As real estate brokers specializing in the sale of multi-family properties, we are constantly hearing the terms “upside” and “value-added.” Whether speaking with investors, both large and small, who are seeking properties that offer these opportunities or marketing a property and trying to do everything possible to maximize its perceived value, these are terms that we use in our daily vocabulary.
We thought it would be a good idea to explain these terms to help you potentially identify these opportunities in your own property. So, what do these terms mean?
Upside
When we speak of “upside” we are generally speaking about the potential to increase income without making any significant changes to the property. These are opportunities that can be capitalized upon simply through changes in management.
The first thing that many owners can do is increase their rents [if not under rent control] if they have not done so in awhile and it turns out they are below market. This will not only result in putting more money in your pocket each month, but keeping your rents up is also important to maintaining the value of your property.
Other examples of easily achieved “upside” include decreasing expenses, which in turn would increase your net income, or beginning to charge for certain types of amenities that competing properties are already charging for.
A “utility recapture” fee is an example of an additional charge that is becoming much more common these days.
Value-Added
A “value-added” opportunity is something which requires a little more creativity and effort, but when these opportunities are realized it can mean big money for the owner/investor. Simply put, when a building offers “value-added” opportunity, it means that there are physical aspects of the property which could be improved or altered, ultimately resulting in an increase in income.
For example, many owners are making cosmetic changes to units and adding washers and dryers so as to appeal to a higher paying customer. Not only does this result in more rent, but it also extends the functional life of your building by keeping it in competition with newer properties.
Other examples include converting an under utilized storage or laundry room into an additional unit or turning a large one-bedroom unit into a two-bedroom unit. These are just a few very basic ideas, so that the next time you are cleaning out an old storage area, you might look at it a little differently.
It is easy as an owner, especially one who has owned their property for a long time, to become complacent with how you manage your building. However, as brokers, we see, all too often, owners selling their properties to buyers who then within a few months dramatically increase the value by making some simple changes which could have been done years ago.
Take a fresh look at your building and make a list of things that you can change. Start with the smallest modifications first and see what happens. It is never too late to get started. You might be surprised to find that once you take on a project that you have been putting off for awhile, it gets your creative juices flowing and you may even develop a new found appreciation for your real estate.
Peter Wright and Ryan Iles are brokers at Paragon Real Estate Advisors in Puget Sound. Reprinted with permission of UPDATE.