Value Increase of Building

[Michael Cole]

I’ve been renovating a 16 unit apartment in Pittsburgh for the past 6 months and things are going well. I’m renovating individual units (kitchen/bath/flooring/some painting) and I’m able to increase rents $150-$300 per unit. Additionally I put in 2 new retaining walls, painted the entire inside common area, new carpets, added a small gym, and put up nice artwork (essentially it looks like a brand new building)

My question is about cap rates......I know cap rates are based on the area and general economic conditions. The cap rate of my place is roughly 9-10% based on initial NOI and appraisal. Would these general renos further reduce the cap rate of this building independent of macro economic conditions and the local area?

[Immanuel Sibero]

@Michael Cole

That's not exactly the take home message to me.

I know you're doing some renos and wanting to justify them but eventually value is what the market (i.e. appraisers, potential buyers, lenders) thinks not what a property owner thinks. The market values a property on actual NOI (you hear and read about this all the time and this is the fact). So if there is no actual increase in NOI then there is no increase in value.

If you're like me and many others who want to be full time investors, you're eventually going to be making buying and selling decisions. You'll find that valuation is the cornerstone of those decisions, so we have to get it right. If you consistently place value on expenditures that do not increase NOI, then you're paying a premium for a property. When you pay a premium for a property, it can only mean two things:

1. EITHER you're a savvy investor. You see hidden, unlocked value that others don't see. So you're a market setter because you set new market cap rates. This is what's been happening with the absurdly compressed cap rate in California.

2. OR you're overpaying. Not much to say bout this one.

I'll just leave you with one other thought- the quickest way to lose money in real estate:

1. Overpay for a crappy property

2. Overpay for an awesome property

So the take home message on this one is: If you're gonna pay a premium, be the savvy investor, don't be the overpayer. 

Cheers and best of luck... Immanuel