How do you add value to your property – both now and at the time of sale?
This installment is going to explain how you build equity with apartments and can do so almost any time you want!
What is equity?
Just about everyone is familiar with the concept of equity.
Essentially, equity is the difference between what you owe on something and what it can sell for.
Just about anything can have equity from a boat to your car to your personal home.
In real estate, there are several ways to build equity. For example, in your personal home, you build equity with every mortgage payment you make.
Additionally, if the real estate market is trending up, then your house is increasing and your equity also increases.
Of course, if the market isn’t so good – well, you can actually lose equity in your home.
Unfortunately, because of what happened in real estate between 2004 and 2008 – many Americans are bitterly familiar with the yo-yo that equity can be.
How equity in apartments works
Luckily, when it comes to apartments, equity is a bit more solid. You can create equity in two directions at once. What I mean by that is:
- You buy down the mortgage with every payment.
- You can increase the value of the property.
Pretty cool, right?
So how does it work and how much equity can we make?
Let’s look at the three most common ways you can build equity in our 200 unit apartment complex example.
Method #1 – Paying down your mortgage
If you make an extra principal payment towards your loan balance, you are increasing the equity.
That’s simple enough, right?
Method #2 – Adding auxiliary income
Remember that the value of your apartment complex is based on net operating income.
So whenever you can add more income you increase the value or equity of the property.
Before we get into the big one – rent – let’s talk a moment about other sources of income.
Let’s say that when you buy this property you can create additional income by installing a laundry facility.
You install some washers and dryers that generate $15,000 of additional income each year.
So you’ve just added $150,000 of equity to your property.
Let me explain in the next section…
Method #3 – Rent raises
Now this is the big boy!
Do you recall back in the Income message when I talked about increasing the monthly rents by $15 per unit?
And how that added value? Here it is again, just to review:
200 units X $15 per month = $3,000 per month or $36,000 each year.
Now, if you also remember that we used a market cap rate of 10% or .10.
So how much equity have we created with the rent and additional income?
If you guessed $510,000 of additional equity you are correct.
Let’s review the math so we are on the same page.
- Rent – $360,000 ($36,000/10%)
- Additional Income – $150,000 ($15,000/10%)
- Total Equity $510,000 ($360k+150k)
Do you see how increasing rents and adding other income added $510,000 in equity to your property?
Talk about amazing!
Do you also see now the true power of buying apartment complexes?
Just wait until we talk about appreciation!