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The best way to create wealth is to create value. Value can be created by making improvements to your real estate which will then allow you to raise rents. The quickest way to add value is to make cosmetic improvements such as painting, installing new landscaping, and cleaning up the trash. This increase in value will create forced appreciation of your property as measured by an increase in the gross rent multiplier, which is a mechanism used to evaluate multi-unit properties. The gross rent multiplier (GRM) is commonly used to determine the value for a property with up to four units. It is calculated by dividing the purchase price of the property by the gross annual rents. This calculation is used to determine the number of years the property will take to pay for itself in gross rents received. Example: You purchase a 4-unit apartment building for $200,000. The average monthly rent is $500 which generates gross annual rents of $24,000. The GRM is calculated by $200,000 / $24,000 and equals 8.3.
By providing cosmetic improvements to your building, you are able to increase your monthly rents to $575. These improvements generate an additional $3,600 in rental income. Your annual gross income has increased to $27,600. To see what impact this has on the value of your property you would calculate the new value as $27,600 X 5 or $229,080. The cosmetic improvements have increased the value of your property to $29,080. There are many ways to increase the income stream from multi-unit real estate. The most obvious way is to increase rents but it is not the only way. If your property is master-metered for utilities, it can be converted to sub-metered. With the tenants paying for utilities you increase the amount of revenue collected from each unit since you are no longer paying the utility bill. Investors can add vending machines, coin laundry rooms, and pay phones to the property. Tenants will take advantage of these new amenities which creates a revenue stream for the owner. If the multi-unit building has additional storage space in a basement, this space can be converted into rentable living space. This will generate additional rental income. Making minor improvements to your property can easily increase the real estate’s value. This increase has a direct increase in your net worth.
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