- Click Here For More Specific Information On:
- Form 5472
How to Increase Your Returns and Add Rental Property Value
jamesrkA smart real estate investor always seeks to optimize the performance of his or her rental investment property to achieve maximum profits. In this article we’ll consider several activities that, if done consistently and vigilantly, will help investors to increase returns and add value to the property.
1) Maintain Market Rental Rates
You have to regularly watch the market for rental rate increases. If your competition has increased rents on comparable properties then you should not hesitate to increase your rents as soon as possible. That is, of course, assuming that your rental agreements permit and provided that your property is not under rent-control regulations.
You shouldn’t be timid to raise rents for fear of driving out good tenants without just cause. If there is a large supply of affordable housing available in your area then you are probably wise not to risk a rent increase. Otherwise, bear in mind that inflation affects your cost of doing business and you are just acting prudently to stay current with the optimum market rental rate to maintain profitability.
2) Reduce Vacancy Rates
Of course being able to charge market rent for your units affects your bottom line less when units are vacant. If your vacancy rate is high, then consider ways to attract tenants you are otherwise missing. Incorporating a pet policy, for instance, opens the door for the increasing numbers of tenants who have pets. Also consider some move-in incentives; often good tenants just need a little financial incentive to become tenants in your property.
3) Examine Highest and Best Use
Real estate investors must also understand what the highest and best use is for their property. If your property, for instance, is being used as apartments when there is a shortage and high demand for office space in the neighborhood that would warrant a higher price per square foot than the residential use, perhaps you should consider a change in use.
This would undoubtedly require making capital improvements to the property, but it might be warranted if it means attracting higher income from higher-paying tenants that at the end of the day would increase your long-range returns.
4) Utilize the Property’s Full Rent Potential
A smart investor will seldom give away for free what can be rented, and always rents every bit of the property possible. For example, areas like storage space or garages are regularly rented separately to tenants occupying a unit in the building. So unless they are already made part of the rental agreement, provide them for an additional charge.
The idea is know your property and to be creative; never take any area or space that has the potential to generate rental income for granted, and whenever reasonable possible, charge additional rent for it.
5) Reduce Operating Expenses
It’s common knowledge that profits increase when expenses are reduced. So examine what your annual operating expenses have been running and make sure that they don’t exceed the absolute minimum amount it takes to operate the property. You might discover a plethora of expenses that can be reduced or even omitted that in the long run will save some money and increase potential profits. It doesn’t take much; every $50 a month saved earns you an extra $600 a year.
Okay, now consider how all of this adds value to your investment property.
Real estate investors buy cash flow when they purchase rental property. Therefore it stands to reason that the more income you add and/or operating expenses you reduce, the more value you add to your investment rental property.
For example, cap rate is one of the most popular methods used to determine investment property value. In this case, the net operating income (income less operating expenses) is divided by cap rate to arrive at value. Therefore when you add, say, $5,000 to your property’s annual net operating income and investors in your market are willing to purchase at, say, an 8.0% cap rate, you add $62,500 value to your property.
James Kobzeff is the developer of ProAPOD – superior
real estate investment software
solutions since 2000. Create rental property cash flow analysis and marketing presentations in minutes! Easy to use and affordable. Learn more =>