Successful real estate investors always seek to optimize the performance and market value of their investment rental property in order to achieve maximum rates of return and profit.
This, of course, goes without saying because the objective of real estate investing is always about making money – which successful real estate investors know how to do.
So this article will provide little new information for them.
On the other hand, those less-experienced with real estate investing will find it helpful because it provides five ways – if done consistently and vigilantly – have proven to optimize a rental property’s financial performance and as a result, add market value.
Both of which, obviously, are consistent with and required for achieving maximum investment profit.
Optimizing
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 real estate 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.
Bear in mind that it doesn’t take much to add profitability. After all, every $50 a month saved earns you an extra $600 a year.
Market Value
Okay, now consider how all of this rental property performance optimization adds value to your real estate investment.
Bear in mind that 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 market value you add to your property.
Example
To illustrate this point, we’ll consider a hypothetical situation using cap rate (or capitalization rate) for our property value calculation. This is one of the most popular methods used by analysts to determine value and also provides us with a formula that should be easy to follow.
Net Operating Income / Cap Rate = Value
Let’s assume that investors in your market place are willing to purchase rental property’s similar to yours at an 8.0% capitalization rate. Since value is derived by dividing net operating income by cap rate, then it is also true that for every $5,000 you add to your property’s net operating income (by increasing income and/or decreasing operating expenses), you add $62,500 to the value of your property.
$5,000 / .08 = 62,500
Hopefully you learned something. Here’s to your real estate investing success.
