How You Can Add Value to Your Real Estate Investment Property

I've never heard a real estate investor say they are investing in real estate for the fun of it, or for that matter, ever come to me with a fistful of dollars because one day they decided it would be a good idea to pull their money out of the bank (maybe from their nest egg) in order to buy an apartment building and possibly inherit potential tenant problems.

Not unlike most of us, real estate investors would regard real fun as taking a family vacation in Tahiti, perhaps embarking on a trip to New Orleans during Mardi Gras, or maybe racing down the freeway in a red Ferrari; they never purchase rental property on the flip of a coin. No, investors are not frivolous about real estate investing, they buy rental properties to make money, and when value can be added to their investment then they make real money.

In this article, I want to briefly discuss six proven ways value is added to investment property, some while you sleep and some the result of a voluntary effort you enact.

1) Inflation- Inflation increases rental property value solely due to the increased cost of replacing the property. The increased cost for land, materials, or actual construction typically adds value to properties already in operation because the cost to replace the property goes up.

2) Improved infrastructure- This is the effect due to development or expansion of any infrastructure within the community surrounding the property. Roads, public services such as electricity, water, and sewer systems, police and fire protection, bridges, parks, schools, hospitals, employment opportunities and so on have a major effect on the value of property, and mostly positive.

3) Economic conversion- When the use of your property changes, like when new zoning laws allow you to convert a small apartment building to offices or a single-family home into a four apartments, that governmental change in the zoning or permitted use of the property would generate greater income and in turn add value to your rental property. It would mean some due diligence to determine the most profitable conversion for your area the means to follow through, but successful real estate investors regularly purchase real estate at a reduced value and turn them into higher value by economic conversion.

4) Increased cash flow- It is understood that real estate investors buy the cash flow in rental property. Therefore, when you are able to increase the cash flow (assuming other factors do not change) you will increase the resale value of your investment property. In this case, you might be able to raise rents and/or reduce operating expenses to increase your cash flow, but with good property management on your part, it can happen.

5) Capital improvements- Unless the value of the land makes capital improvements superfluous (i.e., the land is more valuable than the structure), adding extra apartments to a building, or an extra bedroom or bathroom when the market demands it, can generally increase property value. Naturally, you should research this carefully and weight the costs to the foreseeable increase in property value because the increase in value might not support the cost. Moreover, you want to be certain that the capital improvements will appeal to future buyers and you will at least recover your actual cost. On the other hand, you might be able to add value without major capital expenditures. Many times a property simply needs tender loving care, requiring nothing more than a fresh coat of paint or innovative landscaping, or perhaps minor décor changes and improvements to add significant value.

6) Supply and demand- The scarcity of rental property when the demand for investment properties is high drives rental property values up. This makes it important to pay close attention to your local market, because when your town or region has room to absorb more, and investors are there to buy, your rental property value will increase. Remember, though, that real estate is local in nature and simply because there's an overabundance of properties elsewhere in the country shouldn't be interpreted to mean that your property is not in a good market pocket and will suffer the same economic shortfall.

Much of this can be researched before you make your investment decision merely by speaking with local governmental authorities or knowledgeable real estate professional. For the best and most profitable real estate investing experience possible, be sure you do.