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Forced Appreciation in Multifamily Real Estate
Forced Appreciation, what is it?
In simple terms, forced appreciation in multifamily occurs when someone controls the increase in value of a property through fixes, enhancements and amenities. Think of it as house flipping- but bigger in multifamily. It’s an investment. When a multifamily real estate investor is proactive about increasing cash flow, finding and creating opportunities to generate more income, and wisely managing the property expenses, they are forcing property appreciation. Forced Appreciation is turning a property into a good investment through purchase, fixing and increasing amenities. An investor’s actions and tactical strategies determine how much the value of a property will increase.
Why force appreciation of a property?
Forced appreciation is the secret to creating long term real estate wealth. It is essential. If you own a multifamily property, through forced appreciation you can increase the property’s value by finding new and inventive ways to provide services that residents are willing to pay for. And not only that, but create a better and safer living space for tenants.
How can you force the appreciation of a property?
- Property Renovations (Painting, security systems, flooring, lighting)
- Add Services (Vending machines, laundry rooms, amazon locker rooms)
- Add Facilities (Pool, playground, gym)
- Increase Rent
- Extra Fees (Pet fee, late rent fee)
- Improving curb appeal (This is a possible future renters first impression of a property)
Net Operating Income (NOI)
In multifamily real estate, Net Operating Income (NOI) is a formula that quickly calculates profitability of a particular investment. NOI conveys a property’s net income after operating expenses. Investors are able to force an increase in Net Operating Income in two ways:
- increasing revenue
- decreasing expenses
Or both. The higher the NOI, the higher the property value.
How can you calculate forced appreciation?
To figure out your forced appreciation, follow this formula:
Forced appreciation = Increase in Net operating income (NOI) / cap rate
For example- an increase of annual NOI by $50,000 from $500,000 of $550,000 on a 5% cap rate would increase the property value by $1,000,000 (50,000 divided by 5%).
To find the cap rate, use this:
Cap rate = NOI / current market value (CMV)
For ex: If NOI is $500,000 and the current market value is $10,000,000; this would mean a cap rate of 5% ($500,000 divided by $10,000,000)
The same formula can also be used to calculate the current market value (CMV) if you have NOI and the market cap rate.
Current market value (CMV)= NOI/cap rate
For ex: If NOI is $500,000 and the cap rate of 5%, this would yield a current market value of $10,000,000 ($500,000 divided by 5%)
Invest with us!
Forced appreciation may initially seem like a daunting task for it does require time, money, and strategic planning, but when done correctly it is hugely advantageous to multifamily investors. Mastering the art of forced appreciation will not only increase cash flow but also increase the property value and can be a useful tool you will carry for the rest of your life.
Investing in multifamily real estate offers one of the best ways for you to build wealth. At Prime Investment, we value, highly uphold, and strive for financial freedom, fully passive income, and peace of mind. Our interests are highly aligned with our investor’s interests – when the investment is a huge success we all benefit together. Interested in becoming our next investor? Overcome entry-barriers and invest in real estate with our expertise. It is one investment with many benefits. Start your passive income today.
To learn more about how you can begin investing in multifamily real estate, apply to join the Prime Investments Investor Club now.