How to increase the value of your apartment
building. Part 2 Implementation
1) Increase Rents, Decrease Vacancy, Speed up Turnover
Most active landlords assume market rent is set by the last apartment they rented. This may or may not be true. I recently toured a large corner unit in Oakland which was offered at $890/mo. Because of the unique nature of the unit it was nearly $65/mo under priced however because the owner is managing so many other units they did not realize this one specific unit was under market.
By comparison some landlords keep asking rents inflated deluding themselves that they will get the same replacement rents in a declining market. This is a dangerous game and the landlord always looses (unless you are in a tightening market).
A) Evaluate Rents – Evaluate your rents by asking your tenants, calling on other for rent signs in similar areas or using Rentometer.
Link Corkery has been conducting rent surveys for many years and you can access our rent survey on our website www.linkcorkery.com.
I have also gone as far as to dump Craig’s List asking prices into Excel and come up with my own average. You must know the value of each of your units and their unique selling points in order to get the highest rent for each.
B) Improve Marketing – Market your units with compelling photos and well written descriptions in order to get a larger selection of qualified renters and ultimately higher rent. Whenever I have a turnover I take dozens of photos of each unit and write well thought out, thorough descriptions. A well written description of you and your unit can do more to bring incoming calls than almost anything else. I have had prospective tenants tell me the reason they called is because I seemed nice and low stress. Tell prospective tenants why they should rent from you. After all most people prefer to engage with a person not a company or overbearing landlord. Post lots of photos and video at flickr and share them with prospective tenants.
If you use Craig’s List, re-post your listing every day. I know countless landlords who just dump a quick description of their unit up on Craig’s List and forget about it and wonder why it takes them over a month to rent a unit. When I have a turnover I make it a point to get it re-rented within 2 weeks and there is no reason why you cannot do the same. It starts by posting and re-posting each and every day, and adjusting the price each week. In fact I sometimes start to post the unit even before the old tenant has moved out. Start by pricing the unit at 10% over the nearest comparable unit in your area, then reduce the price by 3-5% each week until you receive a minimum of 5 inquiries per day. Once you have a qualified tenant pull the listing off of Craig’s list so that you can re-post later if you need to.
C) Raise Rents – Oakland allows for capital improvement and debt service pass through. Once you evaluate your rents, any that are below market should be increased as allowable. Rent adjustment calculators and forms.
If you live in an area with rent control you are most likely very familiar with the allowable increases, however, have you gone through each of your leases to make sure all increases have been made? Create a reminder in your calendar for each of your tenants on the anniversary so that you give allowable increases as soon as they are permitted. Keep especially close eye on the random tenant who is well below market and keep up with rent increases every year regardless of the paperwork headaches.
D) Turnover and Retention – Everything you do to reduce the cost of turnover will improve your bottom line dramatically. We were meeting with a prominent property manager recently and she told us that our P&L could be improved by eliminating our legal fees in regards to eviction. In her 20 years of experience as a property manager she has recommended always working out a solution rather than evicting a tenant (within reason). Granted this is not always possible however since then I have tried the same approach and it seems to work. I have a tenant who we would have evicted however instead I spoke with her in person and worked out a solution of partial payments. It has been much less expensive than evicting her.
If you have great tenants let them know how much you appreciate them and do your best to keep them. In many situations tenants will stay in a building because they like the landlord. I have spoken to so many tenants who tell me horror stories about how awful their former landlords were. Granted we all know that tenants can be very high maintenance, however keep in mind that they generally appreciate a comfortable living situation that is low stress and personal. I emphasize this in my Craig’s List postings.
I decided to add a shared garden on one of my apartment buildings to increase the desirability of the property. Frankly not many tenants use the area, but it has kept a few from leaving and generally the ones who use a garden are tenants who care about making and having a nice home. A shared outdoor space or garden can help retain some of your better tenants at a reasonably low cost.
