Value-add is the manner that we force appreciation on our properties. Forcing appreciation means instead of holding the properties long term to create a large increase in value, a period of time is set to take money that was set aside for our renovation to make value-add changes. This “forces appreciation” because the value enhances immediately as compared to just holding the property for a long period of time and giving freedom for immediate rent increases and value of the land.
The amount of forced appreciation can be computed by using the formula Net Operating Income over the cap rate. On the other hand, Net Operating Income (“NOI”) is income minus all types of expenses. The cap rate is more commonly known as the capitalization rate. The same is the yield of a property over a one-year time frame with the assumption that the property is purchased in cash and not with a loan.
You can readily witness the huge impact that incorporating a specific renovation has on the entire purchase value. For example, if you increase the net rents by $10 each unit on a 50-unit complex at a compressed capitalization rate of 8, it would simply increase by $75,000 in value to the purchase prices in just a year.
Isn’t that CRAZY AMAZEBALLZ AWESOME!?!?! Just imagine looking for a gem complex that is 15% below the rental levels in the market. That is a good find!
So, let’s get to the meat of this post. We have listed some of the things you can do upon takeover of the multifamily complex to force appreciation in a period of one (1) to four (4) years:
- Utilities. More commonly known as RUBS, the Ratio utility Bill-back-to-take the present bills by which the complex is paying and divert them back to the tenants. This is a matter of incorporating the accounting and business perspective.
- Application fees. This includes the credit check and background check. There is a corresponding fee for this type of service. And you can take over this task with the business side in mind.
- Returned check fees or late fees. These are types of fees that coincide with default in payment. You can also take over this kind of service with business in mind as this posts a legitimate concern with corresponding penalties.
- Pet fees. For tenants that have pets, pet fees are equally important. And you can also incorporate this into your management for your complex.
- Pet Rent. Pet rents will also help you with your force appreciation of not more than four years. Again, this is also a legitimate thing since pet rents are not new to the real estate industry especially those who are managing multifamily units.
- Parking. Of course, parking is at the top of the list. Almost all multifamily complexes have parking destined for each tenant. But there is a fee on top of the rental fees for the unit itself. Fees may vary depending on the availability of parking space.
- Cable TV service and fees. Cable service also adds significant value to your unit on rental charges. Units with cable TV are regarded as a premium and it may help with your force depreciation in no time.
- Facilities fees. We cannot deny the fact that some complexes possess good and grand amenities. There are fees on top of using such and it can also help add value to your units in your multifamily complex.
- Laundry facilities. This is also part and parcel of the majority of the multifamily complexes and the same can maintain service. The tasks can also be outsourced bringing 20% of the income.
- Low flow toilet, showerheads, faucet aerators. With these fixtures installed, this will possibly save at least 1/10 of the water bill for the entire complex.
- Curb appeal. This will not instantly translate into money but the idea is that more traffic means more prospects that will turn into occupancy. Ergo, there will be less expensive in terms of advertising.
- Upgrades on each unit. This item is where you can really charge more each unit after renovation, depending on the type of your market.
- Office. It is imperative to always upgrade the office to one notch higher than the complex itself. It is the primary thing individuals see when they come in and will be a huge sell-out if it is comfortable, cozy, class, sophisticated, and has something hot such as freshly baked cookies and hot coffee.
- Wasted space. If you have some space that is not used, you better incorporate tons of value for sale by adding more units. This will help you in your force depreciation plan.
- Amenities. Amenities include features like clubhouse, gym, benches, playground chairs for pools, barbeque grills, depending on their class. Well, basically, it is crucially needed in class A type of complexes. Upgrades like these are dependent on the need, preference, tenant type, complicated neighborhood, and other similar parameters.
- Renovation on exteriors. This is somehow related to curb-appeal where if the multifamily complex is beautiful and enticing, the less you need to shell out a significant amount of money on advertising. In turn, the nicer it will feel to residents. The more security you incorporate the better since everyone feels about where they live; the longer they will stay. This will augment vacancy and translates to more money you will generate.
- Vacancy and economic loss. It is given that you may tend to lose a significant amount of money when there is a vacancy or loss to lease. So this is not just simply physical vacancy, but it also includes non-payment of tenants. This is something that should be monitored on a monthly basis upon one’s takeover. There should also be periodic monitoring on a quarterly basis as soon as your renovation tasks are finished. If your tenants are not paying on time, you need to check with your property manager in terms of how he/she handles new tenants.
The 3: income requirement/principle must be justified by present pay stubs, and they should possess good credit. You can still work with them even if they do not possess an excellent credit rating. However, you may charge an additional month’s rent to cover for one month. The property manager’s approach should be that if there is a missing payment by the third of the month, late fees rack up and the tenant gets notice of eviction. At least, you have a couple of more days to replace the new tenant and that period is covered.
- Utilizing one internet provider and/or energy broker. This can add value and additional income to the complex.
Accordingly, these are just some concepts that can be used in generating more money and at the same time, adding value to each apartment unit.
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