Real
Estate Rentals - Sell For More
by: Steve Gillman
Selling real estate rentals isn't like selling houses.
You can paint a house, and get a little more because it
looks nice. Rental properties, especially larger ones,
are different, because they're bought by investors, who
look at income more than new paint. Raise the income,
and you increase value to investors.
Time to learn about
capitalization rates. If investors in your area expect a
capitalization rate of .08 it means they want a net
return (before loan payments and taxes) of 8% on the
purchase price. So if your three-plex generates $12,000
net income annually, they'll value it around $150,000
($12,000 divided by .08). If you can make it generate
$16,000, you make it worth $200,000.
More Income From Real
Estate Rentals
Raising rents is the
obvious way to boost income, if you can justify it. See
what similar units are renting for. If your units are
$60 below the going rate, you can raise the rents and
not lose your renters. Increasing the rent $60 for three
apartments means $2160 more net income annually. With a
.08 cap rate, you just added $27,000 to the value of
your property.
There are other ways to
raise rents. Maybe your tenants will agree to $30 more
per month if you have a carport built. That's $1080 more
net income annually, meaning roughly $13,500 more value
added to your property. ($30 x 3 units x 12 months =
$1080 divided by a .08 cap rate = $13,500) If you can
build that carport for $4,000, that's a good return on
investment right? What else do they want?
Higher rent isn't the
only way to get more income. Storage sheds can be rented
to tenants or you could put in a coin-operated washer
and dryer. With a larger income property, you could
install pop machines.
Reduce Expenses Of Real
Estate Rentals
Could you add insulation
to reduce the heating costs? If you're paying $80/month
for lawn care, will one of the tenants do it for $40?
Could you buy cheaper insurance? Any way you can reduce
expenses raises net income (unless it scares away
tenants). A new $4,000 furnace that saves $800/year on
heating costs means you just turned $4,000 into a
$10,000 higher sales price.
This isn't an exact
science, and of course appearance and other factors
matter. Increasing that net, though, is the surest way
to get more for your rental properties. Make the changes
at least several months before you try to sell the
property (a year before, if possible). Also, learn how
do the math - it really does matter with real estate
rentals.
