A small change in your net operating income can make a big difference in the value of your income property.

So you want to raise the value of your commercial income-producing property but don’t have the money to spend on improvements. There is a simple and basic way to increase your home’s worth. Increase your net operating income by thousands of dollars and your property’s worth by thousands.

Since two factors determine your NOI, your revenues less your costs, these two factors generally can be increased or decreased, even if only slightly, and help increase the value of your property more than you might realize. Most commercial income properties are bought and sold based on a CAP rate, or the rate of return a buyer is willing to accept in purchasing a property.

Revenue Increases

In the current market conditions, sometimes it is hard to keep rents where they are, as many sophisticated tenants know they can get concessions from landlords. That being said, if you can increase your rental revenue through either slight increases or vacancy reduction, you can bring about a surprising value increase in your property. For example, if you own a 10,000 square foot building and can increase your overall rents by just 5 cents a square foot, you will boost the value of your home by $5,000 if you choose a 10% CAP rate. As the CAP rate goes down, the rise in value goes up. For example, using a 6% CAP rate would increase this same building by $8,333.

Better yet, renting out one additional small space of 750 square feet at a rate of $8.00/SF annually would increase the value of your property by $60,000 at a 10% CAP rate and by $100,000 at a 6% CAP rate.

Cost Savings

Unless your property is leased on a NNN basis where all costs are passed onto the tenants, lowering your operating costs has the same effect on the value of your property. Let’s say you can negotiate with your landscaper and get him to discount his monthly rate of $950 by 10%. That little change will bring in an extra $11,400 and $19,000 on 10% and 6% CAP rates. It could hold off any of your expenses not paid by the tenants, such as trash collection, utilities, insurance, and property management.

Timing

While a good property manager will always look for these slight advantages that increase the cash flow, the real benefit is in the additional value they bring when you’re ready to sell. A relatively small increase in a property’s NOI will yield big profits when sold.

The accumulation of assets that will increase value over time is often overlooked. Many choose instead to invest in an item that decreases in value.

A home or other real estate asset will appreciate over time. Each year, property values tend to climb, working exponentially. This continual increase in value should be put to good use.

Exponential Increase

Take the example of a house purchased at $100,000 and increased at a rate of 10% each year. So one year after being bought, it would be worth $110,000, increasing in value by $10,000.

The following year it would increase in value by $11,000, putting it at a value of $121,000 and the next year, if still growing at 10%, the new deal would be $133,100, having increased by $12,100. So over three years, the house, although constantly rising by 10%, is growing by larger and larger amounts each year.

The Rule of Seven

There is a recognised rule in the real estate industry that property values that increase at a rate of 10% each year will close to double in value in seven years. This 10% growth rate is possible in areas that demand real estate, such as capital cities.

Consider the rule of seven and the previously provided example. By continually increasing in value from $100,000 over seven years, the same property will be worth $194,871 by the end of the seventh year. Even if the purchaser of the property had to borrow the total of $100,000, they would have an increased value of nearly $95,000 that isn’t owed to the bank by the end of seven years.

In this way, property purchasing for a long time can increase one’s assets and financial worth. The keen property investor can utilise this $95,000 to borrow against and invest in a second home, again working toward owning a property that will exponentially increase in value over another seven years.

Creating a lot from a Little

Someone looking to buy a house would be hard-pressed to find a decent one at $100,000. However, it is possible to invest in real estate by having at least 10% of the house’s value that one is looking to purchase.

In this way, the home purchases may start with a relatively small sum of money (in comparison to the total value of the bought property) to create one’s property portfolio and begin to generate an asset that will only increase in value over time.

Investing in real estate may be a lucrative and worthwhile endeavour. But being a landlord is not always easy. So here are some things to consider.

There are various reasons you could find yourself pondering renting out a house. Perhaps you wish to purchase a new home and have difficulty selling your current residence. Or maybe you’re moving for a short time and don’t want to leave your house empty for a long time. And the abundance of home foreclosures makes real estate investing an attractive prospect. Whichever reason you choose to become a landlord, there are hazards and issues to be aware of.

Screening potential tenants

Once you’ve decided to rent a house to someone, you become a landlord. And you are being a landlord isn’t for the faint of heart. No matter how responsible and trustworthy your tenant might at first appear, the unfortunate truth is tenants don’t have nearly as much to lose if the property isn’t maintained correctly. Therefore, it’s imperative to screen prospective tenants as a landlord thoroughly. To do this, Consumer reports may be used to analyze rental applications as long as the Fair Credit Reporting Act (FCRA) regulations are followed. Be aware; however, if you deny an applicant based on a consumer report, you must notify them in writing. Failure to provide this disclosure notice can result in a lawsuit.

Your written lease agreement

Be sure you use a written lease or month-to-month agreement that fully details certain information such as the names of all tenants, occupancy limits, term of the tenancy, amount of rent, deposits and other fees, pet policies and certain restrictions. Nolo.com is an excellent site to do some necessary research on the subject of lease and rental agreements.

Upkeep of your rental property.

At some time in our lives, the bulk of us has been tenants. Keep in mind what it was like to have something go wrong, submit a service request and wait for it to be resolved. Making repairs to your rental home promptly will result in a happy, cooperative tenant and protect your investment. Asking that your tenant put their requests in writing enables you to document them. Making prescheduled visits allows you the opportunity to be sure the property is being well taken care of. Be sure to give your tenant at least 24 hours notice before entering the property.

Record keeping

Keeping accurate records of any repairs, insurance costs, and other expenses is essential for tax purposes. Additionally, it is a fantastic method for estimating prices for future reference. In addition, when the time comes for a lease renewal, this gives you an idea of if a rental increase is necessary.

Open communication between landlord and tenant is a must.

If all goes well and your tenant-landlord relationship is amicable, consider yourself fortunate. Many landlords are faced with problems such as non-payment of rent, disputes over maintenance and repairs, destruction of property caused by people and pets, complaints made by neighbours or law enforcement and a variety of other reasons. Attempting to discuss the situation with your tenant should be your first option. Keep records of all written correspondence and notes of conversations. Keeping communication open between you and your tenant allows issues to be resolved before leading to a costly legal battle.

Mediation for tenant issues

If you’ve tried every means possible to reason with an unreasonable tenant, you might consider mediation; It is often accessible for free or at a reduced rate via community mediation programs. Call your county clerk or mayor’s office to find out more information on the mediation process.

Evicting your tenant

If mediation fails or your tenant refuses to comply with your request for mediation, you may have no choice but to initiate the eviction process. But before beginning an eviction, you must first legally terminate the tenancy, which means giving the tenant written notice. Your state dictates this process. At this time, it is prudent to retain the services of a lawyer.

Property management companies

If being a traditional landlord sounds a bit overwhelming, but you still see the financial advantage of buying an investment property, you may consider hiring a property management company. For a fee, usually, a percentage of the rent, property management companies will do most of the work for you, including any routine maintenance. Property management companies can be found online or in business telephone directories.