While residential investors are at the mercy of the market for appreciation, commercial real estate investors can actually make their properties appreciate regardless of market conditions.
We’ve all been hearing about the decline of the housing market. The residential investor’s equity is eroding away right before his/her very eyes. Until market conditions improve, residential investors shall remain at the mercy of the market for their profits.
Although appreciation resulting from market conditions is a consideration to the investor of investment real estate, the right owner or operator can increase the value of the investment by increasing the cash flows.
That’s why you are in a better position than residential real estate owners. An investment property is valued mostly based on these cash flows.
This is called Net Operating Income (NOI)
Because property value is based on NOI, if you can increase the NOI, you, not only increase your cash flow, but you also increase the property’s value.
So, how do you increase the NOI?
Begin by taking a look at the properties potential not just it’s historical data. Because the value of investment real estate is primarily driven by the cash flow that the property generates NOI, any strategy you employ has the potential to increase your cash flow, decrease your expenses, and increase your overall equity and the value of the property.
Below are five strategies you should consider when determining how you can make the most out of your real estate investment.
#1 - Make Improvements to the Property
Improvements can take the form of cosmetic improvements, energy efficiency retrofitting or substantial rehabilitation.
Cosmetic improvements include such things as new paint or wallpaper, new décor to the common elements, new landscaping, new carpeting/flooring, etc.
Energy efficiency retrofitting can pay for itself very quickly, things like light bulbs and ballasts, window tinting, awnings, insulation and weather-stripping are very inexpensive and yield impressive returns. Even though many landlords have the tenants paying for these costs, the reduced payment can yield higher rents.
Substantial rehabilitation involves making structural improvements to the property – for example a substantial rehab may involve redoing all the units of a multifamily property, or changing the structural façade of a shopping center, or making major renovations to the lobby of a large office building.
A dead-end hallway can be turned into usable space, especially if there is a window, as can extra storage rooms. Storage rooms can be rented out separately to tenants or used to enlarge adjacent spaces; both steps would generate more revenue.
If they are big enough, the spaces can even be converted into efficiency apartments or small offices.
On the other hand, if a space is too large to lease to any one tenant, you can divide it into smaller spaces and rent it out to several tenants, in many cases for more than what the original space would have gone for.
In any case, you increase the value of the property for not only your tenants, but for your own portfolio as well.
#2 - Increase Rent
This is the most obvious and of course, you won’t win many popularity contests with this simple tactic, but you will probably increase your cash flow, which, in the end, helps to make a property more valuable. (You may run the risk of increasing vacancies in the process.)
There is a way to do it, especially if the rent increase is combined with energy efficiencies.
Increasing the rent can also increase the value of your investment real estate property. In reviewing the historical data on a property, take notice of whether the tenants are paying market rent or whether there is potential for a reasonable mark up in rents.
Determine how the improvements you make to the property can justify your rent increase. Pay close attention to both the upper and lower level of rents that are being charged for similarly situated types of real estate so you don’t price yourself out of the market.
#3 - Decrease Expenses
This is where the real magic can happen.
Evaluate the historical operating statements of the property to determine if there are areas where you can decrease the expenses.
For example, improving the mechanical system of a building — the air-conditioning or heating, — to make it more energy-efficient can significantly reduce operating expenses. Depending on how long you plan to hold on to the building, you may eventually recoup your initial outlay.
Perhaps improving the property with more energy efficient light bulbs in the common areas will drastically reduce your monthly electrical bills. Or perhaps you find that the gas company can individually meter the units so that instead of paying for the gas, you can fairly pass that expense onto the tenants. In the vast
majority of instances, an investment property owner can cut expenses without significantly impacting the operations of the real estate itself.
Future buyers and tenants will find an energy-efficient building more desirable.
Always challenge the tax appraisers. It is easier to reduce your taxes than you think.
And lastly, make sure you discuss the properties safety items with your insurance broker. There are things you already do which should cause your insurance rate to go down. Make sure your broker knows you have things as easy as fire sprinklers, security cameras, fencing and gates. All of these items will reduce your insurance bill.
#4 - Alter or Change the Property’s Intended Usage
This is the hardest of the five, however you might be surprised how easy it has become over these last few quarters. With very few building permits being requested the city is more willing to take a look at this kind of change it can have a HUGE impact on your properties value.
Often times, changing the use of a commercial real estate property can drastically change the value of the property. For example, if you own an old industrial warehouse in the middle of a bustling epicenter, instead of keeping it as an industrial warehouse, you can seek a zoning variance to convert that warehouse to a hotel, or a condo building, or an office building, or any commercial use that makes sense for that location.
You can call these private zoning changes. Essentially, an easement gives you the right to use another property — to gain access to a roadway, perhaps, or to trim the tops of trees to obtain an unobstructed view.
Some property owners will even seek an easement to have a more prestigious address, which, in turn, can add value to a property. You could go to a nearby property owner and arrange for the use of some alley or walkway.
#5 - Add Amenities
Finally, you can also consider adding amenities to the property to make it more appealing and valuable. We believe this is becoming the way the most successful property owners are going to conducting their business in the future. (More on this topic in a future report).
Value enhancing amenities can include something simple like creating a playground in a multifamily property or adding free wireless Internet for your retail tenants.
Or you can add more extravagant amenities like a daycare center in your office building or an outdoor courtyard in a hotel property. (Hints of our other report)
Parking is crucial in attracting, and keeping, good tenants. If there is enough available land, you might want to consider adding spaces.
Not enough room? Look to other avenues, you could rent from a nearby nightclub during the day, when the spaces go unused.
Or, charge for parking, especially in downtown areas where spaces are in short supply. It can be a revenue adder, which increases the income.
Let's Take An Example:
Same Property, a little higher rents and some good cost cutting of expenses and you increase the value of your property by 25%.
So you can see that you can influence the amount of money you earn from cash flow, but you can also control the value of your investment regardless of market conditions.
By investing in Real Estate, you earn a return on your investment from Day 1 because of the significant cash flows. Additionally, you control your return by improving the NOI through your own efforts; you can increase the value of your property regardless of market conditions.
This report has been written in the hopes you can find a way to increase the value of your investments. These techniques work. They have been used over and over again and possibly have helped your neighbor with his investment property.
CREOS can assist you with any or all of these techniques if you do not want to implement them yourself. Any fees you pay will easily pay for themselves. We have much more to offer and we welcome your calls and questions on this report.