5 Forced Appreciation Strategies to Increase the Value of Your Investment
One of the biggest benefits of apartment syndications is the consistent cash flow for investors. However, cash flow alone will not increase investor wealth. For you to increase your personal wealth, you’ll need to see your invested capital grow over time. When you invest in an apartment syndication, the ultimate goal is to have your initial investment returned plus profit from the sale of the property. In order to produce a profit at the time of sale, the value of the property must have increased.
But how does an apartment syndication grow the value of the property? The answer is something called Forced Appreciation. Ultimately, the value of apartment properties are dependent on their profit or “Net Operating Income” (NOI). While the average house appreciates based on the sales of comparable homes around it, apartments are different. The price that a buyer is willing to pay for an apartment complex is greatly dependent on profitability. When profitability increases, so does the value of the property.
Forced appreciation is the strategy of taking key profit-improving actions to increase the value of the property. Every apartment syndication with New Sight Capital is built around a forced appreciation business model. These typically focus on two categories: increasing rents and decreasing expenses.
Here are the 5 most common forced appreciation strategies we use to increase the value of an apartment property and your investment:
Refreshing Individual Units
One of the most common methods of successfully raising rents is the refreshing of individual units within an apartment complex. This is the main force behind the value-add strategy, which seeks to purchase properties that are slightly aged or outdated, modernizing individual units, and then raising rents to the higher end of the competing market place. A light value-add refresh may be as simple as fresh paint and appliances and flooring. Heavy value-add changes may involve new kitchen cabinets and countertops or modifying floor plan layouts. When we evaluate a value-add strategy for a property, we identify what is the amount of investment needed per unit in order to realize a meaningful increase in rent. From there, we model the return on that investment within the context of investor returns.
Adding/Improving Amenities
If you’ve ever lived in an apartment complex, you’ll know that apartment life is more than just the condition of the individual apartment. Amenities are typically a strong way to differentiate one apartment community from its competitors in the local market. Better amenities often attract more demand from potential renters and allow the apartment complex to charge a higher rental rate. Pools are the most common amenity offered in apartments, but today’s apartments need to offer more than that. Clubhouses, fitness centers, picnic areas are other common amenities that can help with higher rental rates. Dog parks are also becoming a popular way to attract more owners. Smart thermostats, smart lighting, and wi-fi enabled door locks are other amenities valued by today’s apartment renter.
Charging Renters for Utilities & Other Expenses
Depending on the area or period in which the apartment complex is constructed, utilities may actually be billed to the complex owner and not the individual renter. This could be water, sewer, electric, gas, or trash. When the owner of the complex is paying for all or a portion of these renter utilities, it directly reduces profit or net operating income. Many value-add strategists will target properties like this because shifting those expenses back to the individual renter will reduce costs and increase profit. There may be laws in certain areas that govern how an owner can execute chargebacks to renters for these costs. However, when executed properly, this shifting of utility responsibility back to the tenant is an excellent way to improve profit and, hence, the value of the property.
Implementing Market Appropriate Fees
While “other income” fees are a small portion of an apartment complex’s overall revenue, they can be an excellent way to improve the profit and value of a property. In many markets, it’s the norm that tenants are charged certain one-time or recurring fees. For example, one-time fees include application fees, processing fees, initial pet fees, etc. Ongoing fees may include pet fees or month-to-month lease fees. Clever apartment operators are also finding additional services that can generate ongoing fees. These may include trash concierge and dry cleaning services. In the end, the operator wants to make sure it’s charging the maximum fee when appropriate as a way to support the “other income” category of revenue.
Reduce Wasteful Expenses
After evaluating income opportunities, the apartment operator takes a close look at expenses. When they can be reduced, profit and value increase. Some apartments are not well managed in terms of operational costs. Perhaps, a property is spending too much on marketing or administration fees. Some properties are being overcharged for staffing and property management by third party companies. Older properties may be spending considerable amounts on repairs and maintenance that could be reduced by rehabbing units. Either way, reducing costs provides supplemental benefits in the overall value-add strategy of improving the value of the property.
While there are other ways to force appreciation of the value of an apartment property for its investors, these are some of the most common means. Research, planning, and execution are the key to each of these forced appreciation strategies. When evaluating whether or not to invest in an apartment syndication as a limited partner, these are areas that should be addressed in every offering. With intentional strategy, apartment syndications are truly a unique opportunity to grow the value of your invested capital.
If you’d like to learn more about apartment syndications with New Sight Capital, be sure to register through the link at the top or email russ@newsightcapital.com
