Selling real estate rentals isn’t like selling houses. You can paint a house, and get a little more because it looks nice. Rental properties, especially larger ones, are different because they’re bought by investors, who look at income more than new paint. Raise the income, and you increase value to investors.
Time to learn about capitalization rates. If investors in your area expect a capitalization rate of .08 it means they want a net return (before loan payments and taxes) of 8% on the purchase price. So if your three-plex generates $12,000 net income annually, they’ll value it around $150,000 ($12,000 divided by .08). If you can make it generate $16,000, you make it worth $200,000.
More Income From Real Estate Rentals
Raising rents is the obvious way to boost income if you can justify it. See what similar units are renting for. If your units are $60 below the going rate, you can raise the rents and not lose your renters. Increasing the rent $60 for three apartments means $2160 more net income annually. With a .08 cap rate, you just added $27,000 to the value of your property.
There are other ways to raise rents. Maybe your tenants will agree to $30 more per month if you have a carport built. That’s $1080 more net income annually, meaning roughly $13,500 more value-added to your property. ($30 x 3 units x 12 months = $1080 divided by a .08 cap rate = $13,500) If you can build that carport for $4,000, that’s a good return on investment right? What else do they want?
Higher rent isn’t the only way to get more income. Storage sheds can be rented to tenants or you could put in a coin-operated washer and dryer. With larger income property, you could install pop machines.
Reduce Expenses Of Real Estate Rentals
Could you add insulation to reduce heating costs? If you’re paying $80/month for lawn care, will one of the tenants do it for $40? Could you buy cheaper insurance? Any way you can reduce expenses raises net income (unless it scares away tenants). A new $4,000 furnace that saves $800/year on heating costs means you just turned $4,000 into a $10,000 higher sales price.
This isn’t an exact science, and of course appearance and other factors matter. Increasing that net, though, is the surest way to get more for your rental properties. Make the changes at least several months before you try to sell the property (a year before, if possible). Also, learn how do the math – it really does matter with real estate rentals.
President and founder of the Colorado Landlords Association, best-selling real estate author and attorney, landlord and real estate investor with 28 years' experience.