How Can I Increase the Value of My Small Multifamily Property?
To increase the value of a small multifamily property involves a combination of reducing operating expenses and maximizing revenue streams. By effectively managing expenses and increasing income, property owners can improve the property’s net operating income (NOI), which directly impacts its overall value. Let’s explore some strategies for achieving these goals.
Reducing Expenses
One way to increase the value of a small multifamily property is by reducing operating expenses through efficient management of vendor contracts. Vendor contracts are agreements between property owners and service providers for various goods and services necessary for property maintenance and operation. By negotiating favorable terms, consolidating services, and monitoring performance, property owners can lower operating costs and improve the property’s bottom line.
Examples of reducing expenses through vendor contract management:
- Negotiating Competitive Rates: Negotiate competitive rates with vendors for services such as landscaping, maintenance, and janitorial work. Compare quotes from multiple vendors to leverage better deals.
- Consolidating Services: Consolidate services with a single vendor to streamline operations and reduce administrative overhead. Bundling services may lead to volume discounts and cost savings.
- Implementing Service Level Agreements (SLAs): Define clear SLAs outlining the scope of work, performance expectations, and quality standards. Hold vendors accountable to these agreements to ensure efficient service delivery.
- Monitoring Performance: Regularly monitor vendor performance and track key performance indicators (KPIs) to identify areas for improvement and cost-saving opportunities.
Increasing Revenue
In addition to reducing expenses, increasing revenue is another way to enhance the value of a small multifamily property. Property owners can explore various strategies to maximize income streams, such as raising rents, implementing common area maintenance (CAM) fees, or utilizing Ratio Utility Billing Systems (RUBS) to pass expenses to tenants.
Examples of increasing revenue:
- Raising Rents: Conduct a market analysis to determine competitive rental rates in the area and consider increasing rents accordingly. However, be mindful of rent control regulations and tenant affordability.
- Adding Common Area Maintenance (CAM) Fees: Charge tenants a CAM fee to cover expenses related to maintaining common areas such as landscaping, parking lots, and shared amenities.
- Implementing Ratio Utility Billing Systems (RUBS): Allocate utility expenses to tenants based on occupancy or square footage using RUBS. This allows property owners to recover utility costs and increase revenue while promoting conservation.
CAP Rate and Determining Value
The value of a small multifamily property is closely tied to its net operating income (NOI) and capitalization (CAP) rate. The CAP rate is the ratio of NOI to property value, representing the property’s potential return on investment. Increasing NOI through expense reduction and revenue enhancement will result in a higher property value.
Example – 30 unit property with a $25/month rent increase on all units. $750/month or $9000/year increase to NOI:
- Increased NOI: $9,000/year
- CAP Rate Assumption: 0.06 (or 6%)
- Value = NOI / CAP Rate ($9000 / .06) = $150,000
- Increased Property Value: With the higher NOI and same CAP rate, the property value would increase by $150,000.
So, implementing a $25 rent increase per month on each unit, would result in your property being valued $150K more. This is sometimes called ‘forced appreciation’ and is one of the reasons that I love commercial multifamily.
Conclusion
Increasing the value of a small multifamily property requires a strategic approach that focuses on reducing expenses and maximizing revenue. By effectively managing vendor contracts, implementing revenue-enhancing strategies, and improving NOI, property owners can enhance the property’s overall value and generate higher returns on investment. Investing time and resources into these efforts can lead to long-term success and profitability in the multifamily real estate market.
