How to Force Equity Into Distressed Multifamily Properties
Updated: Jun 20, 2020
Improving the market value of a commercial property essentially comes down to one basic principle: increase net income by increasing revenue and/or decreasing expenses. There are a variety of ways this can be achieved, and it often requires some creativity. However, there are also some basic methods that can be considered for any property. Below you'll find some suggestions for multifamily properties.
Location, location, location - that's what it's all about right? Not entirely, but it is critical in the sense that it is the one thing about a property you cannot change. You must ensure the property under consideration is in a location that will accommodate your business plan, especially for a value-add strategy. However, what this means is that you can change just about everything else. Below are some ideas for increasing revenue:
Increase rents to better reflect the current market.
Make improvements to the property. This can be anything from new appliances, new paint, freshly paved roads, the addition of a new playground, nicer landscaping, to even a complete rehab of the entire property inside and out. This will justify increased rents and increased demand for your units.
Add vending machines, coin-operated laundry machines, etc. for a small bump in revenue. This won't bring in a substantial amount of money, but is worth considering depending on the situation.
If the property is in a busy area, consider adding an amenity like a coffee shop or small convenience store that can be valued by tenants while also bringing in revenue from outside customers.
Consider building new units if there is room to expand.
Add small self-storage units in an under-utilized area of the property for residents to rent on a monthly basis.
Install covered parking spaces with solar panels. You can charge a small monthly fee for the assignment of one of these spaces, while at the same time benefiting from the lower long-term (and often government-subsidized) cost of solar power for community spaces.
Often the less exciting part to the equation, but just as important, cutting expenses can make a huge impact to the bottom line. There are obvious ways of doing so, but some creativity can go a long way here as well. You'll want to start by going down the list of every expense paid by the property over the past year (or more), and look at the big items first, as they provide the most potential. Once you've exhausted those options, start getting into the details and consider smaller items. Below are some ideas to help you get started:
Many older properties do not have sub-metered utilities. What this means is that the tenant is free to use as much power, water, and gas as they want since the cost is included in their fixed monthly rent. This often leads to waste (lights left on, A/C running all day, longer showers, etc.) and higher bills for the landlord. Your first move should be to install sub-meters for these utilities to each unit and pass that variable cost on to the tenants. While this will require a decrease in monthly rents, you will experience a disproportionally larger decrease in monthly expenses and you will no longer carry that ongoing liability. However, if sub-metering is not a realistic option, consider simple solutions like installing energy-efficient lighting, water-saving faucets, new appliances, and motion sensor switches to reduce the monthly utility bill.
Consider cutting ongoing maintenance cost by upgrading various systems owned by the property. This can include anything from laundry machines to HVAC equipment.
Get creative by thinking outside of the box. Is there another property that you own or can purchase next door and share resources? This would allow less management, maintenance, and operations personnel for each individual property, therefore decreasing expenses and giving your bid an advantage.
Examine whether the current property management is efficient and cost-effective. If it is being performed by a third-party, you will want to ensure their rates are fair and their services are top-notch. You may also want to consider taking on the management in-house. This gives you more control, better relations with your tenants, and eliminates the monthly fee. However, you'll want to make sure you have enough units to justify the hiring of a management team, and the right people in place to maintain the desired image and follow laws.
Seek the services of a tax consultant. Have them look over the taxes paid by the property and seek ways to lower it. There are a variety of ways this can be done, and it is often worth the investment.
Shop around for a new insurance policy. Make sure your current rate is competitive, and if not consider making a switch.
Any time you are able to increase revenue and/or decrease expenses, this is often leads to an increase in net income and therefore an increase in property value. As a landlord, it is critical that you stay on top of this to maximize returns and maintain your image.
As always, feel free to reach out with any questions.