2) Add Other Income
The fastest way to increase the value of an apartment building is to increase the Net Operating Income. There are numerous creative ways to do this, here are the basics:
A) Laundry – Adding laundry can be simple or difficult depending on the structure of your property. I recently sold a 25 unit condo complex which had room to expand and convert a utility room into a laundry room. My client against my recommendation
chose to create additional storage space. When calculating your ROI on laundry you must capitalize it at the same rate as your building. For example a property that sold for $1,000,000 at a cap rate of 7% would have a cash flow of $70,000. If you can add $150/mo in laundry income you have raised the value of your property by $25,714.
We evaluated a large 63 unit apartment building recently and found the laundry leases were at a 50/50 split on a 10 year lease even though market rates had improved to allow for a 25/75 split. If the owner had not canceled the lease or renegotiated the split prior to the renewal date, he would have been stuck in the existing lease and below market split. Review all your leases and agreements
every 6 months.
B) Storage – We toured a nice building in Lake Merritt recently. The owner had cleverly created a bike locker area in an otherwise useless section of the parking garage. This is a very smart way to add value. Although there may not be an immediate or 1 to 1 increase in income, there are huge benefits to adding bicycle storage to an apartment building. Many tenants do not own cars and they are forced to cram their bicycles into their small units often banging up the walls on the way in. This creates an added value for tenants, decreases rent up time and improves the appearance of patios and interiors.
Many buildings have individual storage lockers which can sometimes bring in $25/month. In this economic climate generally storage is included in a small parking fee. However it is a good idea to find ways to offer storage as it can reduce rent up time and help entice prospective tenants who have a need for storage. This is even more important if your units have minimal closet space.
C) Cell Site – Cell phone companies often locate their towers on top of apartment buildings and this can bring in substantial income. We have listed and sold numerous properties with cell tower income and found that is a great added value however owners need to be diligent in understanding the leases. In general it is much easier to add leases to an existing cell tower site rather than install new sites. Cell phone carriers tend to flock together and place their towers in the same locations There are brokerages that specialize in purchasing cell tower income streams. We recently received an LOI to purchase 4 cell phone leases which produced $6000/mo in income. This was an all cash offer of $600k for the $6k monthly income. This particular company capitalizes the income stream at 8% of annual income. There are many details, options and considerations in regards to cell tower income but its worth exploring, particularly if you already have a cell tower on your building. PCLC can help you evaluate your site for possible cell tower income.
3) Improve Management
In our experience there is no replacement for a dedicated owner manager. Time and time again the most well run properties we see each day are those that are managed by a conscientious owner who is frequently on site and knows the tenants and the building
better than anyone else. This however is not always possible for busy or absentee owners.
A) Outside Management – Over the decades that I have been managing my own properties both independently and with the help of outside companies, I have found that management companies require management. Even if you hire the best management company you should still spend a great deal of time on site, examining all the P&L statements, and scrutinizing every expense. Nobody cares about your money like you do and generally property managers will simply send out a repair man rather than investigate and try to fix the problem internally. Choose carefully and pay close attention.
A good solution which has been successful for me is sharing responsibility with management companies. For example if there is a rent up fee, sometimes I will do the rent up myself and save the fee. Alternatively I may hire a management company to do the rent up and then handle the collection of rent myself. Find a company that will be flexible and work with you on these options. In the East Bay we can recommend CWP and The Lapham Company for property management.
E) On site Manager – Whenever possible the best solution to reduce expenses and maximize efficiency is to have a husband and wife on site management team who can perform a wide range of repairs and even capital improvements. If you own a smaller building you may not need on site management, different cities require on site management depending on the size of the building.
We were able to reduce expenses on a large apartment building by replacing the old manager with a couple who could perform more of the maintenance functions. Your on site manager should have a power snake and know how to use it. It can save hundreds of dollars a year simply by snaking your own lines rather than calling a plumber in an emergency. An on site manager with maintenance and repair skills is your first line of defense against expensive journeymen and service calls.
