A “Load Factor” may be a new concept to residential investors (single family or 2-4 units) as it is a phrase stolen from the commercial office space sector, but it applies across all sector. However, since the “Load Factor” can cause your building to loose rentable square footage thus impacting your asset income and investment value – it’s important for any real estate investor to understand. This article provides ways to analyze the financial feasibility of reducing the load factor in residential assets driven by the principle: Reducing Loan Factor = Increases Asset Value.
Let’s get started.
What is Load Factor?
Load Factor is what I like to call “wasted” or “unused space”. It is that extra closet or a den that can be used for another purpose where the value utility is higher in that second purpose. The load factor in residential real estate comes in the forms of hallway, foyer, basements, attics, closets, and oversized rooms that provides limited utility to the end user (tenant or homeowner).
As a value investor, your goal is to improve investment value through financially feasible load factor reductions.
Load Factor Reduction Feasibility Analysis
How do you know if the wasted space you want to convert into another purpose is feasible change/conversion? I use the Rule of 24. The Rule of 24 states:
A value-add investment is feasible if its nominal cost is paid back within 24 months through improved net cashflow as a result of increased income or reduced expenses arising as a result of the value-add.
Reduction Feasibility Analysis-A Step by Step Guide
Step A: Locate wasted space by studying the asset floor plan. This is easier said than done as I am not a very spatially creative person. To help make my life and now hopefully yours easier, I go …read more