Real Estate is an in-efficient market, which means that those that have more knowledge can benefit from greater cash flow than those who do not have this knowledge.
- For investors, this means that they better you are at knowing your property, the local market, and your value-add strategies, the more money you can potentially make from your investment.
Brian was a great example of this. We sold Brian a building that had been in a family trust for 30 years. The property was relatively well maintained, but dated. The manager did a poor job of filling vacancies, and there was a huge amount of un-used space in this building.
Brian did the classic value add plays of renovating units, increasing rents and reducing utility costs. However, there was several other key additions that Brian made that really juiced the return, which we will cover below.
1. Change the Zoning (or Expand Permitted Uses)
Zoning is one of the most overlooked levers in real estate, largely because many investors assume it’s fixed to the use currently in place. In reality, zoning used may be expanded or changed especially in areas where municipalities want redevelopment, increased tax base, or better land utilization.
A zoning change—or even a zoning overlay, special use permit, or conditional use—can dramatically increase value by:
- Allowing higher density
- Expanding allowable uses
- Enabling mixed-use development
- Reducing parking or setback requirements
For example, the building Brian bought had apartments with a lot of large 2 or 3 bedroom units, which he changed into smaller 1 bedrooms, which was permitted under zoning. This added to his immediate and long term value.
Similarly, if your asset is located on a high traffic road with extra land, or a dense area with a lot of foot traffic, obtaining zoning relief to allow for retail may be possible, resulting if a nice value lift.
The key here is understanding the municipality’s goals. Cities respond to projects that create jobs, housing, tax revenue, or solve blight. Investors who frame zoning requests as solutions—not favors—often succeed.
2. Increase the Property’s “Class”
Upgrading a property’s class (C to B, or B to B+) doesn’t require a full redevelopment. Often, it’s a matter of targeted improvements that change tenant perception and buyer underwriting.
Improvements that typically move the needle include:
- Updated façades and trendy signage
- Tech friendly updates, which attract higher income demographic
- Improved lighting (especially LED conversions) which improves the feel of safety
- Crisp landscaping and new parking lots
- Fresh Smell – Pro tip- paying attention to how a property smells can make a big difference. Hotels have mastered this art, and adding it to your apartments can level up the ‘feel’ of the space by changing the smell.
Increasing class allows you to:
- Attract higher-quality, higher-income tenants
- Reduce vacancy and turnover
- Justify higher rents
Importantly, buyers and appraisers often capitalize income based on perceived class. Moving the property into a higher class of asset can result in a lower cap rate upon exit or refi.
- Moving the cap rate down by 50-100 basis points make a big difference in your end value.
3. Appeal the Property Taxes
Taxes are often the biggest expense with apartments. While many states re-assess upon sale, PA is one of a few states that do not reassess at the time of a sale. MD reassesses every 3 years.
However, there is a growing movement to catch ‘missed value’ on a property tax assessment when a property is sold, which is watched by tax assessment offices. If an investor receives a higher tax bill after a sale, they should ask for the reasons why and appeal if not justified or accurate.
Our friend Brian made improvements to the poor performing property he had bought, by adding 10 additional units. Because this required permits, the taxing authority then increased his tax assessment.
Brian knew the tax code though, and made an appeal based on the tax per unit of other similar properties in the area. He won his appeal because the facts were on his side and he presented accurate data to back it up.
Because the taxes were already high to begin with, Brian was able to get the taxes LOWER than they had been previously, even with a higher unit count, after the appeal.
Tax appeals can increase value in two ways:
- Immediate NOI improvement
- Permanent expense reduction that future buyers will capitalize
Even small reductions matter. A $20,000 annual tax savings capitalized at a 7.0% cap rate creates over $285,000 in value.
Smart investors treat tax appeals as a routine asset management function, and monitor this expense to make sure it is fair.
4. Utilitze Extra Land: Subdivision, Pads, or Solar
Excess land is often a hidden asset sitting idle on the balance sheet. Many properties are built with more land than they currently need.
Options include:
- Subdividing and selling excess parcels
- Building more units on open land OR on parking areas if you have excess parking
- Creating pad sites for drive-thrus, banks, or quick-service retail
- Ground leasing for solar installations
- Adding self-storage or ancillary buildings
Brian’s building had a large parking lot, which a portion of which went unused. Because the parking requirements were low under his zoning, he used some of the excess parking to create an additional 20 unit building.
- This additional 20 units also had the benefit of taking him into the 100 unit count, which pushed his CAP rate lower (100+ unit complexes sell for more on a per unit basis), so his value increased because of the lower cap rate as well as adding additional units.
In some cases, monetizing excess land can return a significant portion of the original equity—while the investor still owns the income-producing asset.
5. Monetize Extra Space: Storage, ATMs, Laundry, Parking & Signage
Many properties generate less income than they should simply because small revenue streams are ignored. Individually, these may seem minor. Collectively, they can materially impact NOI.
Examples include:
- Renting tenant storage cages or rooms in basements
- Installing ATM machines with revenue sharing
- Adding or upgrading on-site laundry
- Charging for reserved or premium parking
- Leasing building signage or adding a Lit LED sign which can sell advertising for local businesses.
- Allowing vending, kiosks, or telecom equipment, which usually work off of revenue sharing.
These income sources often require minimal capital and little management, but can add significant value on capitalization.
Brian’s building had huge hallways, which he utilized with a range of Storage lockers, ATM & Vending. These cost him nothing to bring in, and he received an ongoing revenue share with very little management work. He also had both covered parking and non-covered, so he offered the covered parking at a premium to his tenants. Bundling this into the rent reduced the management.
6. Decrease Utility Expenses
Reducing utilities is one of the cleanest ways to increase NOI because savings drop straight to the bottom line.
Common strategies include:
- Installing low-flow plumbing fixtures
- Sub-metering utilities
- Implementing smart thermostats or energy controls
- Negotiating bulk utility contracts- for example, getting a dumpster from a competitive provider, and then charging a trash fee to tenants is an easy way to save tenants money and reduce your expenses at the same time.
Brian put in mini split systems for his units, which decreased the tenant’s electric bills from the electric baseboard that was in place. The bonus for Brian was two fold:
- Now that he had AC in all units, he could charge more in rent
- The ‘Class’ of building and tenant both increased, because now it had an amenity that higher end tenants expect. These higher quality tenants and higher rents of course decreased- you guessed it – his cap rate.
Many Landlords miss this key point, and are thinking only of THEIR bottom line on utilities. Thinking of utilities from your tenant’s perspective can increase your quality, just like Brian did.
Final Thought: Value Is Built, Not Found
The most successful real estate investors don’t wait for appreciation—they create it. And that, my friend, is why real estate is such a fun investment- you create your own financial freedom while helping others.
The investors we work with appreciate how we help them see missing opportunities and grow their returns. If you are looking to maximize the profit on an upcoming sale, CONTACT US to schedule a review.
