4 Ways to Increase Your Property Value Through Appreciation
Author: Kelley Treon, April 28, 2020
Owning real estate provides returns in the form of operating cash flow, equity from the paydown of the mortgage, current tax benefits and appreciation. Today I’d like to focus on the last one, appreciation.
Appreciation is simply the increase in a property’s value over time. The ways to increase value discussed below are interrelated and when done in combination can have significant effect. All the actions discussed are the result of effective property management. Whether it’s through hands-on direct ownership or a professionally managed syndication like Lonicera Investments, superior management will have a direct impact on the property’s return.
Buy at the Right Price
This seems intuitive but it requires diligence. That is due diligence. Find out as much as you can about the market, the property, the tenants, the projections, etc. This is a large topic worthy of an entire article (coming soon). For now, do your homework and make the lowest offer you think you can reasonably make to close on the property.
Increase Cash Flow
Raise Rent- Set and maintain optimal market rate rents. Reasonable increases over the term of the lease pegged to the consumer price index or some other market index can help you stay competitive while raising rents.
Reduce Expenses- Review service contracts annually. Take the time to get bids and negotiate contract prices. Almost everything is negotiable. Consider multi-year service contract for a reduced price with reputable providers. If you own multiple properties, negotiate a volume discount. Likewise, combining multiple properties under one insurance policy can yield lower premiums. For utilities, ask local utilities to perform energy audits. Submeter individual tenant utilities to allocate and recoup utility costs based on actual usage.
Provide Lease Renewal Options – For some tenants, knowing what to expect if they renew may prevent them from going out and looking, especially if the property has been well maintained and managed. Many people hate negotiating, so if you do one negotiation up front including one or two options to renew, it’s easier for the tenant and may increase retention.
Create a Niche – Cater to a specific type of tenant or business. For example, senior living communities or student housing are specializations. The Lonicera Bethel and Lonicera Northwoods office shares cater to counselors and psychologists. We understand that they need privacy and quiet. We focus the comfort and confidentiality of their clients.
Communicate – Make your tenants aware that you are serious about maintaining a quality property. Let them know that reasonable requests for repairs will be handled effectively. Share with them planned maintenance or improvements. Have your property manager be visible to the tenants. Especially for commercial tenants, let them know that your success is tied to their success.
Maintain and Renovate
Create Curb appeal -If your property stands out from comparable properties, you will generate demand. You will be able to maintain maximum occupancy at top market rents. Landscaping is an easy, cost effective way to improve the attractiveness of a property. Trimming overgrown bushes and trees, replacing dead or dying plants and keeping grass and beds tidy are all relatively quick fixes.
Cure Any Deferred Maintenance – If you’ve bought a property that has not been maintained, a great way to increase rents, occupancy and value is to bring it up to the standard of comparable properties. Hopefully, you purchased the property at a price that reflects the condition. Use the inspection you likely obtained during due diligence to identify and prioritize necessary repairs. Note that most contractors (HVAC, roofing and blacktop) will provide free estimates. If you have a question about a deferred maintenance item, consider getting an estimate during due diligence.
Renovate Wisely – For residential properties, updating baths and kitchens can provide an immediate increase in value and make it easier to rent. Upgrading the common areas of commercial properties provide the greatest returns. Renovating common reception areas, conference rooms and bathrooms with attractive higher-quality materials will enhance value and attract quality tenants.
Maintain the Standard – Visit the property periodically and walk the areas you can access. If you use a property manager, perform the walk through with your manager. Make a list of the maintenance projects you see. Prioritize projects and budget for those that need to be performed immediately. For larger properties, have an engineering study performed which identifies and schedules maintenance for major components and systems.
Know When to Sell
Real estate has proven to be an investment that retains and increases value over time. The factors detailed above are largely within the control of the owner. However, many factors that affect the value of a property are not within the owner’s control. The condition of nearby properties, the economy, the interest rate environment, state and local tax laws, zoning changes may all negatively impact a property’s resale value. Selling at the optimal time is key to value creation.
Of the four ways to achieve a return on a real estate investment (operating cash flow, equity from the paydown of the mortgage, current tax benefits and appreciation), appreciation is arguably the one that yields the most. Effective management will ensure that the property is positioned for maximum appreciation. Increasing rents, reducing expenses, doing prudent maintenance and upgrades, and selling at the right time are all factors that will raise returns.
Kelley Treon, CPA- Principal
Lonicera Management, LLC