This is Part 3 of a 3-part series on how to control AND profit from commercial investment property with a Master Lease Option
Part 3 [You Are Here] – 10 Ways to Increase the Value of Any Commercial Property in 30 Days or Less
Ok, here we are with part 3 of this Master Lease Option series.
Let's bring this baby home!
As I teach in the Master Lease Option Method program, you can drastically increase the value of a commercial building and put profit in your pocket fast by increasing the net operating income, which is just the difference between the gross income and the expenses of a property.
Obviously then one of the most frequent questions I get asked about Master Lease Options is…
“How do I increase the income of a property so that I can make fast cash?”
For you, oh curious ones, I have not just one but ten different FAST ways to increase the income on any master lease option property.
The Top 10 Ways to Increase Income on Master Lease Options
1. Raise Rents
Most properties aren’t charging anywhere near what they should be charging for rent.
There are a lot of reasons for this. Usually it’s poor or lazy management.
Homeownership rates are the lowest they’ve been in 20 years.
Vacancy rates have steadily been decreasing in the United States.
And the rental rates have steadily been increasing.
As vacancy rates decrease, rents SHOULD increase – simple supply and demand.
But not everybody gets the memo.
Landlords get tired and property management firms get complacent.
2. Charge for Extra Parking Spaces
If you’ve got more than one space per unit consider charging for a 2nd.
You can even get more if you have garages or carports for covered parking.
3. Charge for Storage Space
Consider charging a monthly fee for on-site storage.
My niece works at a luxury high-rise apartment building where they have on-site WINE storage! They charge the tenants about $200 a month for space in the wine cellar.
4. Bill Back Utilities
I show you exactly how to do this step-by-step in the RUBS (ratio Billing Utility System) Report that’s included as a bonus in the Master Lease Option Method program.
5. Rent Out the Clubhouse for Parties/Events
Consider renting out your clubhouse or rec room for personal parties and special events.
You can even hold classes there and charge for them such as English as a Second Language or Personal Finance classes.
6. Install Vending Machines Onsite
Sometimes when you’re hungry for a snack you just don’t want to go to the store. Rent or buy vending machines to sell snacks and drinks onsite.
7. Install Coin Operated Laundry Facilities
This is the way I increased income by almost $100 a month on my first 3-unit building.
Every two weeks like clockwork, I had a bag full of quarters to take to the bank!
Look for coin operated washers and dryers at used appliance stores.
Sell laundry detergent and dryer sheets, too!
8. Selling Ad Space in Your Community Newsletter
Put together a newsletter for your tenants and sell ad space to local businesses. You can get $25-$300/month per ad!
9. Add an Onsite ATM Machine
Did you know that you can own an ATM machine AND make big fees from it?
Learn more bout this from my friend Carey Buck who has a great training course on how to do it called ATM Business Blueprint.
10. Install an Internet WiFi Network and Charge for Access
This is my new favorite.
Many people can’t afford internet from the cable or phone company so why not provide it for them for a nominal fee?
Install a simple network and charge $15-$25/month for access!
There are a TON of ways to increase the net operating income (your profit) on Master Lease Option deals.
You’re really only limited by your own imagination!
The 4-Step Master Lease Option Process
To recap, here are the 4 simple steps to a master lease option deal…
You get owners of income properties in good condition to let you lease their entire building for no more than it’s currently renting each month.
Said another way, you are going to be leasing that property for the current net operating income.
You get an option to buy the property in the future – typically five years in the future at or below the current value.
STEP 3 [you are here]
You improve or replace the management and get the property performing to its potential by increasing the income and decreasing the expenses.
Now here’s the cool thing about commercial property.
The value of commercial income property is in direct correlation to the income that it produces.
So if you can increase that net operating income – either by increasing the gross income or decreasing the expenses – then you have increased the value of that property.
The value of commercial property is not dependent on sold comparables in the immediate vicinity like residential properties are.
