We all make investments with one thing in mind: MAKE MONEY!
Many investors buy an apartment building, and because they don't manage it, simply walk away and forget about the many strategies and techniques available to help them maximize the profitability of their investment. One of the biggest mistakes investors make is to fail to create, or ignore, their management plan.
What are some of the things you can do to increase profitability? It's important to note that there are two ways to profit. First, increase or maximize the amount of cash flow produced by the property. Second, increase the value of the asset. Some of the strategies outlined in this article can do both and others are specific to just one aspect of increasing your bottom line.
Most investors start by addressing income. And it makes sense. If you increase rent you not only improve cash flow (theoretically) but you also increase the value of the building. But there are other ways to increase income too. For example, if you have an on site laundry room, own the equipment. Although the maintenance of the machines falls squarely on your shoulders, so does 100% of the income. If you can fit a soda or candy machine, add them for extra revenue. Rent out garages, carports, extra parking space, storage units or do a utility bill back. All of these things increase income and add value to the property.
That said, be aware that increasing rent to market could be more trouble than it's worth if you plan to keep the building. Suppose market rent is $650 and you're renting the unit at $625. If you increase the rent to $650, will the resident leave? Maybe. Maybe not. But you'd better know what comparable properties offer before you do it. Increasing the rent $25 just to turn around and put $2,000 or more into the unit to rent it again is counter-productive. It'll take you six years to make up for that $2,000! On the other hand, if you plan on selling the property it might be the best move. An extra $25 per unit on a 20 unit property equates to $6,000 per year in Gross Operating Income (GOI). If you're in a 10% cap market, that's an additional $60,000 of value.
Next, carefully review your operating expenses. Decreasing some expense line items can improve the value of the property as well. For example, if you decrease the utility cost or reduce property taxes, the difference gets added to your Net Operating Income (NOI) and adds value to the asset. Other expenses, such as controlling maintenance costs, may or may not increase value. Why? Because lenders have their own underwriting criteria and it doesn't matter what you spend in maintenance because most of them are going to use their own numbers anyway--unless your numbers are higher than theirs. In that case, they'll use yours. The point is, just because you spend $3,000 a year in maintenance on your 50 unit apartment building doesn't mean the lender is going to buy off on it--even if the buyer does.
To decrease expense, consider installing low wattage light bulbs, timers in the common areas and motion detectors in the hallways. Replace toilets, shower heads and fix leaks to conserve water. Shop around for lower insurance and fight property tax increases. Anything you can do to lower verifiable expense will not only increase cash flow but add value to your property as well.
Finally, deal with vacant units and late paying residents as quickly as possible. This is perhaps one of the biggest expenses you'll ever encounter and if you don't address it right away, it'll compound into even more problems. Unfortunately many investors lose money in real estate because they don't handle this critically important issue. Always be aware of the changes you make and how they'll impact current and future residents. If you do something to enhance the property or improve the quality of living environments, make sure you let them know. They'll see it, but the more you tell them about all the work you and your team are putting into the property, the easier it will be to convince them to stay. Or, better yet, increase their rent in the future.
Wish you all the success,
Steve Steadele
About Steve:
Steve Steadele, author of the book Multifamily Millionaire, is a successful Real Estate Investor, Broker, Entrepreneur and self-made millionaire. He is a featured speaker at Real Estate Investment Associations across the country where he shares his wealth of knowledge, experience and enthusiasm for the real estate industry. Today Steve specializes in the acquisition and disposition of investment real estate throughout the United States. To learn more about his products and services, visit his Web site at www.SteveSteadele.com.
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