Multifamily assets make superior investment properties due to the steady income flow from tenant rent payments and the potential to increase value. Savvy investors know which changes to make to maximize market value when it is time to sell the property.

Lower the Cap Rate to Increase Value

The first number prospective buyers want to see is the capitalization rate. Find the cap rate by dividing the net operating income by the purchase price, and the figure is reflected as a percentage. Cap rates are helpful for quickly comparing properties and getting an impression of the income in proportion to the cost of the building.

The cap rate has an inverse relationship to value, so the lower the cap rate, the higher the value. To lower the cap rate, we need to increase the net operating income, which can be accomplished by increasing the income and reducing the expenses. 

Of course, not all real estate projects employ a value-add strategy. For example, some highly upgraded assets like class A multifamily properties reach a point of maximum economic improvement. In that situation, the cost of renovations or upgrades would not yield sufficient revenue increases to warrant the expense. 

Improve Current Revenue Streams and Add New Ones

Renovating and upgrading the property to command higher rental rates is one of the most popular methods for adding value to a multifamily property. 

Basic Renovations

Newness and modernity impact the amount that a tenant is willing to pay to live in a property, and those traits apply to both the form and function of the living space and common areas. Tenants undoubtedly pay more for things that look better, like trendy neutral paint colors, stone countertops, and contemporary finishes. But they also pay more for aspects of their housing that perform better, like newer high-end appliances, excellent wifi, and efficient climate control. 

Improve Amenities

When an apartment building offers more to tenants, tenants pay more, and one of the best ways to do that is through adding and improving amenities. For example, tenants will view a well-equipped fitness center as an alternative to a monthly gym membership. Or, a pool in a hot location will entertain the kids for much of the summer and reduce the need to find other costly activities for them. Essentially amenities divert income from other businesses and to the apartment. 

Add New Sources of Income

Multifamily building income is not limited to rent. Low-maintenance options include adding vending machines maintained by the vending machine company or coin-operated laundry machines with a service contract.

Almost any aspect of residential life can be monetized as people increasingly value their time above all else. For example, create a tiered parking system with the best spaces going for a premium amount. Offer valet waste and recycling pick up or popular workout classes at the building’s fitness center, all for a charge.  

Improve Efficiency

Slashing services and amenities are counterproductive to increasing rent, so cutting costs is often a matter of efficiency. Sometimes, this is through energy efficiency like the transition to LED lights or sourcing more competitive subcontractors for services. 

Just as often, greater efficiency comes through tenant retention and other essential services the property management company performs. As such, evaluating the existing property management is crucial to cutting costs. 

Investor Takeaways

Just as important as implementing value-adding strategies is finding the right property for a deal. Learn how to target the right deals through my multifamily coaching program.