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Increasing the value of apartment buildings
By Mneesh Mittal and Oren Steinman Most apartment building owners today are aware that the most significant indicator of value for their building is cap rate. However, many owners still struggle to determine the best way of increasing that value. There are of course two primary ways to do just that: increase rents and/or decrease expenses. Many owners are muttering under their breath at the notion of increasing rents given the 2011 standard increase limitation of 0.7 per cent. However, there do remain other avenues of raising rents, namely by way of renovations and improvements. For instance, spending five thousand dollars per suite on renovations is not an idea that many owners would jump on, especially if that same suite can be made “rent ready” for only a thousand. However, if that extra four thousand translates into an increase in rent of a hundred dollars per month, that extra investment can increase the value of that building by $17 to $21 thousand.
Imagine only five suites are turned over through an entire year. With an extra investment of $20 thousand, the value of a building can increase by $85 to $110 thousand. The key in this example of course is determining whether or not there is a market for the higher rents. Many of our clients have found that such a plan is feasible, others have chosen a less aggressive approach, due to the limitations of their building location within the market. Improving suites and increasing rents can be doubly beneficial if the renovations can be done with a mind toward energy conservation. One client of ours installed low flow toilets in his 30 suite building at a cost of four thousand dollars, lowering his water bill approximately $1800 for the year. That translated into an increase in property value of $30 to $35 thousand.
Renovations are certainly amongst the most obvious paths toward enhancing the value of an apartment building adding units, discharging utility contracts and intelligent refinancing can all have a significant impact on its ultimate worth. Equally important is hiring the right property management and superintendent. Each building is unique and offers various hidden value possibilities. Some buildings are dated and would benefit from improvements while others are impeccably maintained and offer the luxury of unutilized storage or office space. Often the sole obstacle to increasing the value is weak management. We are finding an increasing number of landlords are inquiring about the value of their buildings and it’s usually the same owners that have close relationships with their lenders. Experts predict interest rates to rise by another 0.5 to one per cent by the fall/winter. So, anyone interested in learning more about the value of their building should get the ball rolling now. Oren Steinman, Mneesh Mittal, Amit Paul and Vishal Mittal are The Apartment Specialists - the most active multi-residential sales team in Ontario the past two years, with an average of over $125 million sold per year. If you have questions they can be reached by phone 416-777-0400, or visit www.theapartmentspecialists.ca.
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