Property appreciation is one of the best ways you can make money in real estate. So if you are an owner of multi-family homes, listen up!
Although multi-family real estate is one of the best types of income-generating assets, we all know that it is slower to appreciate compared to other property types. If you do own multi-family property, what can you do to increase its value? Force appreciation, of course!
What Is Real Estate Appreciation?
Real estate appreciation refers to the increase in property value over a period of time. There are many reasons why a property appreciates. First of all, there is inflation. In simple terms, it means that the value of the dollar depreciated, therefore the value of the property increased. Another reason is rental demand and supply. The increase in rental demand in a specific location causes the property’s value to increase. Another reason for property appreciation is the increase of the net operating income for that investment property.
In simple terms, the NOI is a metric real estate investors use to determine the value of an investment property. You calculate the NOI by deducting all property expenses (not including the mortgage) from the annual revenue. Keep in mind that the NOI is the profit before tax. When NOI increases, this simply means the investment property is generating more income. This is why a property appreciates with the increase of its NOI.
But what do you do if you don’t want to wait ten years until your multi-family investment property appreciates? As mentioned, you force its appreciation.
What Is Forced Property Appreciation?
Now, you must be wondering what it means to force property appreciation. Simply, it is when the rental property owner applies changes to his/her investment strategy or property in a way that increases the net operating income of the property. Many times, real estate investors intentionally look for value-add real estate deals so they can quickly force appreciation. This is one way to go about it when buying a multi-family home for investment.
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Sure enough, there are other ways you can force appreciation when you already own the property. Some don’t require a significant cash investment while others do. Either way, they will 100% contribute to the increase in property value over a short period of time. So, what are some ways you can force property appreciation?
7 Ways to Force Multi-Family Property Appreciation
Since the entire idea of forced appreciation is dependent on the NOI, as we have explained, you should be looking for ways to increase it. So, here are seven ways we would recommend to force property appreciation on a multi-family home:
Increase the Rent
Increasing rent is one of the best ways to force property appreciation for two reasons: 1) You typically don’t have to pay anything from your pocket, and 2) Even a slight increase in rental income will result in a significant rise in property values (as we will demonstrate later in this article).
Related: The Top 6 Strategies to Boost Your Rental Income as a Real Estate Investor
Add Facilities
If you have a closed-off area around your rental property, why don’t you use that to force property appreciation?
What you need to do is add some facilities, and that will allow you to charge extra. For example, adding a swimming pool would be a great idea if you have an apartment building. This way, you can charge more in rental income, but the tenants won’t have to feel like they are burdened by the payments. Another example is establishing a playground for kids which will also allow you to charge your tenants extra and therefore, increase your NOI and the property appreciation as a result.
Add Services
Have you ever considered the fact that adding services such as laundry, vending machines, and cleaning might also help you force property appreciation?
Think about it, if you have a studio apartment building and you are renting to university students, why not include a laundry room with washing machines that operate on coins?
But, of course, the services must be complementary to the type of investment property as well as the type of tenants you have. So, make sure you don’t overdo it.
Rent Extra Space
Got a basement? Got an attic in any of the units? Does the building have a shared storage space? It is always a good idea to use that space to your advantage.
These types of additional facilities come in handy for real estate investor and provide the opportunity to increase the NOI of an investment property. As a result, your property will show higher rates of appreciation in a short period of time.
Cut Down on Property Expenses
Property expenses are no joke in the real estate business. In fact, they could make you or break you if you don’t have the proper knowledge of how to manage your rental property’s finances. One type of property expense you might want to reconsider is professional property management fees. If you are paying your property manager $200/m from your rental income, guess what? That is a good $2400/y! Can you believe that!
Instead of hiring a professional property manager, learn to do it yourself. Find out what tasks property managers do and learn to do them. This way, you can save A LOT of money which could go towards increasing the property’s NOI, and therefore, forced property appreciation. And by cutting down on expenses, you don’t have to spend a penny on increasing the appreciation rate for your investment property.
Keep in mind, the example of self-managing your rental property to cut back on costs is not a good idea for everyone. For example, if you’re a complete beginner or own multiple rental properties, you will probably need a professional property manager as they have a lot to offer in terms of knowledge and skills. In that case, look for other ways to cut costs that won’t hurt the performance of your rental property.
Extra Fees Are ALWAYS a Good Idea
Listen, additional charges are the best when it comes to increasing your rental property’s net operating income. If your tenants fall behind on rent, a late fee will come in handy. If your tenants want to bring in their pet, well, hey, why not? A pet fee is always a significant advantage to the landlord. In fact, there are so many types of fees you can charge your tenants which will be very beneficial in terms of property appreciation.
Related: How to Set the Best Pet Policies for Your Rental Properties
Property Improvements
Another way to force property appreciation would be real estate renovations. Painting the walls, changing furniture, and adding advanced technologies for convenience and security is a great approach. In fact, if you feel like it’s been so long since you’ve done some renovation work, you might need to do so soon. So, take advantage of the situation and include some high-quality items to increase your rental property’s NOI, and thus, achieve faster property appreciation.
How Do You Calculate Property Appreciation?
OK. So, this is where investment property analysis comes into play. Calculating the property appreciation rate is part of the property analysis. You will need both the NOI of the property as well as its capitalization rate (cap rate).
We already explained what NOI is, so the question is, what is cap rate?
The capitalization rate is basically the amount of return a real estate investor should expect relative to the property value. In other words, you divide the NOI by the total property value, and you have the rate of return on your multifamily property investment.
Now, what is the property appreciation formula? This is how it looks:
Property Appreciation = NOI/Cap Rate
A Quick Demonstration:
Let’s take the example of increasing your rental income. Assume you are investing in a multi-family home that has ten rental units and is worth $500,000 in market value. Let’s say you charge $800 in monthly rental income per unit. The total monthly expenses sum up to $200/unit (not including taxes or mortgage). Let’s assume your property’s capitalization rate is 14.4%. So, how do you calculate property appreciation if you decide to increase your rent by $25/m/unit?
First of all, let’s calculate the NOI before the increase: 10*($800-$200)*12 = $72,000
Now, let’s calculate the NOI and the property appreciation after the rent increase:
We said it is an increase of $25/unit. For all the units that would be 10*25= $250/m
The NOI after the increase is 10* ($825-$200)*12 = $75,000
The amount of property appreciation after the increase is $75,000/14.4= $520,833
As you can see, with a slight increase in your rental income, your property has appreciated by $20,833 in a matter of one year. So, imagine the amount of property appreciation if you cut down on property expenses, managed to add a few extra services or apply some changes!