Increasing the value a Kitchener Multi Family building is MUCH different than it’s counterpart – Single Family. However, in some ways it’s MUCH easier for the savvy investor to make some serious money!
Before I get into the 7 tips to increasing the value of your Kitchener Multi Family building, let me quickly go over the difference between Single Family and Multi Family when it comes to raising the value of these properties.
<DISCLAIMER> Do know that I’m talking about Kitchener Multi Family buildings that have FIVE units or more. The rules I will be going over do not apply to buildings with 4 units or less.
If you’re reading this blog, you may already own one or a few Single Family rental properties. This is how most of us start investing in real estate, which is always recommended.
And that’s because Single Family is MUCH easier in terms of making mistakes and coming back from it. You can definitely ‘learn as you go’ when it comes to these properties, and it’s actually recommended to take this approach if you’re sick of being stuck on the sidelines!
That being said, when it comes to investing in a Kitchener Multi Family building, it’s the complete opposite!
You NEED to be an expert and sophisticated investor before even looking at a building to buy. If you make a mistake on a 20-unit building, the amount cash that you’re dealing with is MUCH bigger and hurts much more. But this discussion is for another blog.
Let’s get into the differences when it comes to raising the value of the property.
In our Single Family rentals, we raise the value by renovating the mechanicals (furnace, A/C, electrical) and the ‘pretty things’ like the floors, kitchen cabinets and painting.
Now there’s a reason for this. When we plan on selling our Single Family rentals, who’s our end buyer?
It will likely be a ‘regular home buyer’ who is looking for their primary residence. So these upgrades are very important to them and will dictate how much they want to pay for the property.
The more ‘pretty’ and upgraded your rental property is will have a direct effect on the value you will receive.
The other difference is that Single Family prices are strictly dictated by comparable sales in your neighbourhood and area. For example, if the property next door to your rental sold for $280,000 and your property has the exact same in layout, square footage and has the same renovations – your home will also likely sell for $280,000.
This is where the difference lies.
While decor and mechanicals do play a part in dictating the value of a Kitchener Multi Family building, it’s a very small part of the equation.
Multi Family values (remember, buildings with 5 units or more) is really dictated by the NOI and the areas Cap Rates.
Don’t know what this means?
The NOI is “Net Operating Income.” This is the amount of money a building brings in (gross rents, laundry income, parking income etc) subtracted by all of the operating expenses (utilities, vacancy allowance, maintenance funds, properties manager costs, etc).
Essentially, it’s all of the income minus the expenses BEFORE the mortgage payments.
This cost is not included in the ‘expenses’ of this calculation as mortgage costs can significantly vary from buyer to buyer depending on their plans. The utilities and other expense however, will not vary from buyer to buyer. They will stay the same for everyone. This is why this method is used to determine the value, which I’ll get to soon.
Cap Rate is the rate of return an investor will receive on the building. Every area will have it’s own cap rate.
The lower the cap rate, generally the BETTER the area – and the more you’ll pay.
The higher the cap rate, generally the WORSE the area – and the lower you’ll pay.
So, here’s the beauty of investing Multi Family. It’s just straight business and numbers – no emotions!
If the NOI on an 20 unit Kitchener Multi Family building is $100,000 (all income minus expenses) and the area cap rate is 5.5% (a B+ area in Kitchener–Waterloo), the value of that building is $1,818,181. (NOI divided by Cap Rate – $100,000 / 0.055 = $1,818,181)
That’s it! That’s how values are dictated in Multi Family real estate.
Now there are other factors the come into play such as, “does the building have balconies? Does it have a gym?” etc which will ultimately increase the value. These upgrades will likely LOWER the cap rate.
But the way you and the banks will land on a value will be still be the same – NOI divided by Cap Rate. Simple. No emotions on paint colour and flooring!
7 Ways To Raise The Value Of A Kitchener Multi Family Building
Now you know the difference between the two investment niches.
Single Family real estate values are purely dictated on comparable properties and more importantly, decor and upgrades.
Multi Family values on the other hand is almost purely dictated on how much CASH FLOW the building produces. The MORE money your building brings in, the HIGHER it’s worth.
I spent so long explaining this because it’s crucial for you to understand this before I got into the 7 tips. Without knowing this information, the 7 tips below wouldn’t have made sense to you.
With that being said, let’s get into the 7 tips on how you can easily RAISE the value of your building.
1 – Renovate Common Areas
This is by far one of the most overlooked ways to increase income and values and so many landlords are shooting themselves in the foot!
