There are two main factors that affect the long term profitability of an investment property – market appreciation and increasing cash flow. Outside of curb appeal and capex, market appreciation is pretty much out of our control. On the other hand, driving value by increasing cash flow is absolutely something we can control. Easier said than done some might say. Well, here are 5 ways to increase the NOI and add value to your property.
#1 – Increase the Rent
Increasing the rent to match market rates seems obvious, but knowing how much to increase takes a little more thought. First, you need to figure out the market rent. Compare your unit rent to other similar units in the area. To help keep everything equal, make sure you are comparing apples to apples. Look at similar size units in similar age buildings with similar amenities and handling of utilities. You can also ask local property managers and brokers what they’ve seen as market rents.
You will only be able to increase the rent when you get a new tenant or at a lease renewal, depending on the terms of the lease agreement. If you increase the rent too much, too fast you could end up with a vacancy. Weigh any rent increases with the possibility of having to replace the tenant and the costs of the turnover. Whenever you can, add some value when increasing rents. Small improvements make rent increases much more palatable to your residents.
#2 – Decrease Your Expenses
Go over the past 3 years of expense statements and see where your money is going. Look for ways to reduce utility expenses. Installing thermostat timers can dramatically reduce heating and cooling costs. Something as simple as upgrading to energy efficient light bulbs can cut costs as well. Even if your units are separately metered, you will be able to charge a rental premium if you can prove cost savings.
Preventative maintenance can save hundreds in repairs. Make sure that you or your property manager are doing bi-annual inspections, and ask your tenant if they know of any repairs or problems.
Also, consider using a maintenance man to fix simple plumbing or electrical repairs instead of a licensed professional, if legally permissible in your area.
#3 – Refinance at a Lower Interest Rate
A reduction in interest rates by even ½ of a percentage point can make paying closing costs on a new mortgage beneficial. Before rushing out to refinance, make sure you calculate the break-even point. Determine the costs of the refinance and divide that by the monthly savings. That is how many months it will take to recoup the cost.
#4 – Improve the Appearance
A rental premium can be charged on buildings that are well maintained, visually appealing or offer upgraded features that appeal to that tenant group. Often some simple upgrades such as new hardware, faucets or cabinet doors can make a unit feel more modern. Increase the exterior appeal by improving the signage, striping the parking lot, adding some landscaping or improving the lighting. Additionally, make sure your units are immaculately clean when showing them. It is amazing how most tenants equate value with cleanliness.
#5 – Offer Value Added Services
Tenants, are often willing to pay extra for amenities and services. You start with the market rent and then add al a carte services. Here are some examples:
Value Added Services
- Pet Fees
- Trash Concierge
- Laundry Services
- Parking and/or covered parking
- Small Garden Plots
- Furnished Units
The application of these suggestions could easily increase your annual NOI by 10% or more. An increase in NOI means an increase in cash flow which will result in an increase in market value.