Beginner Series - Forcing Value In Apartments

The Real Estate Espresso Podcast

The Real Estate Espresso Podcast is a show that speaks to sophisticated investors. Many of our listeners have large portfolios of apartments. They are investors in storage, industrial, land. We have lenders, economists, developers, project managers for the major national commercial builders all amongst our listening audience. This is a sophisticated audience. You know what cap rate is, what yield is, what an interest rate inversion.

But chances are, you the listener have a family member who is a stakeholder in your business, but maybe not an active participant in your business. We have been receiving feedback that from time to time, it would be great to provide some content that would accelerate the understanding for some of our less experienced audience members. Starting today, we are going to include two evergreen shows per month that include topics that are geared more towards the beginner audience.

On today’s show we are going to talk about adding value to an apartment. We are often lead to believe that value is determined by the market. When you sell an asset like a single family home in the open market, the sale price is more like an auction than a scientific formula.

In the world of multi-family investing, the most common measurement of value is the cap rate, or in other words the multiple of net income.

But if the profit generated by the property goes up, then the value of the property would go up too in order to keep the value of the building constant at 5%. There are numerous ways the profit can increase. You can increase the base rent. You can reduce the vacancy which adds to the income. You can reduce expenses. You can add features to the property that can add revenue. For example, you might have a tenant rent a parking space from you in addition to their apartment. They might rent a storage locker. They might choose the building’s internet access instead of paying a monthly fee to AT&T.

If the building has been improved, then you might be able to command higher rent. If the building was modernized with a new exterior facade, and new kitchens, new bathrooms, new flooring you might get an extra $200 a month in rent. If you got rid of the coin operated laundry in the basement and put laundry machines in each unit, you might get an extra $50 a month in rent.

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