Why is it that you see many multifamily busines plans looking to add in-unit washers and dryers or other value-add items?
Unlike with stocks, with multifamily apartments, the owners can directly increase the value of the property through what is known as forced appreciation.
Forced appreciation can be accomplished by:
- Increasing rental income or
- Decreasing operating expenses.
This is why we oftentimes look for value add properties, where there is opportunity for us to make further improvements to the property and on how well lit is run and thus increase the net operating income (NOI) or the money which the property generates. Commercial properties like multifamily properties are valued primarily based on NOI, rather than on comps like with single family homes. So for example, if you increase your NOI by $10,000 a year on a 4 cap property, then you just increased the value of your property by $250,000.
Value increase=NOI improvement/cap rate
$250,000 = $10,000/.04
So how can we force appreciation?
- Renovations - upgrade the kitchens by adding stainless steel appliances, updated fixtures, shaker cabinet doors, and granite counters. Updating the bathrooms are always a nice touch as well. Refinish the apartment with two-toned paint and new flooring like LVP to make the apartment even more attractive so that tenants are willing to pay higher rents
- Add services like amazon lockers, add in internet for all tenants or trash valet (where tenants can leave their trash outside their doors in the evening and someone comes to pick it up)
- Improve amenities like adding a shared office space, kids playgrounds, dog runs, bbq areas which will allow for a better rent premium.
- RUBS (Ratio Utility Billing System) - passing on utility costs to your tenants
- Reduce property expenses via optimizing efficiencies, leveraging economies of scale.
What other ways have you found to force appreciation?