Six Ways to Boost
Your Property's Value

During the time you own an investment property, you should take advantage of every opportunity to increase its value -- and ultimately its sales price. The key is to not buy properties that are already in perfect condition. Always buy opportunities. Then decide what aspect of the property you plan to improve. Time the improvements so that the market will pay for them. In other words, if a market has a high vacancy rate, chances are good that money you spend on improvements or even marketing your property won't increase it's occupancy.

There are several ways to enhance your net-operating income and improve the bottom-line profit when you sell.

These include:

1. Cosmetic improvements and deferred maintenance.
2. Major rehabilitation.
3. New economic uses.
4. Operational improvements.
5. Marketing.
6. Financial engineering.

• Cosmetic Improvements

The best money you can spend on a property is for minor cosmetic improvements. In most cases, the improvements with the highest payback are simply paint and carpet. In addition, you can add new furniture and fixtures. These customary improvements can make a big difference.

If necessary maintenance was deferred too long, your first focus shouldn't be cosmetic improvements. Deferred-maintenance issues come in varying degrees. Large problems require more complex construction projects, and the financial risk involved increases. In worst-case scenarios, deferred-maintenance issues can include structural problems. They're not only expensive and difficult to estimate, but also invisible. Even though potential tenants or buyers can't see them, they still demand attention.

Despite the risks and complications associated with repair or rehabilitation, there also are corresponding opportunities. Be careful in doing your homework and pricing the cost of your rehab plan before buying a piece of property. Through the due-diligence phase, if you learn that the property is much different from what it's represented to be, either cancel your purchase or tell the seller what you found. Sometimes sellers use the due-diligence process to learn the same things you need to learn about improvements and will often adjust the price accordingly.

• Major Rehabilitation

The larger the project, the higher the risk. Major renovations can present major opportunities. For example, a few years ago my brother-in-law and I purchased an old, two-star hotel in a prime Paris location. There were no four-star hotels anywhere nearby, which was interesting given the location, practically in the shadow of the Eiffel Tower. Since it was in extremely poor condition, we began to plan major property renovations.

While building a brand-new hotel would have been less expensive in this situation, obtaining the right to build one in that location would have been impossible, given the complicated and lengthy approval processes in Paris. This created a major barrier to entry for new competition. Redeveloping the existing hotel was our only option. Through the purchase, we obtained the entitlement to have a hotel of the same size as the existing hotel. We gutted the entire building and rebuilt everything from scratch.

Around the world similar opportunities exist for major redevelopment projects that can be successful because of their uniqueness, barriers to entry and exclusivity.

• New Economic Uses

Before buying, think about what additional uses a property might offer. For example, years ago we purchased an apartment community with an oversized recreation facility and an indoor tennis club. These amenities were ridiculously huge and became burdens to the property's net operating income. At the time of purchase, the seller disclosed all of the expenses associated with the facilities and we paid a lower price than we would have if it had included a more typical clubhouse, pool and tennis court.

After we modernized and improved the tennis and pool facilities, we offered the amenities in the form of a private club, with residents of the property receiving complimentary memberships. Our tenants appreciated the improvements, and the membership fees charged to those outside the apartment community helped defray the renovation expenses. After our third year of operation, these facilities were profitable.

• Operational Efficiencies

It's generally easier to increase gross revenue than it is to cut expenses. But both are important and should be considered. No matter what type of property you own, in addition to expanding its economic uses, you can improve operations and net operating income in other ways.

Net operating income is one of the two critical components that determine property prices. Any method you can devise to cut expenses and improve operations goes to the bottom line. While new sources of income are great, they often come with additional expenses. But every dollar saved directly benefits net operating income.

With every property acquisition, take a hard look at taxes early on. Is your property over-assessed? If so, don't be afraid to hire consultants or lawyers to make inquiries and appeal valuation decisions.

Next, consider insurance and other controllable expenses. Every property has a narrow band of controllable expenses, but they all must be carefully reviewed. Remember that some seemingly obvious ways to reduce costs should be left alone because it would mean cutting quality as well. Still, if operations can be done more efficiently, by all means, get moving in that direction.

Additionally, carefully review staffing costs. When my partners and I bought a property that included 1,145 apartment units, a golf course and a lake, we evaluated the existing staff. We then cut underperformers and eliminated unnecessary positions. We also lowered other expenses, such as property taxes and insurance. Further, we were able to realize the economies-of-scale benefits (reduced supply costs and maintenance fees) associated with grouping the purchasing and service needs of all our properties.

• Marketing

Never underestimate the power of marketing. Increases in revenue usually can't be directly attributed dollar-for-dollar to marketing costs, but on an incremental basis, marketing has great value. For rental property, anything you do to improve occupancy or increase rental rates is a big benefit.

Every piece of real estate has a reputation. The name of the property and its reputation carry brand value.

Some reputations are difficult to overcome. For example, one of our investments, Rigi Vineyards, had become synonymous with lower-quality grape care; even though the grapes were produced in a good location with hard-working managers, shortcuts were taken. As a result, the grapes produced there consistently received low bids from wineries.

One of our marketing initiatives includes renaming and rebranding the area as Napa River Ranch. We're renaming parcels of land as individual vineyards as they are redeveloped. Each will be carefully marketed to complement the winery buyers' grapes and to service their needs, coordinating it with the harvest. It's our intention to go the extra mile to do everything we can to please the wineries. It may sound strange, but the reputation and detail involved in marketing grapes is critical. More important is to back up the positive image with good customer service. This is true in every business.

Marketing does not have to be expensive. At another of our properties, Huron Hills, we created a mascot for the apartments, made bumper stickers, and had pizza parties on Sundays. These efforts required only minimal costs, but resulted in fully leasing a property that was virtually empty when we bought it.

Return to list.

Continuously review your property's financing. Stay on top of interest-rate changes and consider the possibility of refinancing at lower rates for higher amounts of money with greater future flexibility. Real-estate financing has become extraordinarily complex, and lender requirements can make or break cash flow. It's important to consider your financing options on a regular basis.

There are no crystal balls in predicting the ups and downs of interest rates. The key is to know the importance of financing your real estate. Even if you purchase a property without the best financing, seize opportunities to improve it when they arise.

Depending on opportunity, flexibility and market conditions, you should always be ready, willing and able to refinance.

Time your expenditures for when they'll do the most good. Trimming operating-costs should be considered during downturns and upturns. Marketing expenses and improvements can be best tolerated during more robust markets -- although they're often needed most during tough times.

Physical improvements are best made near the end of a downturn. If you're in a cycle that's turning up, consider major physical improvements so that, as the market rebounds, your property will be better positioned. On the other hand, if you work to reposition and improve a property in a market that's on its way down, you may suffer from high vacancies without achieving your goals.

-- Mr. Hall is author of "Timing the Real Estate Market" (McGraw-Hill, 2004), from which this article has been excerpted.

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