by Matt Kastner Since the market began to slip in the mid-2000’s, it has become harder and harder to get favorable appraisals. Especially on investment oriented properties, such as multi-families and rental homes, with so much of the local market dominated by foreclosures and cash investors. When there are no comparables to be found, most appraisers are going to look at things from an income approach. They are going to look at property conditions, cash flow and cap rates. So the more profitable your building, the more it is worth. In order to achieve the most favorable appraisals on these properties, they must be run as efficiently as possible.
Complacency is your biggest enemy as a landlord. It is an easy trap to fall into when the rents coming in on a building are enough to keep you content. However, when you begin to lose your edge, the loses can pile up. For every lease renewal without a rent increase and every vacancy without improving the unoccupied unit, the quality of the property will slowly degrade. If you are not careful, this trend can be hard to recover from. You must avoid this trap.
You cannot be afraid to raise rents. When your expenses go up at the property, in cases such as the recently imposed trash collection fee in the City of St. Louis, you should not hesitate to raise rents at your next lease renewal. Even for long-term tenants, who you might be used to letting slide. One word of caution though: Keeping in touch with what rents are going for near a property is crucial. If you raise rents to far, you might start losing tenants to your competitors. It’s a fine line.
Of course, in order to raise rents as high as you can, your property also needs to be kept in tip-top shape. That is not to say you have to update all your kitchens with granite countertops and stainless appliances; just make sure things are clean and in fine working order. By running a tight ship, you can more easily justify rent increases and higher asking prices on your vacancies. Clean units also rent more quickly, which should help keep the income stream steady. This will also benefit you on the appraisal, if you can provide documentation to back you up.
So what does all this mean? In short, when a property is bringing in the rents, it is worth more. Even if the property will not be sold anytime soon, this increased equity position will enhance yourability to refinance your mortgage. The additional rent collected each month won’t hurt your cash flow either. No matter your situation, don’t become lazy and complacent. If you do, you might wake up one day to find your building on life support. And in this increasingly difficult sellers market, you simply can’t afford that.