You may want to consider value-adding components to make the most out of your property investment.
But what exactly are value-adding components?
A commercial property, such as an apartment complex, generates income on a monthly basis. Also known as a net operating income or NOI, this amount determines the annual value of the property itself. Rent and utility payments made by tenants are included in the NOI. The cash flow coming from these payments lets the property appreciate over time. On the other hand, mismanagement and a failure to collect rent can work towards diminishing the property’s value.
In this sense, value-adding components provide opportunities for opening new income streams. Your NOI grows and your property appreciates over time as a result.
Let me give you one example. Let’s say you bought a multifamily property at a capitalization rate of 9.5%. The NOI based on rents and other fixed income alone is pegged at $156,600. In five years’ time, the property would grow in value at $1,648,421.
Now, supposing you have decided on increasing the rent and let tenants share in the utility bills. These value-adding components allow you to add an extra $71,901 to your NOI. At the same capitalization rate of 9.5%, the property would grow in value to $2,405,274 within the next five years.
From this illustration, we can say that value-adding components can help increase a property’s worth and result in a higher cash flow for you and your investors. If you want the property to appreciate better, it’s important to implement the right value-adding components that will impact your bottom line. Still, you need to be very careful since tenants are easily turned off if they are asked to pay extra for amenities. As a good rule of thumb, take time to calculate for an optimum increase in the NOI without giving your tenants a good reason to vacate.
I would suggest the following value-adding components for your multifamily investment.
Giving the property a thorough makeover is one way you can add value. If you invest in a new coat of paint for the property, landscaping projects, and carports, you can pass these expenses over to your tenants. As long as they are paying for the improvement of the property, your tenants won’t mind paying for an extra item in their monthly billings.
In many cases, property owners shoulder 70-100% of the monthly water, sewage and other bills. We have found that these utilities were not charged back to the tenants to the degree that the state or local authorities allow. You can let your tenants pay for a percentage as a bill back. This is commonly called as RUBS (Ratio Utility bill back system). So, we can use an outside company to do the individual billing to the tenants or use a simple way to charge the tenants a flat monthly rate depending on the size of the floor plans at the community. This will lessen your utility expenses and increase your NOI considerably.
Another way to open up a new income stream is to set up card/coin-operated washing machines within the property. Not only do they provide convenient laundry services to your tenants, they can also open up a new income stream. They won’t bring an immediate impact to your NOI, but the payoffs will show if you give it enough time.
These are a few other amenities that we can provide the tenants for their conveniences and charge a fee to increase income. USB outlets, lighted faucets, and high-speed internet are some other items that can be provided for a small fee.
If the community turns out to be an emerging market, you will be in the position to raise the rent, hence increasing your NOI. Job growth, a great business climate, increasing wages, among other factors, can work towards turning the community into an emerging market. In this sense, it would be best if you research for markets with a high potential for economic growth. You can then purchase multifamily properties in these markets.
I hope that these value-adding components can help you increase the profitability of your multifamily investment.