How to Decrease Expenses While Adding Value to Your Building

By Kyle Pulis

Market reports continue to show the multifamily real estate market in Canada is booming, as investors capitalize on the open lending environment and renting remains a viable option for millions who are not ready to dive into marketplace.

But one of the ?hot topics? of discussion across investors? meetings recently has been how to increase the value of multifamily properties.

Fortunately, multifamily building owners are in luck, in that that it?s their financials and not the market that dictates the value of their investments. This means that, as owners, THEY can take control and implement a plan to improve the value of the property.

But before taking the wheel and driving forward, investors have to build a foundation of market knowledge.

First, let?s consider the cap rate for the building. The capitalization rate for property is a long misunderstood concept, yet it?s absolutely fundamental to market success for those who own multifamily properties.

The local cap rates are what set the values of a building. Cap rates range from market to market; however, they typically stay between 5-8%. The lower the cap rate is, the more you are paying for the building and its corresponding Net Operating Income (NOI). That?s why highly competitive markets like Toronto have cap rates as low as 4%. People here are willing to pay much more for the same level of income being produced by a building in a much less competitive city like Sarnia (Ontario), where properties sell at an 8% cap rate.

To solidify this concept, here is how a building is valued using a cap rate:

Building Value = Net Operating Income/Cap rate
$1,000,000= 60,000/6.0%

The potential of a property soon becomes obvious when you look at how the cap rate affects building value.

For example, if an investor owns a building with a 6% cap rate and can increase profits by just $100 per month, they can increase their building value by $20,000.

This can be seen by:

$20,000= 1,200/6%
Or
$1,020,000 = 61,200/6.0%

Think about that for a second. All you did was increase the building?s monthly income or decrease its monthly expenses by $100 and you added $20,000 in value to your building. There are tons of ways you can make your building more profitable and unlock potentially millions of dollars? worth of value. Next, I am going to describe a few of my favorite ways to unlock this value and how you can too.

Increase Rents to Market Levels

Those that own property over the long-term often fall behind in scheduled rent increases for their current tenants. Whether they?ve established a rapport with friendly tenants or are unwilling to fill out the proper paper work, these owners are losing out on thousands per month in additional rents when they fail to implement yearly increases to market levels. Also, when the time comes to fill a vacancy, owners must be sure to research what the new market rents are in their area and price their unit accordingly. This is especially important in provinces like Ontario and BC that have strict limits on rental increases. Pricing your units too low may make renting your unit easy but you are losing much more than you think.

Renovate to Appeal to Higher Caliber Tenants

Another option for building owners is to renovate their properties to appeal to a higher class of tenant that are willing to pay above market rents. They might add brand new kitchens, pot lighting, stainless steel appliances and other modern tastes to their properties. It may cost you an extra $5,000 in renovations, but if it allows you to raise your rents by $100 a month, you?re $15,000 ahead still (based on 6% cap rate).

Increase Cash Flow with Building Enhancements

Tenants will always pay for convenience within their own properties. This means that building owners can add tenant value while improving their investment ROI. Installing systems such as coin-operated laundry, extra parking, storage space, snack machines and ATMs within the property is simple enough. And yet these features can bring in tens of thousands of dollars in extra revenue to drive-up property value in the multifamily marketplace.

Tenants aren?t the only ones willing to pay for the use of your building. Companies will rent space on your roof/walls from you for a number of uses like solar panels, billboards and cell phone towers.

As well as improving returns from their building, owners must also consider their on-going expenditures as a means to enhancing building profitability. There are a number of changes that can be implemented to maintain tenant comfort and ensure long-term tenancy while reducing the overall cost of operations.

Here are a few examples that might work for individual building owners:

Low Flow Plumbing

Building owners can save by installing low water flow systems within their showers and other plumbing areas. These products are designed to conserve water while reducing the energy cost. When then coupled with some of the lowest energy prices available to building owners when they compare energy prices, this could lead to huge savings across multiple complexes. When installed over a building with 20 properties, the savings quickly add up. Therefore, it might be a good idea to reach out to the likes of Ultimate Plumbing & Repair to see if their services could bring some savings to your properties.

Insulated Roofing

Another common problem in older buildings is poorly insulated roofing areas. These areas let in cool air during the winter and allow warm air in during the summer, limiting tenant comfort and making those new air conditioning systems a pointless investment, instead, the first option to be looking at might be to find an affordable siding and roofing contractor that can keep expenditure down while also completing the improvement jobs in a professional and suitable manner. By installing insulated roofing in their buildings, owners can both achieve energy efficiency targets and reduce those rising gas bills significantly. Search for roofing austin tx to find some of the best companies to come and quote changing the roof of your property to something more energy-efficient.

Strategic Renovations

Owners must analyze which maintenance issues are leading to excessive month-to-month costs. For example, they might have a boiler system that isn?t working to peak efficiency or toilet systems that are costing large sums in day-to-day maintenance. These costs can easily be removed from the balance sheet with renovation work that is done properly and well thought out. One of my favorite reno-tricks is to install peel and stick 12×12 tiles and grout them as if they were ceramic. When you?re finished, they will look exactly like ceramic tiles but will never crack and break. It?s a trick that helps eliminate having to constantly replace broken tiles or, even worse, having to replace the whole floor when one tile cracks because you cannot find a matching tile years later.

Retain Control and Act on Opportunities to Improve Building Financials

Ownership of multifamily properties brings with it its own set of unique advantages outside of the fluctuating real estate market environment. But owners must be able to improve the profitability of their building if they are to increase its future sale value. Today?s multifamily property owners have a measure of control over how their asset performs compared with other properties in the area. Keeping that control requires decisive action and a commitment to improving those all-important building financials.

Kyle is the Co-Founder of Pulis Investment Group which offers investors a Hands-Free, RRSP eligible opportunity to invest in apartment buildings. Winner of REIN’s Rookie of the Year, Multi-Family Player of the Year, Leslie Cluff Memorial Player of the Year and Top 10 Player of the Year awards. Kyle can be reached at: kyle@pulisinvestments.com.