When Equiton looks at adding a property to our portfolio, we don’t just look at the price tag and the property as it currently stands. We look deeper to see what others don’t; what the property can become through our expertise and active management strategies. When it comes to income-producing properties, the ability to bring out a property’s true value is essential for the success of your investment.
Warren Buffett, one of the most successful investors in the world, said it best, “Price is what you pay. Value is what you get.” The intrinsic value of a property is the inherent value of a property, which can differ from the purchase price or market value. It’s the building’s underlying value. The goal when buying income-producing multi-residential properties, like apartment buildings, is to buy properties with an intrinsic value greater than the purchase price or market value, then work to increase that value further. Knowing the price of a property and what value we can get out of it allows us to determine the property’s worth and helps ensure that our investors will receive the best possible return on their investment.
Apartment buildings afford owners greater control over the value of the property than other types of residential real estate, like single-family homes. This is because apartments are valued based on the income they produce rather than on comparable house sales (the price of similar houses, in similar neighbourhoods). As we’ve seen in recent months, single-family home prices are subject to numerous factors completely out of the control of the consumer. Apartments offer more stability both in their value and in the income they produce.
How do you determine the value of an apartment?
Multi-residential apartments are valued by finding the Net Operating Income (NOI) calculated by taking the gross income the property can produce and subtracting all the expenses the property requires to operate. Once you establish the NOI, you can determine the capitalization rate (cap rate). Cap rate is a valuation measure used to compare different real estate investments. Although there are many variations, cap rate is often calculated as the ratio between the property’s NOI and the original capital cost, the price paid for the property or, its current market value. For example, if you have a property that generates $500,000 per year in NOI and the market value of the building is $10M then the cap rate is $500,000/$10M or 5%. The higher the percentage, the better the return.
This isn’t where our valuation process ends though. Cap rates on their own don’t show the intrinsic value of a property and are often misleading; they fail to tell the whole story. To determine the intrinsic value of a property you must do your due diligence to establish the gap to market of the rent, any repairs the building may require, etc. A wide variety of factors affect value. The right expertise is required to know which factors to consider.
When it comes to increasing the value of an investment property, the old adage holds true, you have to spend money to make money. How you choose to spend that money makes all the difference. Bottom line: our job as active investors is to increase the NOI by adding income and/or reducing expenses. If you do that, the value of the property goes up.
“At Equiton our focus is to increase the value of our properties organically, through improved operational efficiencies, functionality and aesthetics,” says Paul Holowaty, Vice-President of Operations, Income-Producing Properties. “We carefully consider each potential improvement to ensure the best value for our investors as well as our residents.”
As a passive investor, you should understand how value is truly added to the properties in any portfolio in which you invest. Understanding this core concept, arms you with the ability to make the best possible investments.
Adding the Right Value
Typically, the upgrades that provide the best return on investment improve the property’s attractiveness, convenience, and usage of space.
Renovating and Upgrading Interior Finishes Adds New Life and Appeal to Your Property
- Equiton’s Value Creation in Action: Units in our 5 Wilsonview Ave, Guelph, Ontario apartment had original finishes dating back to the 70s. Through renovation and upgrades, such as adding in-suite laundry facilities, we were able to increase the appeal and thus the rent gap to market of the units. The renovations added an estimated $297,637 in value to the property. In our 12 & 14 Auburndale, Toronto, Ontario apartment, we renovated five units, made configuration changes to four of the units, and added additional bedrooms, bathrooms and laundry rooms. Through our efforts, the estimated total value created was $1,520,880.
Optimize Square Footage to Maximize Income-Producing Area and Improve Desirability
- Equiton’s Value Creation in Action: In 787 Vaughan Rd, Toronto, Ontario we converted a one-bedroom suite to a two-bedroom suite. The work from home climate established during the pandemic resulted in a higher demand for more bedrooms. This resulted in an improved vacancy rate, an increase in rental revenue, a positive return on investment, and an increase in the property’s value. Square footage can be optimized in other ways as well. In our 125 Wellington St. N. property in Hamilton, Ontario, we consolidate Administration and Security from two offices into one office and created an additional rental unit with this found space. This resulted in an additional monthly rent of $1,395, an annual increase in top line, and a positive return on investment. The value created was an estimated $446,400. We purchased the property in March 2021 for $54,310,111. After our changes, it was appraised in June 2022 for $79,000,000. That’s an increase in value of $24,689,889 or 45.5%.
Boosting Curb Appeal Gives Your Property and Grounds an Important Facelift That Attracts Tenants
- Equiton’s Value Creation in Action: Within the same year that 125 Wellington St. N., Hamilton, Ontario was purchased, it was the proud recipient of the 2021 Hamilton Trillium Award, which made the property much more appealing to residents and the community.
Improved Operations and Property Management Increases Efficiency and Lowers Expenses
- Equiton’s Value Creation in Action: Equiton actively manages all our apartments through our own property management company, Equiton Living. We ensure that we have the right people in place to manage our properties effectively and efficiently. With multiple apartments in the same area, we can consolidate management services, thus saving on expenses.
Improvements for apartments are not “one-and-done.” Through expert, active management you must continually look for opportunities to improve and optimize the property. Equiton’s Paisley Blvd. W. property in Mississauga, Ontario is currently undergoing renovations to add nine incremental suites by converting underutilized space. The estimated impact of the renovation is an increase in yearly revenue of $185,400. This is estimated to increase the property’s value by $5.3M.
Renting for longer, in different life stages is quickly becoming a more attractive option for people than single-family homeownership. Your properties need to have the features that potential tenants want, proper management in place and optimized, efficient strategies if they are going to increase in value and provide a steady income stream. Making improvements, even small ones, to meet the demands of the modern renter will increase tenant satisfaction while increasing value to your apartment building.
At Equiton, we see what others don’t and use our expertise to buy the right properties, increase their value, and provide consistent and increasing returns to the investors in our Apartment Fund.
Certain statements herein contain estimates that we believe are reasonable but involve uncertainties and other factors which may cause actual results to differ from those anticipated and no assurance can be given that such estimates will prove to be correct.