Raising The Rents Of A Real Estate Investment Property
An Obvious, Yet Somewhat Misunderstood Technique For Increasing The Value Of An Apartment Building
The more cash flow that a real estate investment property generates, the more it is worth. Commercial real estate is typically valued based on its NOI (net operating income). Therefore, anything you as an owner can do to increase the NOI, increases the value of your investment property.
Single family homes, on the other hand, are typically valued based on comparables, or "comps". For example, if there are two identical rental houses on a street, yet one generates an extra $150 per month in cash flow, they are still valued the same. You won't find an appraiser talking about NOI when it comes to single family homes.
That is not to say, however, that comps are not used in the valuation process of commercial properties. (Any apartment building that has more than 4 suites is considered commercial real estate) Comps, as well as the replacement cost approach, are used in combination with what is called the income capitalization approach, which I touched on above.
Now if I were to ask you to provide me with one way to increase the cash flow of a real estate investment property, chances are your first response would be "raise the rents". And you would not be alone in that response. I believe that would be most people's response, and of course, it is a correct answer. Let's take a look.
On the surface it seems simple enough, raise the rents, therefore raising the NOI, therefore raising the value of the property. There are a few caveats to this train of thought. Here is one of the most common.
If you are looking at purchasing a real estate investment property beware of this common trap. The listing realtor or current owner will often tell you the rents are below market and you will be able to raise them as soon as you take over the building.
Do not believe them!
Do you own homework. They may in fact be telling the truth, but do not take their claims at face value. A better scenario for you as a purchaser would occur if the owner didn't realize that his/her rents were below market. That's the type of situation where you could perhaps pick up the property at a bargain.
Now, once you own and are managing (or a professional property manager is managing) an apartment property, you want to make sure that you are always on top of the rental market. Don't fall into the same trap as the previous owner and let your rents lag behind the market.
Always keep your properties "sale" ready. In other words, make sure your rents are maximized at all times so that if you did want to sell, you would get maximum value for your real estate investment property.
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