Readers of the RHA Update tend to be an informed group of investment property owners. In the past, I have addressed the benefits of good property management from various angles, including better financial performance and steering clear of expensive law suits. In addition to these obvious benefits, good asset based property management can provide owners with substantial gains when they elect to sell or refinance their properties. As a Property Manager and active Investment Broker, I understand the importance of keeping the property in top shape and commanding the highest rents achievable.
I was recently contacted by an out of state investor looking at a property that was for sale. They wanted my opinion of the property as they would be retaining our firm if they moved forward and purchased the asset.
I took several of my staff members and went to visit the property on a Saturday morning. There was a leasing office however to the surprise of us all, it was closed on Saturdays. Yes leasing staff needs days off, but certainly not on a Saturday, which can be the busiest leasing day of the week. The biggest job property managers have is to get the units leased, something that can’t be accomplished if they are not there to do it. As the subject property was operating at TWICE the vacancy of others in the area, I got my first glimpse of what was going on at the property level.
On a subsequent visit, I did get in to see the units. Many were extremely tired with worn carpets. The kitchens were also worn. Glimpse number two showed why rents at this property were less than others I visited up and down the street. As you will see below, this breakdown in property management is going to cost the Seller a lot of money.
Here’s where it gets interesting. When you sell a commercial property, one of the biggest factors used in determining the value a Buyer will pay is the Cap Rate. Put simply that is the return they would receive on the Net Operating Cash Flow (Income minus Expenses) based on the purchase price. Many properties today are trading in the 4%-5% Cap Rate Range. At a 5 Cap, an investor will pay a seller $20.00 for each dollar of income! Think about it. If you have a 20 unit building and can increase your rents by $35.00 per unit a month by improving the management of the asset, it will equate to $700.00 per month, or $8,400 per year. Now let’s multiply that by the $20.00 (5 Cap) and you just made an additional $168,000.
There are many things you as a property owner can do to get your bottom line up. Take a good fresh look at your building. It might need a new paint color to make it look more modern, the units may need to undergo some cosmetic updates, exterior lighting with LED technology will not only enhance the look of the property, it will pay for itself in utility savings. Utility bill back in place? If no, why not. Take that expense and multiply it by $20.00 for every dollar you spend! In the end, your asset will pay you back 20 fold and them some for each dollar you spend enhancing the property. It will also improve the value of your asset should you wish to refinance, get you better tenants, and give you faster turnovers.
About the Author
Bruce A. Kahn, CCIM, CPM is a Managing Director of The Foundation Group Investment Real Estate Solutions, a full-service property management and brokerage company. He has earned the designation of CCIM (Certified Commercial Investment Member) issued by the CCIM Institute, and is a CPM (Certified Property Manager) with the IREM (Institute of Real Estate Management). For further information or for a property analysis, please contact him at 206-324-9424 or by email.