Many investors ask me, “What will my property be worth in the future?” Wow, am I Nosterdamus? Do I have a mystical magical crystal ball? Of course not. I tell them they likely bought the property by paying a multiple of the property’s consistent income stream. I also tell them the multiples of gross income or net operating income have not substantially changed in the last 20 years. So therefore, I feel it’s safe to say future value is a function of the net operating income of the future. So if you can consistently increase income or reduce expenses while maintaining the property in reasonable condition over time the value of the property will adjust accordingly.
For example, let’s say you just bought a four family building that had a net operating income over the last few years of approximately $10,000 per year. You bought it for $100,000 or ten times its stabilized net income. Over the next five years you have successfully raised income and expenses by 3% per year and the net income now (five years later) is stabilized at approximately $11,592. If you were consistently successful at this I would estimate value could approach $115,920 as shown below.
|Annual NOI||Value at 10 cap|
|Net Income at time of Purchase||$10,000||$100,000|
|End of Year One||$10,300||$103,000|
|End of Year Two||$10,609||$106,090|
|End of Year Three||$10,927||$109,270|
|End of Year Four||$11,255||$112,550|
|End of Year Five||$11,592||$115,9200|
Many factors can affect your ability to consistently increase income and because you must take this risk, it’s fair to say you deserve to earn a yield higher than you can yield from a more predictable and less risky investment like US Treasury bills or a passbook savings accounts.
Such forecasting can help in determining what you may be able to borrow at a future date and what available cash flow may be available for other needs and investments. Real Estate is a long term investment with slow gradual change possibilities. Adverse changes can happen more rapidly than substantial positive changes and we must be prepared to avoid as many adverse changes as possible while gradually improving your bottom line. Be realistic and don’t expect a sudden upward spike in income.
OK How can I increase income and decrease expenses???
Here are some additional ways to increase income
Gradually raise rents to comparable market rates. Look around and gradually increase if justified. Remember be gradual or you may lose good long term tenants.
Increase ancillary sources of income. Laundry, Pet fees, Application fees, Damage fees, Water reimbursements, Cable TV, Phone hook ups, Parking fees, Grants, Tenant Insurance, Recreation fees, Party admission, resident field trips, house and pet sitting, etc.
How to lower my operating expenses
Lower vacancy. Increase economic occupancy. (This is numero uno)
Get real estate taxes reduced by lowering assessed value
Lower insurance premiums
Submeter water usage to each tenant
Use energy efficient electrical and gas lighting, HVAC, hot water heaters, etc.
Economize on labor costs. Analyze the value of each employee or subcontractor
Analyze if it worthwhile to bring subcontracted services “in house” namely refuse collection, painting, janitorial, lawn care, security, management, accounting to name a few.
While you’re at it, look at your existing debt service. Can you reduce the interest costs?
Such adjustments should be reviewed and monitored to optimize your operation and values. Keep in mind, you will not be able to do all the items mentioned above but it can be gratifying to put forth the effort.