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Managing Your Investment

The income and resulting cash flow (income less expenses) that a property can generate drive the amount a rental property is worth. Suppose that you could purchase a 4-unit building in a rural area or you could buy a similar 4-unit building in an upscale suburban community just a half-hour commute from an economically robust city.

  • If each unit in the rural building rented for just $250 per month whereas those near the city rented for $1,000 per month, which building do you think would be worth more money? Or, looking at it another way, which building would you prefer to buy if both buildings were for sale for the same price? Higher rents translate into a much higher property sale price.
  • Suppose that property like yours typically sells for 10 times the property's gross annual income. For example, each unit rents for $1,000 per month x 4 units x 12 months = $48,000 x 10 (gross multiplier) = $480,000 market value.Suppose that, through property improvements, you can increase the unit rents by 10 percent. Now the building is worth $1,100 per month x 4 units x 12 months = $52,800 x 10 = $528,000 market value. Thus a mere $100 per month per unit increase results in a $48,000 increase in the building's value.

Plan for the sale of your rental property as far in advance as possible so that you can be sure that your rental incomes are maximized. If any units are coming vacant, examine what upgrades can be done to boost the rent you can charge. Also consider what enhancements you can make to the building. Survey the local rental marketplace to ensure that you're not underpricing units.

Minimize your property's expenses

In addition to maximizing income, you can also increase a property's cash flow by minimizing its expenses. Planning at least a couple of years in advance for the sale of your building should give you enough time to make your property more cost efficient to operate and therefore more profitable and appealing to the next buyer.

  • For example, although you have to shell out some money up-front, investing in energy efficiency by insulating your property and installing modern appliances can really slash your operating costs. If you haven't evaluated your insurance for at least a couple of years, also shop around to be sure that you're getting the best insurance value you can.

Understand opportunities for adding value

Before you bought your property, you should have taken the time to research and understand the effects of zoning or possible rezoning on your property's use. A surprising number of real estate buyers, however, neglect this important step. Even if you did understand the zoning of the property before you bought, the mood of your local planning department, which interprets zoning laws and approves building projects, may have changed in the meantime.

So before you consider listing your property for sale, be sure that you know how you can improve its use and value. Even if you don't want to do significant renovation or contracting work, you should at least understand how you can further develop the property so that you (and your agent if you're selling through one) can sell for a higher price by promoting the opportunity to add value.