Increasing Value to Tenants Increases Property Value

I’m a big believer in the idea that when you take care of others first you will be taken care of yourself.  Our free enterprise system is set up to reward those who bring value to the market, in our case – tenants.  Our residents willingly pay their rent in exchange for a place to lay their head at night.  Many property management companies stop there but PIMCO goes beyond the tenant needs to the tenant wants.

Adding value (or perceived value) to any product is the key to increasing income (value) to the business.  The core product we provide is shelter but much like a car, we add value by adding features.  The higher perceived value of the customer the higher they are willing to pay.  The more tenants are willing to pay the more income the property producing, thereby increasing the value of the property.

PIMCO specializes in increasing property values through increasing income, repositioning, and renovating properties for our clients.  Today I’m going to briefly talk about increasing your capitalization rate through increasing income.  The cap rate is calculated by dividing the income by the cost of the property.  For instance, let’s say you just purchased a small apartment complex that is earning $80,000/year for $1,000,000.  This would give you an 8% cap rate, which isn’t bad but you’d like to get a little more bang for your buck.

Your little 20 unit complex is about to get a small face lift.  You decide to spend $3,000 installing an on-site laundry room and vending machines which will add $10,000/year of income.  You also spend $2,500 on adding covered parking which allows you to charge an extra $50/month per unit.   Not everyone will be willing to pay the extra money for covered parking so you only build 10 covered parking spots.  This gives you an extra $500/month or $6,000/year.

Another great way to add value is to create a “dog park.”  This is a glorified way of saying dog bathroom.  Having a small fenced in area that tenants can take their dogs to so they can do their business and maybe play with the other tenants’ dogs can really make prospective residents feel better about having their best friend in your complex.  This is drastically make the property cleaner and more appealing.  Nothing says stay away like a big pile of poo by the sidewalk.  You can even increase your rents by say, $20/month when it comes time to renew for this one item.

By using these three simple strategies you’ve successfully increased your revenue to $100,000/year which brings your cap rate to 10%.  Now, if you want to sell this property and the buyer is happy with an 8% cap rate you can sell it him for $1,250,000.  This is oversimplifying but you just spent $6,000 and got $250,000 in return.  I’d say that’s a pretty good return, wouldn’t you?

There are a number of other small projects that can be implemented that can dramatically increase the perceived value of your tenants, which increases your revenue, thereby increasing your property value.  The whole point here is find out what the tenants want, how much they are willing to pay for it, and get them what they want.  By taking care of your tenants they will take care of you – many times over.