F) Rent Up – I recently met with a client who said his unit was vacant for 2 moths and he had showed it 20 times. It can be difficult to accept a loss to lease on a unit especially when you have been receiving top rents for many years. But the sooner you accept the reality of the situation the sooner you can get back to making money. Reduce the rents quickly until you have a steady stream of qualified applicants. In general the higher quality renovation you do the higher quality tenant you will get and the faster you will rent the unit. You must balance this with the costs of renovation and time to rent. For every month you lose in tenancy, you need to make up for in increased rent. Our recommendation is that you lower the rents quickly in a declining market and fill the units with qualified tenants as soon as possible. Do not make the mistake of getting desperate and taking a poorly qualified tenants. The number one rule to keep in mind when renting up a unit ITS BETTER TO HAVE A VACANT UNIT THAN A BAD TENANT.
4) Reduce Expenses
This is largest category an owner can control and manipulate that can improve an apartment building’s bottom line very quickly. Property managers differ in the way they account for expenses, sometimes classifying turnover as capital improvements and other times taking them as repairs. Some of your decisions may change depending on your tax situation and your long term goals with respect to your portfolio. Be sure to check with your accountant regularly and make sure you take a combination of capital expenses and repairs so that you can protect the long term value of the asset.
Your expenses on any given property should fall within the guidelines of what a benchmark lender uses in your area. For example we recently met with a representative from Chase to review their guidelines. They will take a min of $750 per unit in repair cost and underwrite expenses at 45% of SGI, including vacancy factor. If your building’s expenses are higher than this something is wrong. Meticulous managers can keep their expenses below 30%, but do not save at the expense of necessary maintenance. This is where the Axis I,II and II come in. Evaluate the age of the property, tenant mix and location to target the biggest areas of potential savings and budget for the inevitable big ticket repairs.
A) Maintenance – Apartment buildings require constant attention, there is always something breaking or needing to be upgraded. Most of the work is generally on the inside of the units and should be done on turnover. Whenever possible bill back repairs to tenants. Clogged toilets should be cleared once by the landlord, thereafter any clogs due to tenants should be billed back to them. Keep in close touch with your tenants, send letters, post information and let them know the rules right from the start.
When repairing the interior of a unit, make a calculated decision regarding materials. In our apartment building we like to replace linoleum with tile whenever possible however we have a budget for repairs and once we go over, we use linoleum instead. Any time you re-tile shower enclosures, make sure to install new valves and copper risers which can be accessed in upper and lower units at a later date.
We always use the same color paint on the inside of each unit and keep extra paint on hand. Often we do not paint the entire unit, but carefully select the areas that need attention. Sometimes we paint a single wall or even wait to see if the new prospective
tenant requests the unit to be painted. Many landlords simply paint each unit no matter what each time it turns over, this is not necessary. With water base paints it is possible to feather in with a roller and touch up scuff marks or simply paint a single wall. Make sure your maintenance man can do this.
B) Capital Expenses – Major capital expenses such as roof or foundation work should be budgeted and planned for and discussed with your tax advisor. Make sure you always consider your long term goals when deciding which items to postpone and which to tackle. Many property owners are surprised when an old water heater explodes at a cost of $4k to replace. With proper planning this can be dealt with before hand by inspecting the property more carefully and allowing for adequate reserves. Plan ahead, inspect your building and budget for capital expenses.
Whenever possible if an item is outside your budget, explore repairing, patching or deferring projects. I have been able to have a qualified roofer patch a roof on our apartment building for 2 years before replacement. At the time of replacement he agreed to credit me for the repairs. Find qualified people that will work with you and who are flexible in how they operate. I cannot recommend highly enough Alonso Guerero roofing contractor 510-557-1535 and for seismic work or soft story issues contact Homy Sikaroudi at 510-750-4420.
