One of the critical things to understand when it comes to investing in commercial apartments is the formula that is used to determine the value of each complex. Unlike single family houses, where the value is determined based on the structure of a comparable property, the value of an apartment complex is based on the amount of income it generates on a yearly basis. Think of it as a business rather than a building. The more income it generates, the more it is worth. When we purchase an apartment complex, we are looking for specific opportunities to increase the cashflow in different areas. These are called “Value Plays” or “Value Adding Components”.
VALUE PLAYS SOLVE PROBLEMS CAUSED BY:
- Poor supervision of management companies
- Mismanagement caused by owner self-management
- Deferred maintenance
- High vacancies
- Below market rents
A single Value Play opportunity can help generate target returns. Here are some examples of Value Plays:
- Increasing rent to current market pricing. We may purchase properties that are 10% or more under current market pricing. This gives us the opportunity to increase rents and immediately increase the value of the property.
- Improve curb appeal by improving landscaping, adding carports, etc. Tenants will pay more when a property is in better condition or has carports or security gates.
- Implement a water and sewage bill-back system to charge to the tenant for actual usage. In many cases, the apartment owner pays for the water. If we bill the tenant it aids to offset those expenses and increase the cash flow, and tenants get more frugal with their usage, decreasing overall operation expenses.
- Add a coin laundry facility to the complex (may seem minor, but the income adds up quickly).
- Annual rent growth increases by 3-4% per year.
In an emerging market where a lot of new jobs are being generated, the annual market rent increases by 3-4% to support the new demand for housing.
One of the next steps will be to show you the impact that each of these value-add components can have on the value on an apartment complex (remember the more income we generate, the more the complex goes up in value).
The value of a property is determined by theNOI and the capitalization rate (Cap Rate) for a particular geographicarea.The Cap Rates are provided by local Realtors who keep a pulse on the local market.