One of the things we love most about apartment buildings is how many options we have to increase their value. In our recent newsletter on appreciation (https://weekendwealth.ca/profit-centres-of-real-estate-appreciation/), we talked about how property values rise over time with the market. Forced appreciation is different. It’s value you create yourself, and apartment buildings are especially good at it.
"An apartment building simply has more buttons and levers to control its value.”
It comes down to how an apartment building is valued. A house is priced by comparing it to similar homes that sold nearby. An apartment building is valued on the income it produces. Take the total rent, subtract the operating expenses, and you’re left with the net operating income, or NOI. NOI is the money the building earns before the mortgage is paid, and it’s the number banks and appraisers use to decide what the building is worth. That gives you two levers:
- Raise rents → NOI goes up → value goes up
- Lower expenses → NOI goes up → value goes up
Here’s a recent example. We bought a 14-unit building for $1.6 million. The rents were below market, so we brought them up modestly, and our operating systems trimmed the expenses. Those two small adjustments increased the NOI enough that the building is now valued at $1.88 million, an increase of $280,000 within our first year of ownership. The market didn’t have to do anything for that to happen. The value came from how we run the building, and that’s exactly why forced appreciation is one of our favourite reasons to own multifamily: we have control over the value of the asset.