systems, and more.
Reduce Costs
Net operating is not improved only by increasing income. Reducing costs is just as important, and one of the most effective ways to do that is to consider the management company in place.
The management company serves as the public-facing arm of the apartment building and handles both the retention of current tenants and the recruitment of new ones. As such, its effectiveness, or lack of, is directly related to rents received.
Next, evaluate subcontractor costs and whether competitors have lower rates. Again, this may be another task delegated to the management company, reinforcing the need for a reliable, competent management company.
The management company should not be the only efficient part of an apartment building. Energy audits can identify options for reducing utility costs like improved insulation or building materials. Alternatively, consider passing more utility costs off to the tenants.
Property Renovations & Improvements
Making improvements to the property can help to attract renters while increasing the value of the property. While interior renovations may seem like the best way to add value, don’t forget about the exterior. Improving curb appeal can make a major difference in drawing in tenants. Adding the latest technologies, like smart locks and thermostats, can also give your property a modern, cutting-edge feel.
An Opportunity to Refinance
Identifying ways to increase income and reduce costs can increase the final sale value of an apartment building. It can also create an opportunity to refinance the property. Under the 2017 Tax Cuts and JOBS Act, proceeds received from a refinance are tax-free, so taking advantage of opportunities to increase an apartment building’s value has multifaceted benefits to investors.
What’s Your Next Move?
Kent Ritter is an experienced multifamily investor and operator helping you to build real wealth through real estate syndication. Learn More
