“If It Ain't Broke…Fix It…Fast…”
No, it is NOT a typo. In our business of investment real estate, particularly commercial investment real estate, you need to have a method of always working on the properties that you own – or the person in charge of managing then needs to be doing this. Let me emphasize – ALWAYS. Remember the value of your apartment building is directly derived from the Net Operating Income the property produces. The formula is quite simple:
More Income = Higher Value
I have seen sellers leave thousands of dollars on the table when they have sold their properties…and never even knew it. This is especially true for owners that manage properties themselves and have owned them for many, many years.
Some apartment owners start to play things safe over years of ownership. You may have seen my simple example of the old gentleman that sold his 7 unit property for $130,000. After making just a few changes over a period 4 months, the property was easily worth $160,000.
And I am not talking about putting in new windows, siding, carpet, or cabinets. The changes I am referring to are simply getting rents up to market levels and reducing expenses where needed. What happens with many owners is over time they start to play it safe. They get comfortable with the tenants, their vendors, and the overall property management, and they operate with very few problems – in their own minds…
Thus, as human nature goes, owners tend to stop paying attention to their expenses. They stop paying attention to what the market rents are for the apartments. The bottom line is they fall into ‘the comfort zone' and let the building run on its own, rather than making the property more profitable.
Be sure that you are not making these two huge mistakes with your apartment property:
1. Not Increasing Rents To Market Rates
Many owners that manage their own properties have a tendency to not raise rents. I have even seen this where a property management company is running the day-to-day operations.
This is the number one mistake I have seen investors make over the years, and like the gentleman in my story, leave tens of thousands on the closing table when he sold…and never even knew it.
2. Not Watching Expenses Closely
Be sure that you are checking expenses closely, and bidding out services on a regular basis. Do not be complacent with your vendors. It is easy – especially with recurring expenses like insurance to stay with your existing agent, and not ‘shop around' on at least a yearly basis. Remember, it is good to have a nice working relationship with your vendors, but do not sacrifice profits and property value because of it.
By the way…you might be wondering about the seller in the story I told earlier. How could a seller with NO real motivation to sell, with NO real reason to discount his price leave a whopping $30,000 on the table? It was not broke so he did NOT fix it. Moral: FIX IT! As much as you can.