Don’t be too quick to casually dismiss your options, either. For instance, one of my clients is researching geo-thermal heat and air conditioning for his retail building. If it proves to be cost effective not only will his costs go down but he will also be able to “sell” heat and air-conditioning to his tenants, thereby decreasing expenses while increasing income.

This brings us to the fun stuff, increasing income. The most common technique is to increase rents. Nothing wrong here, but after you have moved rents to their economic maximum, that is, to a point where even with increased vacancy costs you still attain a higher NOI, then what?

The principle is to give your tenants more and thereby create demand. The higher the perceived benefits, the more tenants are willing to pay. This is an area of boundless opportunities in itself. Physical improvements to their building may be made, vending machines may be installed, parking may be expanded, garages may be rented separately to others, space planning may be developed to create additional bedrooms. The beat goes on …

In early 2002, I sold an apartment building to a client who was able to increase the rentable space 33% with a modest capital expense. By increasing the building’s tenant capacity, he increased the income. By increasing the income, he increased the NOI. By increasing the NOI, he increased the building’s value. Now, eight months later, the building is under contract for a price that is 27% higher than the purchase price and, when it closes, will produce a net return of 105% on the capital invested!

Another way to make your property more valuable is to shift its use. I also sold a large boarding house to which the new owner will make some obvious improvements and lease the property to a single national user at a handsome increase in income and a dramatic decrease in management expense. Up goes the income, down go the expenses, up goes the NOI, and up goes the value.

A cousin strategy is more common -- change the use entirely. Often zoning changes can bring this about. As a general rule, the more dense the zoning, the higher is the value of the property. A common example would be the conversion of an old home on a major arterial into a property for retail or office use.

“No can do,” you say. “The regulators in our town are just too Boulderized. They won’t budge an inch if the project smacks of development (the dreaded “D” word).” Times change. When the dog days and dog nights of an economic downturn emerge, sacred government jobs are threatened. Surprise, cooperation! A common benefit of having a wolf at the door.

Another opportunity for profit not found in “good” times comes from a greatly increased number of sellers who are willing to carry financing to facilitate the sale of their property. Seller financing can increase leverage and by so doing, increase your return. By way of illustration, a recent client purchased a multi-family building with a 60% first loan at 6.25% and a 25% owner-carry second at 3%. This enabled them to acquire the investment with a blended rate of 5.35% and to only have a 15% capital investment. Lower interest payments translate, of course, to a higher cash flow.

In one way or another, good investment opportunities are most often the result of negligent management. It seems that top quality, attentive management exists in only 20%? of the market while 50% or so are various shades of mediocre and a good 30% are from careless to downright slipshod. In good times, the sheer force of the market often overcomes the problems of poor management practices, not so when the tenant population thins or for some other reason we dip into difficult financial times.

Not every poorly run property is an opportunity; some are over priced, some are too costly or too time consuming to tackle, some are just too far gone to resurrect. However, in the tangled thicket of investment properties suffering from management practices gone awry, there are some treasures. This can be a fertile field for the astute investor. More good news: These properties come in every size and shape, in every town and in every part of town, in every price range and in every condition, in every category and every market type.

The moral is to be a contrarian. Now that the media is filled with dire predictions, now that winter’s winds have stripped the landscape of its blossoms, now that people are retreating from financial exposure, now is the time to slide some money out from under your mattress and be a buyer. As Goethe said, “Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.” - MH

MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com