Tenants want to live in a great space, and they will pay for it. So if the first thing they walk into before going home is a gross looking stairwell with paint chipping off of the wall, how long do you think they will stay? And what kind of tenant profile do you think you’ll attract when all of the good ones turn around and walk out on your showing?
A quick coat of modern paint, some new floors and baseboards in these (usually small) common areas won’t cost you a lot but it will defintiely pay off!!
Remember, the MORE rent you can fetch by making your building feel more inviting and SAFE, the HIGHER your building will be worth! (Remember the calculation above??)
2 – Renovate When Tenants Move Out To A HIGH Quality
When you take over a building, you’ll likely let the tenants ride and won’t change things inside units that are already tenanted (unless something needs fixing right away).
But when the tenants you inherited naturally start to move out, completely renovate that unit to a Single Family quality! This is where my personal skills come into play as I already have a renovation system that works really well with my single family portfolio.
Remember, Multi Family units are generally small! Replacing the outdated kitchens, floors and painting throughout will generally cost somewhere in the range of $7,000 – $10,000 per unit.
But now let’s say you can get $200 per month MORE in rent for that unit because of those renovations. Is it worth the effort?
Check out this calculation!
$200 x 12 months = $2,400. You’ve just added $2,400 to your NOI.
$2,400 divided by the same cap rate you bought the example building above (0.55%) = $43,636
You now just increased the property by $43,636. Was ‘going over board’ and spending $10,000 on renovations worth it?
3 – Add A Dishwasher In EACH Unit
Now this strategy is likely done when an existing tenant moves out, but again, it will be worth the expense!
Let’s say you don’t have the money to completely renovate this particular unit like in the example above or maybe, it doesn’t need to be overhauled.
Maybe the decor is already updated – will adding a dishwasher help in increasing the value of your Kitchener Multi Family building? Let’s see!
Adding dishwasher will cost around $750 installed. But let’s say that now raised the rent by a ‘measly’ $30 a month. (very realistic!)
$30 x 12 months = $360 added to your NOI statement every year.
$360 divided by your 5.5% cap rate = $6,545.
With a $750 expense, you’ve increased the value of your building by $6,545! Fun, isn’t it?
4 – Split Hydro Meters
This is a big one, especially here in Ontario! Hydro rates are rising every year and if you can pass this expense onto your tenant, the better!
Remember, the LOWER your expenses, the HIGHER your NOI will be. And we know what happens once we do that 😉
Depending on the size of your building, this can be expensive.
On the flip side, splitting hydro will not only increase your NOI, it will also GREATLY increase the desirability of your building when it comes time to sell.
Other investor’s hate buildings that don’t have the hydro split. I know I do!
Not only will you boost the value of your Kitchener Multi Family building through increased NOI, it will also increase the cap rate thus raising the value even further. A double boost for a large expense – it’s worth it if you have the cash and the long term plan to do it!
5 – Install Low Flow Toilets
When it comes to multies, you’ll likely be paying for water. Splitting the water can tricky and many times impossible. But all is not lost!
Install low flow toilets in each unit as soon as you take over a building!
If you have 20 units and they all have old toilets from the 70’s, the $250 expense all in for each unit will defintiely be worth it to lower your utilities (which you increases your NOI, which increases the value! I know, I know – you understand this already 🙂 )
6 – Pay Long Term Tenants To Leave
Some tenants stay for YEARS. And that can be great!
But if you’re planning to sell in the next 3-5 years it might be a good idea to pay these long term tenants (who usually have a very low rent compared to market rents) to leave.
Maybe offering them $1,000 dollars to leave and completely renovating the unit like in ‘tip 2’ will be worth it!
7 – Get Detailed 3 Year Financial Statements Ready When Selling!
Believe it or not, most Multi Family sellers are not very sophisticated!
If you want top dollar and you’ve done all or most of my 7 tips on your Kitchener Multi Family building, you’re probably pretty savvy!
But if you want that last boost of value, have VERY clear and easy to understand financial statements for the new buyer!
Get all of the utility bills, tax bills and financial statements for the last 3 years at minimum. Get EVERYTHING and have it organized!
Sophisticated buyers will pay more when working with an organized seller. The buying process in Multi Family is already hard and long enough, so the easier you can make this process the better.
You will be rewarded with cash!
Conclusion To Your Kitchener Multi Family Building
I just gave you 7 AWESOME tips to raise the value of your Kitchener Multi Family building, but it is easier said than done. There’s a lot more to it than the above.
However, if done correctly, they will give you money in real life – guaranteed!
Work with an expert and specialized realtor when planning on selling your building. If you’re in the Kitchener, Waterloo and Cambridge area – I’d love to help you out and make you some serious money!
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