Enthused by the prospects of making his goal a reality, the owner pursues the income side of the ledger more fully and notices that his laundry income is inadequate. By making the laundry room available to the tenants in a neighboring building he is able to increase his income $25 by a month. (While it is true that $25 a month is not overly exciting, at a 9.5 cap rate it increases the value of the building $3,158! Hey, it's a day's pay.) To meet his goal, he still must increase his NOI an additional $2,214.

In looking at his expenses, he notices that if he can bring them down a few percentage points he can meet his objectives. His current expenses are:

In checking with insurance companies for competing quotes, the owner realizes that he had included some personal items in the building's coverage. He learns that he can stay with his existing carrier but exclude his non-building coverage and reduce his bill to $1,139; a great beginning.

He considers appealing his property tax bill but after checking other properties he decides that his tax burden might be on the low side already. It doesn't look like Maintenance & Repair, Trash or Utilities can be reduced, although the sheer size of the utility bill does make him wonder how its payment might be assumed by the tenants. However, since he is increasing their rents quite a bit he decides that shifting this responsibility to the tenants might be a strategy for another day.

He does, however, speak with the tenant who is handling the on-site management duties. After explaining the new rental increases, he suggests that the tenant/manager could increase his income with an incentive plan to reduce anticipated vacancies. The net effect is to reduce the cash payments to the "manager" from $300 to $240 a month in exchange for a $50 bonus on each lease signed at the new rate. (If the manager responds to the incentives as predicted, the extra money paid to him will be more than offset by a decrease in vacancy losses. In any event, the on-going

fixed expense is reduced.) In addition, he increases the manager's income $25 a month in exchange for the manager (or, more likely, his son) being responsible for the yard work. This has the effect of reducing the yard maintenance expense from $680 to $300.

The new financial structure of the property looks like the following:

Sweet success: the new NOI divided by a cap rate of 9.5% brings the value of the building to $760,500. Whew!

The combination of increasing income and decreasing expenses, when coupled with the dynamic consequence of capitalization (the multiplying effect when investment returns act upon net operating income to achieve value) creates major wealth accumulation results. If not "the" secret to successful investment, it is certainly "a' secret. Simple? Yes. Overlooked? Yes.

Someone once said, "Keep your eye on the doughnut and not on the hole." Translated to the investment arena it might be said, "Keep your eye on the NOI and not on the whole...
financial analysis." -

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