You don’t have to play that game when you're a commercial investor. You have control over the value of your property.
Finally, you exercise your option which means that you’re actually buying the property.
But you're buying the property way below market value now because it’s worth much more than the option price that you first negotiated.
In the Real World
Now, let’s do a little case study so you can see how these income increasers will work in the real world.
So, what I have here is a real apartment building – the Wabash Street Apartments here in Denver, Colorado, 1 Wabash Street.
It’s listed for $825,000.
It’s a 14-unit property, the cap rate is 8.36% and it was built in 1948.
The Financial Summary and Debt and Equity Information provided indicate the current net operating income is $68,737.
So here is how we establish the value of an apartment building.
Property Value = Net Operating Income/ Capitalization Rate
So in this case we’re going to take $68,737 and divide it by 8.36%.
That gives us a value of this apartment building, this 14-unit multifamily building of $822,000.00.
So we can see that we’re right in line here with the list price of $825,000.00.
Let’s say that we were going to offer a Master Lease Option on this property and we were going to just apply three simple and super quick income increasers on this property.
The Profit Pile On
The first thing we do is a really, tiny monthly rent increase.
Let’s say that we increase the rent by $20.00 a month.
Well, 14 units multiplied by $20.00 is $280.00 a month.
We’ve just created an extra $280.00 a month for ourselves.
We multiply that by 12 and we get $3,360 in additional net operating income.
We have just increased the building value to $862,404.00.
The next is to install a coin-operated laundry in the building.
In the basement we’ll just put in a couple of coin-operated washers and dryers.
Let’s say conservatively that your revenue from your coin-operated laundry is going to be $200 a month and that’s conservative because I’m sure these people will do more than one load of laundry a week (hopefully).
So $200 a month from that coin-operated laundry will add another $200 to your pocket, multiply it by 12 and that increases the net operating income by $2,400.00.
Add that to that first income increase and now you’ve increased the value of that building to $891,112.
Income increase number three is to institute the Ratio Utility Billing System (RUBS).
We are going to bill back the utilities to the tenants.
Now the cool thing is that, especially in these older buildings, they weren’t individually metered.
And if you're looking at installing individual meters in apartment buildings to be able to accurately bill back tenant utilities that will cost a fortune.
So tons of owners, especially on these smaller buildings just, have not instituted billing back the tenants for the utilities or installing the meters.
There is a huge opportunity for us here by instituting a simple ratio utility billing system and I tell you exactly how to do that in a report called the RUBS Report that’s included as a bonus to the full Master Lease Option system.
Let’s say that we instituted the ratio utility billing system here and we’re billing back an average of $30.00 a month per unit for utilities.
$30.00 multiplied by 14 units – that gives us an extra cash flow of $420 a month multiplied by 12 – that’s $5,040.
We add that to income increase number one and income increase number two and now we’ve increased the value of that building to $951,399.
Take a look at this.
What we’ve just done with those three simple things is…
Increased the value of the property by $129,399!
That’s your equity.
So when you go to exercise your option at the full purchase price of $825,000.00, now you have equity in this property of almost $130,000.00 just by instituting those three income increasers.
Your net operating income has increased and the monthly cash flow that you just put in your pocket from this one dinky, little 14-unit apartment building is $900 a month.
You haven’t even touched the expense reduction yet.
Your annual cash flow (in your pocket money) from this one tiny little property by just doing those three simple things on this property is $10,800.00.
Do this two or three times and that’s “quitting your job” money.
This is how you can make the compelling no-brainer offer to sellers that you can take over the day-to-day operations, guarantee their net operating income and pay their full asking price when you exercise your option.
I mean how can a seller say no?
And now that you’ve seen just how simple it is to do master lease options, how can you resist the opportunity to start investing in commercial real estate?!
Get more details and join us over at Master Lease Option Method!
I hope you've enjoyed reading this blog series as much as I've enjoyed sharing it
Leave me a comment with any questions and let me know what you think!