Forced Appreciation is a potential way to increase the value of your Apartment Complex by Tens of Thousands of dollars within a few short months.
Unlike Single Family Homes that appreciate based on supply and demand, Apartments appreciate based on the income that the property generates. If you refer to some of my previous articles on my web site you’ll find information on Cap Rate and Net Operating Income. Using these two vital figures you can figure out the value on any apartment complex. I’m not going to reiterate that information here since it’s already spelled out on my web site, however, I will quickly recap the Apartment Value formula so you’ll be able to follow along with how making some minor changes to your property’s revenue or expenses can dramatically increase the value. If you remember from these previous articles, the Value of an Apartment Complex is calculated by dividing the Net Operating Income by the Cap Rate. (NOI / CR = Value)
If you have an NOI of $100,000 and the average Cap Rate for your style of building in your market ranges from 8% to 8.5%, your Apartment Value will range from $1,250,000 at an 8% cap rate down to $1,176,470 at an 8.5% cap rate.
$100,000 / 8% (or .08) = $1,250,000
$100,000 / 8.5% (or .085) = $1,176,470
Therefore, if you want to increase the value of your complex you need to find a way to increase your NOI. Since NOI equals your Effective Gross Income minus your Operating Expenses, you have two choices to increase your NOI. Either increase your income or decrease your expenses.
Increasing your income in possible by either increasing your rental rates, decreasing your vacancy or increasing your Other Income which could include laundry, vending machines, parking fees, storage rental, etc. However, we all know how we feel when someone wants to charge us more money. We also know that as Apartment owners there’s only so much blood you can get from a turnip. If all of your income is set at market rates, then it maybe difficult to justify a rental increase to your tenants if they can move across the street and save $50 a month.
So let’s look at this from a different perspective, one of reducing expenses in order to increase the NOI rather than increasing income. This method, if done properly, will have less impact on your tenants too and in most cases they won’t even know you did anything differently, but you increased the value of your property by tens of thousands of dollars!
Now, when I talk about reducing expenses, I’m not talking about neglecting the property and not performing the maintenance and repairs that need to be done. I’m talking about finding more cost effective ways of managing your expenses. Let’s look at a few examples.
One thing to utilize when you’re looking to reduce your expenses is your TIMMUR, Taxes, Insurance, Management, Maintenance, Utilities and Repairs.
Taxes – The first thing we look at when we purchase a property is whether or not our Property Taxes are accurate for our property. One possible way to reduce your expenses is to ‘contest’ your property taxes. Sometimes assessors can become over zealous and just keep raising rates even though the property’s value may not have kept up with their rate increases. By having the taxes reviewed, the Tax Assessor may find that you’ve been over-charged and this could lead to you getting a reduction in future taxes as well as a possible refund for over-payments from prior years. Make sure your contract with the seller specifically states that you are entitled to any refunds from prior years since you are now the new owner of record.
Insurance – You’d be amazed at how much Property Insurance can fluctuate from year to year. We ‘shop’ our policies every year to make sure we’re getting the best terms and rates available. We don’t assume that the current policy we have in place in year 1 will still be the best policy in year 2 and so on. We always reevaluate our policies about 60 days prior to their renewal. The company that was perhaps the 3rd highest the year previous may now be the best rate because that company has reevaluated their own policies and fees and adjusted their rates accordingly. You just never know.
Management – If your have multiple properties with the same or multiple Property Managers, you may want to consider consolidating to one manager in order to lower your PM fees. They maybe able to have one on-site manager manage several properties in order to reduce your fees rather than one for each property. Also, if you can consolidate from 2 or more PM’s to 1 PM, they should be able to offer you lower management fees all the way around, especially, if they want to keep your business.
Utilities – Utilities are a big drain on expenses especially if you are paying some or all of your tenants’ utilities. There are several ways you can recoup these charges. One is by implementing a program called a Residential Utility Bill-Back System (RUBBS). I won’t go into too much detail here, but essentially, it’s a way to ‘charge’ your tenants for their utility usage based on the square footage of their unit. The plus side is that you recoup money from the tenants. The downside is that since it’s based on square footage it doesn’t nescessisarily charge each tenant based on their actual usage. You may have someone in a 1 Bed/1 Bath unit that uses twice as much energy as someone in a 2 Bed/2 Bath unit.
