Your ability to secure optimal mortgage financing terms, is tied to your ability to optimize income. Remember that old adage, “Cash is King”. It stands to reason therefore, that optimizing your investment property’s rental performance should be top of mind for you.
Techniques are varied
The techniques available to you as a property owner, are as varied as the number of property types in the market. Your approach will be unlike that of any other property owner. You will undoubtedly have differing present leasing characteristics; a different outlook on the economics of the community within which you are located; differing access to financing; and a different investment horizon, to name but a few.
Highest and Best Use
Many property owners may not have a good idea as to their properties existing and potential value. Are your rental rates keeping up to market conditions? More fundamentally, does your building even represent the highest and best use of the site? The Appraisal Institute of Canada defines Highest and Best Use as The reasonably probable and legal use of property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.
Many options are available to an owner. These range from a passive do-nothing, or do very-little approach, to a complete demolition and re-development, perhaps in conjunction with a property re-zoning.
What considerations will govern your strategic approach? They are many and varied, (and will obviously include your ability to raise investment capital on a competitive basis), but consider the following:
- Has the property income been fully realized (rents maximized and operating costs minimized)? Or is there upside potential?
- Does the market support your projections for increased revenues? Perhaps you are in an up and coming area with a growing population. Increased employment opportunities and other positive indicators suggest that it would appear to be a relatively prudent investment. On the other hand if the area is decline, or the population is aging, and/or employment opportunities are decreasing, then your projections may be optimistic, and may require a re-think.
- How long will it take you to realize the benefits of your investment? In other words, is the payback sufficiently rapid, or will it take a long time for the benefit to accrue to you as owner? Many property owners will project the value appreciation resulting from an improvement to a property, and will consider whether a future refinancing will allow them to recoup/release equity in an amount equal to or exceeding their investment. Your approach may differ.
Consider getting professional advice, to test your assumptions. Increased rental income provides you immediate additional cash flow It also enhances your property’s value, allowing for the possibility of increased financing for future portfolio growth.