C) Turnover – Turnover should generally be categorized as capital expenses in order to improve the cash flow of a building. While some owners like to take the deduction in the same year, this can create a weak P&L. Your property should look good physically and on paper. Be careful not to run all your expenses through your property of you will eventually be stuck with a poor balance sheet which can make selling and re-financing difficult.
Walk through with each new tenant and take 4-5 photos of each room for documentation. If a tenant occupies a unit for less than 2 years, any damage should be billed back to the tenant. Make sure tenants know they cannot leave picture holes in the wall or custom painted rooms. Do regular inspections of each unit so there are no surprises. I always inspect units as soon as I get a 30 day notice, before the tenant has vacated the unit. This way I can plan my time line and ensure a speedy rent up.
D) Utilities – Water, gas and electric are all rising. In Los Angeles where I have owned property for many years we saw the water bill rising exponentially and the city suddenly adding taxes and fees to the water bill. Be careful in how you manage the water bill on your apartment building. While some owner managers will tell you it’s a fixed cost and there is no way to control it that is simply not true. Turn your focus to the largest areas of potential savings first, but water may be one of them. You can get free or $10 replacement low flow toilets. Install in sink aerators and locks on outside hose bibs. Keep landscaping to a minimum and use drought resistant plants wherever possible. We recently toured a large garden apartment complex in Hayward just after the premises had been watered. We discovered pooled water all around the concrete and in areas where there were no foliage.
Simply changing the quantity and timing of watering can save. Look for leaks and have the water company test your lines whenever there is suspicions increase in water bill. East Bay MUD can give you a discount on a previous water bill if you find and correct any known leaks. Ask for a discount or refund after you repair any leaky fixtures. Train your tenants to communicate with you, especially if there are dripping faucets. Common area utilities can be controlled with timers and automatic lighting.
E) Garbage – Recently we were able to get 2 large recycle bins in exchange for one large dumpster. This can save up to $80 or $100 a month. Remember to capitalize your savings the same way you did with laundry income. A savings of $100 a month can equate to $20k or more in increased value. Train your tenants to conserve, trash, water and electricity.
F) Taxes – Apply for re-assessment to reduce your taxes. If you purchased your property after 2005 you probably have lost value. The assessors’ office in some cases will automatically reduce your assessed value, however sometimes you must apply for a temporary reassessment through the assessors’ office. You should also apply for a formal appeal at the same time as you apply for an informal appeal. The formal appeal can take up to 2 years, if you are denied the informal appeal you can wait to get a hearing. You need to file both every year between July 2 and Sept 15th at a cost of $50.
5) Reduce Interest Rate
This may seem obvious but we met with a landlord recently who had a 7.5% loan on his apartment buildings. Now is the time to evaluate refinancing options for all of your apartment buildings. This should follow careful strategic long term planning, something
PCLC can help you with. There are many options when considering a refinance. We were recently quoted 4.5% by a HUD lender fixed for 35 years, however the points are very high and there is a non-refundable 5K up front fee. Generally speaking a 5 year fixed is the most common solution we are seeing and Chase has funded many apartment loans at 4.5%. However they have strict guidelines and the LTV’s are falling. Location is also an issue, go back to Axis I. In this market Chase considers many parts of Oakland to be a high risk area. They are very with underwriting, sometimes refusing to lend altogether.
Now is the time to refinance if you are planning to keep your property for at least 3 years. Read your note and understand the important factors such as prepayment, index, term and allowable assumption. In some cases landlords may be better off allowing their loans to adjust down rather than refinance. Because California is considered a declining market, most lenders are going to take a low LTV on any apartment building. Act now to mitigate the risk of being unable to refinance if values drop further. Generally speaking if you can save at least 1 point on your rate it’s worthwhile to refinance depending on the points. Refinancing into an assumable loan can be a huge advantage if you are considering selling in the near future.
We can recommend Dawn Ernst for commercial loans at 510-885-1047 and Ted Levenson at Chase 415-945-5430.