Increasing the Velocity of Value in an apartment building with income multipliers

The Value of an apartment building is based on income produced by the property. Once you know the income of the building, you use either the Gross Rent Multiplier or the Capitalization Rate to determine value of the building The multiplier number is determined by the market. In other words, what are investors paying for income streams from the buildings in your market? In general, increased income creates increased value as determined by the multipliers described below.

Gross Rent Multiplier (GRM)

The most commonly used rule of thumb is called the Gross Rent Multiplier. It simply compares the price of the property to the annual gross rent. Part of the reason it is so popular as a rule of thumb is that on most Multiple Listing Service (MLS) listing sheets a GRM is calculated by the computer and shown on the listing sheet. In general, the lower the GRM, the better the value is to the investor. Its drawback is that it only considers rent and price out of all the factors listed above.

Capitalization Rate (Cap Rate)

This is popular because it is also easy to compute. It is arrived at by dividing the Net Operating Income by the price. It is also indicated on the MLS sheet for each property. In theory, it is a better measure than the GRM because it considers the Net Operating Income (Rent less the expenses of the property). The problem is that the expenses of the property are rarely reflected accurately in the MLS and often not accurate even when they come directly from the owner. In an existing apartment, you can study the market and determine it there is anyway to increase tenant desired services for additional income and full occupancy. Here are a few ideas:

Hire Professional management if not already in place
Pass utility costs to “Paid by tenant”

Laundry room, vending machine income

Charge for parking

Create extra storage and Charge for it

Improve Security

Improve or creating outdoor living areas

Enforce reasonable late fees

Charge for weekly maid service

The items listed above will likely increase the income and stability of that income. However, some of the greatest potential to create additional income and value is through major improvements.

Increasing the Velocity through major improvements

Using the Gross Rent Multiplier effect, major improvements can have a huge influence on the value of the property. In addition to a few samples to increase income above, you can analyze if major improvements will allow the rent to be increased.

As an example, first determine what the market Gross Rent Multiplier and Capitalization rate is in your market. After studying the market, you determine that most buildings sell for about 16 times the annual rent. Next, if an older 20 unit building rents for $1000 a unit or $20,000 a month or $240,000 annually, multiply that number x 16 for a value of $3,840,000. After your market study, you determine if you put $10,000 a unit for new kitchen and appliances, bath, windows, carpet and paint, that the units would rent for $500 a month more or $1500 a unit. 20 units x 10,000=$200,000 investment in improvement

20 units x 500= $10,000 a month or $120,000 a year increase If the local multiplier is 16 X $120,000 is $1,920,000 increase in value, for a $200,000 investment in improvements. The new total value would be $5,760,000. You can use this simple formula, using your own market’s data, to determine what would apply in your case. If you improve major components of the building, you might be able to increase the velocity of your investment by applying component depreciation for additional tax savings.

As always, consult with your individual REALTOR® and CPA to determine what works best for you.

By Duane Duggan. Duane has been a Realtor since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.

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