Apartment Buildings for Sale in Detroit MI | How to Boost Your Building’s Value – Part One

posted in: Apartment Investing | 0

 

Let’s be real; you got (or want to get) involved in the apartment business to make money.

There's a lot of things you can do to improve the value of an apartment building.  (Image: wallyg/Flickr)
There’s a lot of things you can do to improve the value of an apartment building. (Image: wallyg/Flickr)

Regardless of whether you’re buying and holding, or wholesaling apartments, you want properties that have “value-add” opportunities.

These opportunities give the end buyer the opportunity to increase the cash flow, and thus the value, of that building.

Related: Downtown Detroit Apartments for Sale | Are You Doubting Yourself?

 

Luckily for you adding value isn’t rocket science.

To say it plainly, anything you can do to increase the Net Operating Income (NOI) will improve the value of that building.

Got it? So let’s look at some of the ways you can do just that.

 

1. Increasing the Rent

 

I thought I’d start out with the most obvious method.

If you’re buying an apartment building, it’s possible that the previous owner wasn’t charging the tenants market rental rates. He or she may have been under-charging.

 

Treat Your Tenants Right
If you’re going to be raising the rents, though, you’d better be treating the tenant’s right up to that point. If you haven’t, raising the rent could cause more problems than you are prepared to handle.

This includes responding to maintenance requests in a reasonable amount of time, and simply making sure you or your management team is being fair with them.

This is just one reason why it’s important that you’re looking over your property management team’s shoulders to make sure they’re providing quality service to your tenants.

If you don’t, you might just make your already pissed-off tenants decide to move elsewhere.

 

Properly Increment the Rent Increase
You never want to make the increase in rent so dramatic that it influences people to move.

As a rule of thumb, try to do the increases by no more than 5 percent at a time.

Also, don’t forget that you can’t raise the rent until your tenant’s current lease is up, as the lease is a binding document.

 

2. Covered Parking

You can charge tenants extra to park under covered parking or in a garage if the property has one.

Car ports aren’t cheap to have built, but the additional money you can get from these can be worth it in the long run.

Not to mention they add to the value of the property.

I’ve seen apartment complexes charge as much as $50 a month for the ability to have their own assigned parking spot in a carport.

 

3. Sub-metering the Property

If you have one meter for the whole property, you can save some bucks by getting it “sub-metered.”

Sub-metering your building is one of many ways to boost your NOI. (Image: this lucid moment/Flickr)
Sub-metering your building is one of many ways to boost your NOI. (Image: this lucid moment/Flickr)

This involves getting a meter designated for each unit in the building.

This doesn’t really bring in more money each month, but it does save you money, which is just as good.

And guess what? It also boosts NOI, which of course increases the value of the property.

Plus, when you sub-meter the units, you can lower the rents, which will allow you to promote lower rents to prospective tenants.

 

Why it Saves You Money
When the property is sub-metered, you as the landlord no longer have to pay for the utilities. You pass that expense on to the tenants.

This is because it’s impossible to see how much each unit is consuming if all of the unit’s consumption are being recorded on one meter.

 

Where to Find Sub-metering Opportunities
You’ll rarely find opportunities to sub-meter the property when you’re dealing with newer buildings. Most new buildings are sub-metered when they’re built.

You’ll find more of these opportunities in Class B and C buildings that are a little older.

 

Is it Worth the Price and Effort?
Whether or not you want to do this depends on the amount of money you have in the budget for the project, and how long you’ll be personally holding on to the property.

Nonetheless, doing this will definitely save you money in the long run. It’s just a matter of how long you will have to wait to start seeing the savings.

Don’t quote me, but I’m pretty sure I remember seeing somewhere recently that the price can run anywhere from a few hundred bucks, to as much as $800 or so per unit.

It’s also important to note that sub-metering offers a way to detect leaks, and discover maintenance issues, too.

 

Reduce the Rent
I alluded to this earlier, but if you sub-meter the utilities, you’re going to have to reduce the rent that you’re charging the tenants.

The general rule of thumb is to reduce the rents by about 70 percent or so of what the average tenant’s electric bill is each month.

You want to assume that the tenants are going to become a little more mindful of their power consumption once they realize that they have to start paying for it themselves.

As a rule of thumb, you want to usually assume that they’re going to reduce their consumption by about 30 percent or so.

Example of Savings

Let’s go through a sample situation to drive-home the point on how this can save you money.

Let’s say that the average bill in your building is $60.

Multiply that times 70 percent, which equals $42 bucks.

As a result, you’d reduce each tenant’s rent by $42. 30 percent times $60 is $18.

If you have a large number of tenants in the building, adding vending machines to the property can be profitable.  (Image: Mr. Mystery/Flickr)
If you have a large number of tenants in the building, adding vending machines to the property can be profitable. (Image: Mr. Mystery/Flickr)

So if your building in this example had 50-units, you’re adding $10,800 to your yearly revenue.

Not bad, huh?

This is even better if you’re planning on holding the property long-term.

If you paid $500 per unit to get the property sub-metered, you’d start seeing the financial returns on this after three years ($10,800 * 3 = $32,400, and you paid $25k to get the property sub-metered).

 

4. Add Vending Services to the Premises

This one’s fairly self-explanatory. At least in my opinion, it is.

 

5. Adding Storage

When you offer tenants additional storage, you’re giving them added convenience.

And you can be giving yourself added NOI.

You can charge those that want to rent-out the storage space, or you can give everyone in the building access to their own space and just charge more in rent.

 

6. Low-Flow Aerators

When you add low-flow aerators to the faucets in the units, you lower the water flow, which will lower the water bill.

What I love about these is that they’re pretty cheap.

You should get an aerator that reads at the 2.75 gpm (gallons per minute) level or lower.

If your faucets are modern, they should have threads on them already that allow the installation of aerators.

 

7. Coin-Operated Laundry

Adding one of these help you in multiple ways.

For one, you’ll make money from the washers and dryers.

Also, you might be able also raise the rents on the tenants because of the added convenience you’ve provided for them by providing laundry machines to the premises.

In addition to the actual washers and dryers, you might even want to add a vending machine in the laundry room that dispenses soap and other products they can use for the washers and
dryers.

All of this equals more money in your pocket and a boost in value of the property as a result.

 

Warning!
Unless you have four or more tenants in the building, you might want to really think on this before you decide on adding coin laundry machines.

If you don’t have enough people in the building, the machines probably won’t get used enough for you to make a good return on what you’re going to pay for these machines out of your
pocket.

 

Leasing the Equipment
To lower the headache on you and/or your property management team, you might want to consider leasing the washers and dryers.

The downside to this is that you’re probably going to have to split the profits with the leasing company. I think you can negotiate on the split, but from what I’ve read it’s usually
about a 50/50 split between the parties.

Utilities
And don’t forget that you’re going to have to pay for the water and electricity that these machines use.

This is yet another reason why you want to make sure the machines are going to get enough use to make these machines worth the effort.

A good rule of thumb is to avoid adding coin laundry to the premises, unless the estimated utility expenses stay below 25 percent of the estimated monthly revenue the machines are going to
bring in.

 

Alright, that’s enough for me for now.  Click here to check out part two.

By the way, what’s your biggest concern when it comes to increasing the value on apartment buildings?

Leave a comment below.

 

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