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.