Adding Value to Apartment Investments
by Omar Ruiz
This article is about adding value to apartment investments by focusing on stabilized operations. Rehabbing a distressed property can provide numerous ways to affect a distressed properties value depending on its condition; therefore, this article is not about rehabbing. It’s about properties that are stabilized, to achieve operating efficiencies and maximum value.
It’s important to differentiate value created by market forces and value created on the income statement. Uncontrollable market forces can add value to apartment investments, due to location desirability, growth in the local economy and supply/demand factors that create market appreciation over time. There can also be sudden and/or immediate changes that affect neighborhoods (new developments, corporate moves, etc). Investors don’t have control over appreciation created from market dynamics, so it’s difficult make investment decisions on this.
2 Sides to the Story
This article focuses on activities investors have control over for adding value to apartment investments. Investors can add value apartment investments by focusing on the income statement. The income statement is composed of 2 sections: Income and Expenses. Subtracting expenses from the income gives you the net-operating-income. The net operating income is the final number that all value from an apartment investment will be derived. Let’s look at increasing value as it flows down to the net operating income.
Adding Value to Apartment Investments on the Income Side:
On the Income side we focus on ways to increase income that add value to apartment investments. The common way to increase income is by increasing rents. It’s easier to do on properties with under market rents, especially if you’re willing to pay for improvements. If your rents are at market or above, it may be trickier to do because your property can become uncompetitive. It’s important to study rent comparables to know how high you can increase rents.
There are other areas that income can be increased to affect the value. Allowing tenants to have pets and charging extra on the rent is a great way to get extra income. Providing valuable amenities like on-site laundry or washer & Dryer hookups can bring extra income and allow you to charge more. One a property we owned that had garages, we were able to rent out the garages for additional income that added value to our apartments.
For utilities on a master meter, you can bill back those utilities to your tenants. Service providers exist that can either attach sub-meters and calculate a tenant’s use, or they calculate using formulas based on square footage.
You can get creative by adding services or special amenities your tenant’s find valuable, such as covered parking or assistance with trash removal. It’s helpful to check your competition for ideas that can help you create extra income.
Adding Value to Apartment Investments on the Expense Side:
On the expense side the focus on ways to decrease expenses, thereby adding value to apartment investments. There are “fixed” expense (insurance, taxes, etc.) that are harder to affect and “variable” expenses that fluctuate and give you a better chance to reduce them.
For the fixed expense of insurance you can get new quotes and adjust your deductibles for a cost savings. Just make sure you’re not compromising coverage. Property taxes can be reduced by protesting any increase in appraised value. County appraisers have processes for challenging tax valuations. In certain areas there’s tax consultants that specialize in protesting valuations.
For variable expenses such as utilities, replacing fixtures is a good way to reduce costs. Water saving fixtures such low-flow faucets, shower heads and toilets will save money. If you’re property has a lot of common area lighting, consider installing LED light fixtures that use less electricity and last longer.
Getting new quotes on you contract services, such as landscaping, pest control, cleaning services, may allow for cost savings. Just make sure you’re not compromising quality and customer service. Communicate with vendors that provide regular use supplies like paint, caulking, plumbing, etc. and request bulk or contractor pricing to lower your costs.
The Bottom Line:
Every property is unique and there may be other ways of adding value to apartment investments. Regularly review your income statement for opportunities to add value either by increasing income or reducing expenses. Sometimes you just need to get creative and find new ways of adding value to apartment investments by becoming as familiar as possible with the operations.
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