Many apartment owners often wonder about strategies that they can use to justify higher rents in their buildings. They are often looking for a way to increase investor returns and bottom line performance.
Obviously, higher rents will inevitably deliver greater returns for investors. But increasing rents goes beyond the bottom line. From a real estate perspective, higher rents can drive up property values. In turn, higher property values can allow owners to secure additional financing, providing the equity needed to fuel the portfolio growth.
What are some ways to increase rents? Daniel Bragagnolo, Business Development Manager, Commercial Financing at First National Financial LP, offers the following strategies:
Tenants will be willing to pay higher rents for better quality. Quality can span across three key areas – your brand, the physical building and the suites.
Good marketing does more than help you sell. Marketing done right helps you establish a trusted, credible brand that tenants covet. It is critical to present yourself, your company and your property in an honest, authentic and professional way both in print and online. Invest time and effort to create a current, informative and easy-to-navigate web site that provides information and value-added services. The perceptions that tenants have of your brand will translate into their expectations of your property.
The physical building:
Common area features help to enhance the perceived and real value of your property. Amenities including on-site laundry room, building WiFi, games room, party room and gym contribute to more than a simple place to live – they help to create convenience and community. Design amendments are also another way to transform the physical building for greater value. Turning one bedroom into two bedrooms, modern design and diligent upkeep with capital repairs can all contribute increased value.
What is your rent turnover strategy? When former tenants depart, it’s an excellent opportunity to update suites. With some smart investment, you can renovate the unit before it goes back on the market. Updated floors and lighting, fresh paint and cosmetic enhancements to kitchens and bathrooms (countertops, vanities, appliances) can improve your overall product significantly. With a better product, you can command higher rents and greater tenant longevity for return on your investment.
Trend: purchase and upgrade
Bragagnolo says he is seeing a trend with owners buying older, underachieving buildings, upgrading them significantly and transforming them into valuable properties.
A long-standing First National client was looking to buy what most would consider a high-risk building because of the 50 per cent vacancy. However, the client was skilled in managing rougher types of properties with challenging tenants.
“The client wanted to diversify in a particular geography,” says Bragagnolo. “The goal was to purchase the property, renovate it and enhance its value.”
To secure the building, the First National team provided an interim conventional loan that was 85 per cent of the purchase price as well as financing to cover renovations. The client upgraded the kitchens and added a modern design feel to the living spaces. As a result of the renovations, the client was able to raise rents for those units by $300.
With full vacancy and higher paying, better quality tenants, the First National team then went to CMHC to secure insured financing.
“In two years time, the client will be applying for a mortgage that will enable the withdrawal of an additional $10 – 12 million in equity on the property,” says Bragagnolo. “In three and half years, the client has been able to amass $22 million in debt on a property purchased for $14 million. It’s a real success story.”
This client’s purchase and upgrade story illustrates how higher rents can deliver bottom line and investor value but also create opportunities to secure the equity needed to fuel future growth.
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