Adding Value To Commercial Rental Property By Recognizing Underutilized Space
I recently sold a commercial rental property that I had owned for about 10 years. And when I did so, I pocketed an extra $60,000, simply by renting out what had previously been underutilized space.
The investment property was a mixed-use building with commercial space on the main floor and 3 floors of residential apartments above. When the building was originally constructed, a sauna and hot tub room had built on the main floor for use by the residential tenants. When I bought the building the room had not been used in a while. My first thought, and luckily I came to my senses at some point, was to "refurbish" the hot tub and sauna and begin allowing the tenants to use the facilities. My second thought, and a much better one than the first thought, was to instead lease the space as a storage area to one of my commercial tenants for $150 per month.
That's $1,800 per year. At a 9% capitalization rate (which is what I sold the building at), that's $20,000 in extra value.
On to the residential areas to look for more money!
Each of the residential floors of this commercial rental property had its own storage room. They were good-sized rooms, perhaps even big enough for small studio/bachelor apartments. Unfortunately, the way the building was designed, only a corner of the room touched an outside wall. Extra suites were out of the question.
For those of you who have ever lived in an apartment building, you understand what a premium storage space can be. So, I offered two of the storage areas to tenants as storage space, and kept one for building storage. (carpet cleaners vacuums etc.) The previous owners had let storage areas become junk rooms over the years, so I had them cleaned out and then rented to the residential tenants. Another $150/room, times two rooms equals $300 per month or $3600 per year. At a "9 cap" that's another $40,000 in "found" equity. And since I didn't do much of anything to the spaces except clean them, that $60,000 in increased value was pretty much "free money".
The next time you are looking at a commercial rental property for potential purchase keep this strategy in mind. Never assume that the current owner is maximizing the value of the property, especially if it is a distressed sale.
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