Real Estate “Value-Add Investing” is a proposition wherein you buy properties at or below market value and still increase their value by 20%+ by identifying and exploiting value add improvement centers that the seller was not able to tap. In the last article I wrote, we discussed how to increase the value of your investment through rental income growth techniques. This article we will look into the flip side of the equation and see how you increase your investment value through expense compression.
The value add formula to determine the feasibility of executing any value add strategy is the same as the last article. Lets just review it once again:
Feasible Strategy = Value Add Increase/Savings > Cost to Make the Increase Happen
The formula from the perspective of expense reduction relates to how much money is saved in comparison to the upfront cost to reduce or remove the expense category.
What Expenses to Reduce?
Every property has operating expenses that directly impact the property’s net operating income. Typically operating expenses combine to total approximately 55% of a properties gross income. Hence reducing operating expenses is a great way to increase property net operating income and its associated resale value. That is the big picture that you should keep in mind as you go after and identify expense reduction centers.
Operating expenses typically fall into one of two categories: verifiable or non-verifiable expenses. Verifiable expenses are those that you will incur on a repeat basis and it can be verified by a third party i.e. property tax, utilities. The expense compression value add strategy surrounds reducing verifiable expenses since when you go to sell the investment property; the prospective buyer will only give you credit for this category …read more