How to: Increase Your Properties Cash Flow & Appreciation

Morning Jump Start

If your Monday is anything like mine you’ve read through your weekend emails and energy levels are high after drinking at least your second cup of coffee (thanks to my office sales manager/coffee guru, I’m now have a coffee habit and am becoming quite the coffee snob!) and lunch time is quickly approaching. For many of us coffee (and its caffeine) is a key ingredient to building momentum in the morning. Now let’s take a look at a key ingredient for building momentum in your real estate investments.

Investment Jump Start

Wither you’re a property owner, user or buyer, there are tons of opportunities to make money in today’s commercial real estate market by adding value to properties. By adding value essentially you are creating your own appreciation or increasing the cash flow of a property rather than allowing the market to dictate your returns. So how do you add value and where do you start?

Increase Your Net Operating Income

A good place to start when analyzing investment property is to look at the income and expenses. If you take the income and subtract the expenses (as well as a small percentage for vacancy and losses) you are left with the Net Operating Income or NOI. If you can increase your NOI you can increase your cash flow or value and likewise, if the NOI decreases so does your cash flow or value. Wouldn’t it be great if you had someone working for you to help ‘add caffeine’ or increase your NOI?

Add Caffeine Add Value

That is exactly what I do for my clients. I help investors identify and purchase undervalued investment properties with upside potential to increase NOI, or position their current properties for disposition to realize maximum returns.

Passive Investment Income & Value

Let’s take a look at a 3,000 square foot retail building which hasn’t had any recent improvements or rent increases and currently rents for $1.00 per square foot on a Gross lease (Landlord pays property taxes, insurance, & maintenance expenses). If you do the math the annual gross income would be $36,000. Now take away an estimated 35% for expenses you are left with NOI equal to $23,400. An investor with investment criteria of a 6% capitalization rate would pay $390,000 for the property.

Add Value Investment Income & Value

Now let’s say you were able to convert the same building with a Gross lease to a Triple Net lease (NNN), where the tenant shouldered the cost of the property taxes, insurance, and maintenance expenses. The result is an NOI of $36,000. The same investor would pay $600,000 for the property!

Add Value By Working With An Investment Specialist

The above is a general basic example of how the value of investment property can potentially be increased with proper management. If you are a property owner, user, or buyer, working with an investment specialist can add dollars to your bottom line by time and energy saved to the client as well as benefits received from the skill sets required to analyze, market, and negotiate a successful sale, purchase or lease transaction.

Understanding The Four Phases of The Real Estate Cycle

Predicting a city’s position in the real estate cycle can result in opportunities for profit. On the other hand, failure to know where the market is in the cycle can be disastrous.

To help identify the opportunities in our current real estate market lets first get a better understanding of the four phases of a real estate market cycle.

Recession. In this phase, sales activity is very slow, while prices and rents continue to decline. The rate of decline begins to decrease and eventually bottoms out. Almost no new construction occurs.

Recovery. After a recession, the market stabilizes, prices begin to recover, and excess space begins to be absorbed. This process continues, and the vacancy rate begins to approach equilibrium, where supply equals demand. Recovery is usually caused by one of two factors: External shock from a development outside of real estate, such a revision of tax laws, may cause the recovery, or, passage of time from the real estate cycle running its normal course. After a recession or depression, very little or no new construction may occur for several months or years. Eventually, general economic activity begins to increase the demand for space, excess space is absorbed, and financing become available on favorable terms.

Expansion. During the expansion phase, space becomes difficult to find, rents rise rapidly toward new construction levels, and prices continue to increase. Construction activity increases dramatically, but vacancy rates remain at the normal level or lower. This phase may last for a few months or for years, depending on the activity of system components, national economic trends, shifts in basic employment, or changes in social relationships (such as family size or space needed per worker).

Hypersupply or Oversupply. At some point in the expansion phase, the market may become over built. Builders and lenders may not perceive that the market is saturated. They continue to pump capital and new buildings into the market or an external shock occurs such as an unfavorable tax law or a general economic recession. In this phase, prices begin to drop, sales activity begins to slow, and vacancies begin to increase. As these changes occur, the tend to gather momentum, and prices and sales activity continue to slow even more. New construction continues for a while in this phase for two major reasons; Builders, developers, or lenders do not detect the changes occurring in the market, or some projects cannot be stopped. When these projects are completed, however, new developments and construction quickly come to a halt.

Identifying what phase the market is in is extremely helpful when developing an investment strategy.

Which is why I offer my clients a quarterly market report as a value added service to help them better understand the current market and make informed investment decisions. By working together with my clients to understand their goals and objectives I am able to develop an investment strategy to add value to their property. Contact me today to see how I can help you!

Sources: CCIM Institute & IRR Viewpoint 2007