How do multifamily properties increase in value?

Description:  A summary of the ways we increase the value of our multi-family properties

It’s pretty simple:  When you increase the profitability of a multifamily property – either by decreasing expenses or increasing income – then the property becomes more valuable.

Just how much more valuable depends on where the property is located.  But let’s say that we’re talking about a desirable multifamily asset in a good market.  In that kind of circumstance, the prevailing cap rate – just a fancy valuation term – may be 5.  All this means is that for every additional 5 cents of annual profit that the property generates, the value of the property goes up by $1.

And here’s how that becomes really exciting.

Just imagine you’ve got a 100-unit building and you raise rents by an average of $15 per unit.  Well, that’s another $1,500 per month you’re taking in, or $18,000 extra per year.  But what does that do to the property’s value when it comes time to sell it?

Well, remember, this area is trading at a 5-cap.  That means that every nickel of additional profit is worth a whole dollar when it comes time to sell.  That’s a 20X factor.  So that extra $18,000 per year means that your property just went up in value – not by $18,000 but by 20 times $18,000 which is $360,000.  That’s over a third of a million bucks of additional value that’s created with a very small amount of additional profitability…

…and let me tell you this for sure:  An experienced, savvy general partner running one of these deals will generally cause an increase of FAR MORE than $18,000 in income over the course of the project’s life… so I suspect you can see how multifamily property ownership can become VERY profitable, VERY quickly.