The US Department of Labor in Washington D.C. announced mid January that inflation has hit a 17 year high. And what’s more is that at the same time, personal earnings have actually fallen behind this increase by .9 percent. Most people will see this as terrible news. But this dark cloud has a silver lining if you own rental housing.
When you consider these two financial factors while recognizing the ridiculous increases in single family real estate prices, you may well find that this is a great time to take advantage of the market by improving your existing properties in ways that will allow you increase revenues. There is a real good chance that the cost of financial improvements, due to still low interest rates, easily makes the improvements not only affordable, but profitable. People need a place to live and will pay accordingly. With less people being able to buy homes, it forces more people (with more money) into the rental market thus fueling the upward pressure in rents at all levels. If your real estate has the elements or amenities it needs to qualify for the higher rents and you should have no problem getting them. Here’s a real life example of an apartment complex that is being remodeled one unit at a time. Let’s look at just one unit and see if these numbers and percentages make sense.
Cost to gut and rebuild 575 square-foot apartment $12,000.00.
Rent increase $100.00 per month or $1,200 per year. (Percentage annual yield on investment amount: 10%.)
Value increase based on 7% cap rate using the $1,200 new revenue: $17,143
So here’s the question, would you invest $12,000 to have an immediate increase in the real value of a property of $17,143 (That’s a 43% increase on your $12G) and then continue to earn a 10% cash-on-cash ongoing yield on the original invested amount? If your answer is “No”, you might want to consider seeking work elsewhere. (Tell me where else you can turn $12,000 into $17,000 this quickly, this securely or this simply and still have a great ongoing cash return.) If your answer is “Yes”, you should look at your current holdings to see if this type of possibility exists in upgrading (appliances, HVAC, amenities, lighting, landscaping, etc. etc. etc.) Remember, if the debt service on money borrowed to make improvements is less than the increased revenue, you have a positive spread, an increased NOI and a higher market value. This is true creation of wealth.
As with anything in this business, treat your decisions like a business and let the numbers lead the way. It is always a great time to be in real estate if you understand how to approach the differing marketplaces and conditions. Good luck and the best of success in your real estate career.
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