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.