Another alternative is to have each unit individually metered so the tenants are charged based on their actual usage. The downside with this scenario is that it can be very expensive. You’ll need to do some additional research and a ‘Cost-Benefit’ analysis to see if this method makes sense for you.
You can also look into reducing your utility expenses by installing energy saving lights or water flow restriction devices. Even making sure windows and doors are properly insulated will help the savings add up.
Maintenance & Repairs – Another thing to consider are your contractors when it comes to Maintenance and Repairs. Just like PM’s, if you consolidate and use 1 for more properties, they maybe willing to work with you on their rates both hourly or contractually. What do I mean by contractually? Some maintenance providers may offer you Service Agreements or Contracts to perform certain work on an annual basis. As an example, if you have a pool at your complex they may offer a contract to ‘service’ the pool on a weekly basis to check the chemical levels, clean it or do other routine maintenance. The same thing applies to your landscape company. They may give you an annual contract to mow the lawn, pull the weeks, trim the plants and trees, etc. They may even include snow removal if you’re in a snowy area in the winter time.
You may have service contracts on your ‘mechanicals’ too. Mechanicals include things like boilers, chillers, AC units, elevators, etc. Some companies will provide service contracts that are set at a certain fee for the year and they’ll fix or cover any repair work that needs to be performed over that 12 month period. You need to be careful though and read the fine print. Some contracts may only cover a percentage of the hourly rate or the cost of parts. In others, the parts may not be included at all, only the labor.
We suggest you shop around on a regular basis to find the best contractors with the best rates in order to save money.
Here are a few other things you might want to ‘shop’ around. They maybe small, but can add up to some big savings; trash collection, advertising and security services. Just make sure you routinely check with competitive companies to make sure you’re getting the best rates possible. Specifically regarding advertising, whether it’s you or your management company that’s advertising in various publications around the area, many will offer a discount if you advertise with them on a regular basis. In one case, our PM was advertising about every other week in the local paper. After some research, we found out that if they signed an annual contract and advertised every week, the annual costs would actually be lower. We got more exposure with less money. A double win!
So what’s the bottom line? Why have I been rambling on about all of this? Well, let’s take a look at how a small amount of savings can add up to a large increase in the value of your complex.
Let’s say you reduce your insurance by $75 per month, your taxes by $130/month, maintenance & repairs by $235/month by finding more cost effective contractors, trash collection by $85/month, your water bill by $55/month because you installed some inexpensive water saving devices and another $60 per month on your utilities because you installed energy saving lights. You did most of this by just making a few phone calls to compare rates and fees. That adds up to a monthly savings of $640. That may not seem like a lot, but just look at what it does to the value of your complex.
$640 times 12 months equals an annual savings of $7,680. That means that you’ve increased your NOI by $7,680 for the year. If you remember the Value formula (Value = NOI / CR) that I talked about at the beginning of this article and we use that same formula compared to our annual savings, we can determine how our savings of $7,680 per year increases the value of the complex.
We stated earlier that the average Cap Rate for our style property in our market was between 8% and 8.5%. Now, let’s plug in our annual savings figure to see what happens:
$7,680 / 8% (.08) = $96,000
$7,680 / 8.5% (.085) = $90,353
That means that by finding a few ways to decrease our monthly expenses by only $640, we’ve increased the value of our property from $90,353 to $96,000!!!And we did it without raising rents or by compromising the current standard of living for our tenants. What an awesome way to increase your net worth just by taking an active role in the on-going operation of your complex and not assuming you can’t do anything about what you’re paying for your operating expenses. A few phone calls, a few hours of work, and you just increased the value of your complex and your net worth by almost $100,000.
We appreciate your feedback and always love to hear from our subscribers. Let us know what you think of our articles and what you’d like us to discuss in upcoming issues. Until next time, have a great month and may God Bless you and your family.
