This is part two in a five-part series about increasing your income as an income property owner. Bob Nelson, real estate investment broker, with Pacwest Real Estate Investments, and René Nelson, commercial broker and owner of Pacwest Commercial Real Estate in Eugene, look at value-add with units renting below the market rate.
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Let’s imagine a scenario in which a client is sitting on some cash. They do not want to go out and buy another apartment complex and take on debt. They consider themselves to be in the retirement stage of life, but they do want to improve their current property. They have an 18- to 20-unit apartment complex. They’re behind on market rents because they’ve had such good tenants. They have slowly raised rents, but many years they didn’t raise rent at all
At this point they’re about $200 below market rent for what a one bedroom, one bath could rent for. How much should they put into each unit in order to make a value-add worthwhile?
Value-add is a commercial broker’s term for a property that can be acquired based on its current value and the current rents, and then the buyer can do improvements and remodeling to change the property’s appeal and perhaps get closer to market rent.
Unfortunately, when a landlord is $200 off for market rent and they give a tenant a $200 increase in rent, the tenant will probably tell you good-bye. But of course, they will likely discover that they will pay more on the next place.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
I suggest that this situation calls for a substantial increase but not necessarily $200. A significant increase may motivate some people to move, helping them to realize perhaps they had wanted to move out earlier. Then, as some units become vacant, you can go in and take out the carpet and put in wood floors, substantially upgrade kitchens, substantially upgrade the bathroom, and you’ll find that when those renovated units are available to be rented by a new tenant, you’ll probably cover your spread.
The question then becomes, how much money do I put into a project in order to accomplish that $200 per month increase? We’ve developed spreadsheets based on our own experience to assist in those evaluations. If you need help, contact me at 541-485-8100.
The Increasing Your Income through Value-Add Series is from Bob Nelson and René Nelson on the “Real Estate Today ” Eugene, Oregon, radio show, which airs at 5:30 daily on KPNW.