It goes without saying that we invest in real estate with the hopes of selling the property at a higher price than we spend to acquire it. The steady appreciation of real estate in the U.S. makes this a reasonable expectation, but waiting decades to realize gains from a rental property isn’t the most profitable or sensible strategy.
There are many ways to increase rental property value actively. Top strategies include renovating to increase the market value of each unit, maintaining a lean operation, deploying sustainable operation/design strategies and ensuring competitive market rental rates.
Let’s explore some of the best and most achievable value-add strategies for investors of varying experience levels in single-family and multifamily rentals.
Improving Rental Property Value Through Renovations
The most common way to increase property value is through renovations. Improved condition is more appealing to potential tenants, and enhances the satisfaction of existing tenants, stimulating sufficient demand to keep vacancy rates low and providing leverage for rental rate increases.
If you decide to focus on improvements, pursue updates and upgrades that deliver the highest return on investment. For multifamily, this generally means putting the most thought and money into kitchens and bedrooms, as well as flooring. Refinish cabinets and countertops, and use durable materials where possible to minimize costs and maintenance requirements.
Before getting started on an improvement project, I recommend assessing the highest and best use of the lot and structure. Research the local market and economy to identify demand factors and determine if the current use is still relevant in light of population growth, incomes, and availability of labor and employment. If the prevailing use, consumer tastes or industry makeup in the subdivision has changed since the original construction or acquisition, consider converting from retail to medical or office to retail, or repositioning the property to attract more exclusive tenants.
One trend that is effecting positive changes in real estate development and management across the world is sustainable design, also known as green building. Aside from building code requirements pressing the issue, the industry is finding that tenants value green features like photovoltaic (PV) solar systems, and are willing to pay premium lease rates for units that provide greater energy efficiency, durability, indoor air quality and thermal comfort.
A Lean Operation Equals Increasing Rental Property Value
Sustainability is synergistic with operational strategies that aim to reduce expenses before striving to generate additional revenue. Any improvement in cash flow through cost reduction results in an immediate and actual increase in property value. For the most part, all income properties — commercial or residential — are valued using the income approach to valuation.
The income approach estimates the value of a property as of a given date by converting the property’s net operating income (NOI) to value by dividing it by the prevailing capitalization rate. The capitalization rate (or cap rate) is the average rate of return demanded by investors for properties of the same class and perceived level of financial risk.
Green building features such as energy-efficient lighting, passive solar design and low-flow fixtures reduce energy and utility costs. Whether the property is a five-unit multifamily or industrial complex, tenants appreciate reduced operational costs and are willing to pay higher lease rates for efficiency.
When you’re paying for utilities rather than the tenant, you want to keep these costs as low as possible. Efficiency is even more critical to your bottom line in this case. Don’t get stuck with the bill for the irresponsible use of resources by tenants. Implement individual metering of utilities for every unit, and pass the cost on to each tenant according to usage.
If onsite property management costs are a cash flow drain, transition to a centralized property management structure, or outsource to a professional and reputable property management firm in the local market that specializes in your property class.