Feature
by Arthur T. Griffith
What is my property worth? How can I increase its value? If you own property, particularly in San Francisco’s rent-controlled environment, you have probably asked yourself this question more than a few times. While San Francisco is certainly a tougher market to understand than most others, some basic rules still apply.
We all invest for the same fundamental reason: to maintain and create value. The most common investment vehicles tend to be stocks, bonds and real estate. Each of these investments shares a common trait—cash flow. Your basic investment question should be how best to generate and manage income and, thus, value in the apartments you already own.
Investors buy apartment buildings for three primary reasons: income, appreciation and tax benefits. Income is the focus of this article, with appreciation covered in a future article and the third, tax benefits, left to the tax experts.
There are different methods for valuing an apartment investment. Appraisers and brokers typically determine the market value of an apartment building. Essentially this process examines properties similar to yours that have recently sold, making adjustments for income, size, condition and financing. Each of these factors has an influence on how investors view individual properties. The analyst then arrives at a projected value. You may be familiar with how these values are expressed. The most common way is a gross rent multiplier (GRM). GRM is simply the income multiplied by a factor. For example, a building with $100,000 in income, in a market with average GRMs of 12, would be worth $1,200,000.
Although both appraisers and brokers analyze investments, the individual buyers actually create the market. Analysts are merely forecasting what they believe the market would pay. When investors evaluate the worth of your property, they are really asking the question, “What would I pay for the right to receive the future benefits of this piece of real estate?” The way to create more value in the apartments you own is to influence income, the primary benefit. In San Francisco, the single best way to increase value is to add income. For example, typical apartment buildings include the following income streams: apartment rents, parking and laundry. Some may also enjoy income from signage or additional storage. A relatively small increase in any of these can produce a sizable increase in value.
Income Example You own a nine-unit building in San Francisco. Buildings in your area sell for approximately 12 times gross income. The income on your building for last year was $100,000. This year you have added $150 a month or $1,800 a year in income from a new parking spot and the annual allowable rent increase. With buildings selling for 12 times the annual gross, your modest income bump translates into a roughly $21,600 increase in value. Not too shabby.
In non-rent-controlled areas, the income on a property is generally considered to be at market. If the rents are below market, it is usually due to deferred maintenance, poor management or other such issues. Except for certain situations, such as post-1979-constructed apartment buildings, San Francisco does not currently enjoy the luxuries of an environment free of rent control. A well-managed building, in perfect condition and without any other significant issues, may be as much as 40 percent off the market rents simply due to long-term tenants paying submarket rents. Ninety percent of the buildings I evaluate for clients have income that is below what it could be. The nature of a rent-controlled environment is such that landlords often become confused or apathetic about the current rules and regulations. As demonstrated above, your payoff comes from staying up to date.
A Few Take-away Tips
You can improve your investment, if you are:
- diligent about your annual allowable rent increases—for every little bit helps—and, if nothing else, bank the increases and take them at a later date;
- investigate the addition of an onsite laundry, for machines typically pay for themselves in a short time and then become a great source of additional income; and
- stay as current as possible on new rules and regulations, for informed investors maximize income by understanding the rules of the game and, in turn, reap the rewards of a more valuable investment.
As always, for a more in-depth evaluation of the specifics of your properties, contact a knowledgeable broker.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Arthur T. Griffith is an apartment broker and a state-licensed appraiser with BT Commercial. He can be reached at 415-677-0451. Copyright © 2004 by the San Francisco Apartment Magazine. All rights reserved.