The main value indicator of commercial real estate is based on how much net income it produces. The key word in this statement is ‘net income.’ An investor is not looking for revenue of $25,000 in rent each month only to find that the expenses amount to $30,000 – this is just a money-losing property. A buyer is looking for a property with a solid income and a good rate of return. Increasing the net income of a commercial property can be achieved in two main ways.
Increase Rent
The most obvious way to increase the value of a commercial property is to increase the base rent of each unit. Of course, this does not make a landlord a well-liked individual; however, one does not need to add sharp increases to add significant value to the property.
Take for example a 10 unit apartment building with rent set at $800 per unit per month. With a total rent of approximately $8,000 per month or $96,000 per year and expenses at $65,000 per year, the net income would be approximately $31,000 per year. Based on a 9% expected return on investment (ROI) this property would be worth $344,444 to a buyer. If the rent on each unit can be raised by only 2.5% ($20) the net income would rise to $33,400 and the building would now be worth $371,111. That’s a $26,666 increase in value for only $20 per month!
While the rents are the easiest place to add both cash flow and value to a building, this is not always the best option. By raising rents a landlord will run the risk of having people leave the building, thus creating vacancies in the process – a key consideration in any rental market.
Decrease Expenses
Another great way to increase property value, and does not directly affect the tenants, is to decrease monthly expenses. This is an often-overlooked item because it is much harder to accomplish than simply writing a rent adjustment letter and distributing it throughout the building. Decreasing costs should be an ongoing duty of the property manager and building owner.
To begin this option, utilize the help of a Certified Professional Accountant. A professional accountant can usually uncover additional ways to successful cut costs, taxes and fees in your operation. They will also help you look at all outgoing expenses and determine which could be reduced or eliminated.
Reduced Expenses: these may include utility invoices (reduce water and electrical consumption in public areas), cleaning (outsource to the lowest qualified bidder) and advertising costs (ask for referrals from good tenants)
Eliminated Expenses: gas or heating costs (write these as owner responsibility), yard maintenance (remove grass and add decorative stone) and energy (eliminate free electrical outlets for parking)
Final Thoughts
The wealth that can be generated by commercial real estate is almost limitless. Over time, having the ability to increase the net income from a property will result in a much higher value and sale price when the time comes. By using different techniques to either increase revenue generated from the property or reduce expenses, these small changes will lead to much larger sale prices.
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Commercial Real Estate Investing - How To Increase The Sale Price Of Any Building
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