One of the definitions of “value,” per Merriam-Webster, is the relative worth, utility, or importance of something. Using the value definition framework, we can explore how an apartment house owner can add value to a property.
The one thing I have personally noticed is that many people would rather pay for something over time instead of paying the full price upfront. We are a country that loves financing everything from our cars, to sofas, to appliances. Paying a small amount over time with interest is how financing works. How does an apartment owner create value while still satisfying a tenant?
Now producing a win/win situation is optimal when renting an apartment to a tenant. Apartment owners must remember that they are providing a service, albeit one that falls under the basic necessities category of shelter, but a service nonetheless. One way to add value is to offer “upgrades” with the unit that cost the tenant a small amount of money each month.
Many apartments today do not come with refrigerators or other appliances. An owner could increase the rent $50 a month and offer a fridge. If the fridge costs $600, the owner recaptures that expense and the tenant does not have to deal with putting up the money to own or the hassle of moving it later. Of course, if the tenant stays longer than a year and the fridge is in fact $600, the owner has newfound dollars each month.
Obviously, there is a limit to what an owner can charge and what a tenant will pay for upgrades, but if an owner runs the numbers, both the tenant and owner maybe able to find a middle ground that allows for both parties to win. Locating that middle ground can lead both parties to find value.
At the time of writing this article, the Los Angeles rental market on the Westside had a high inventory of supply.
Some owners are offering little or no deposit on apartments; however, this is a foolhardy strategy. As stated in previous articles, deposits are the only real monetary collateral owners have to protect themselves from tenant damage. Even if a tenant means well, life happens and unintentional accidents take place. Many owners do not mind the cost of repairs from tenants — assuming normal wear and tear is a cost of business. However, it is when a tenant maliciously damages a unit that an owner finds out the true cost of apartment house ownership. Deposits are not an item an owner should ignore. A better strategy would be accepting a deposit over time.
Some owners have decided to give rent concessions, such as a month free. This strategy is fine, but an owner should consider the fact that a tenant will most likely leave after a year and find another unit for the same or cheaper price in this type of rental market.
Instead of offering deposit or rental concessions, an owner could add value to the unit. However, instead of offering an upgrade, the owner offers this value added item as part of the apartment. One item which is in high demand is high speed Internet. An owner could offer Internet and give a free wireless modem with move-in. An owner may be able to justify an additional $50 each month in rent, which simply wipes out the cost of the Internet, but the benefit comes from renting the unit faster since the value added item is in high demand and differentiates the owner from the competition.
One of the best ways to add value is by saving time. Today many banks offer Internet banking and some even give owners tools to deposit checks remotely.
If you do not like collecting rents, you can offer a small discount on rent to your tenants in return for automatic transfers. Most large banks allow transfers from one account to another. If you offer a $5 discount to tenants who pay their rent on the first day of the month who transfer the money, you may be surprised how many will pay on time. Of course, an owner has to decide if this loss of income is worth their time.
Adding value does not have to cost a lot of money. Sometimes just thinking outside the box is all that is needed. Win/win situations can be created between owners and tenants. The only limit is an owners imagination and of course, what the market will bear in terms of price.
Mike Heayn is a Commercial Loan Consultant, specializing in Multi-Family Lending. He can be reached at (310) 428-1342 or e-mailed at firstname.lastname@example.org.