QUICKLY FIGURE HOW MUCH VALUE YOU ADDED TO YOUR APARTMENT.
I looked around at all the listeners nodding their heads in an “I get it,” kind of way, and I nodded right along with them. But I didn't get it.
Early on, when I made the switch from single-family rental investing to multifamily investing, everything was an education. I was intrigued by how the value of your investment is determined by increasing your net operating income. As long as you either increased your rent or decreased your expenses, you could increase the value of your investment. Hence, the value add. I also recall listening to a guest speaker at a meetup. He said if you raised your rents by $30 on your 200 unit, congratulations, you just increased your value by $1,200,000! I looked around at all the listeners nodding their heads in an "I get it," kind of way, and I nodded right along with them. But I didn't get it. I realized later that he left out a few key numbers that contributed to that final result. I wondered how many others were nodding their heads, but wanted to raise their hand, and ask, "Could you explain that?" For those of you, who don't know the answer, I am here to explain. It is simple, and you only need the following figures.
200 units - count of the building.
$5,000,000 - Price when you purchased the building.
$30 rent increase,
Let's assume you started to allow pets and charge pet rent, plus you add a dog park, and together this will enable you to bump the rents by $30.
Market Cap rate 6% This is, of course, a key metric. It is the market sentiment for your local market. It is best to poll a few brokers and Property managers for this. It is 6% in this example.
The Value Add
units * rent increase * 12 months (annual) / (cap rate) = $1,200,000
200 * $30* 12 (months)/.06 (cap rate) = $1,200,000
% increase in Value = Value Added/Original Value
$1,200,000 / $5,000,000 = 24%
Shrewd operators will aim to achieve this value increase within 18 – 24 months.
Congratulations! You took your building from a $5,000,000 asset to a $6,200,000 asset in a year and a half to two years. Now you can nod your head with genuine confidence.
We're starting a short video segment called "NAPKIN MATH," to help understand some of the terminology in real estate investing.
Comments