As an investor, you already know the 2 most common methods of determining income property value.
- The first is by estimating the value of the property itself.
- The second is through estimating the value of any personal property that affects its value, as in the case of a liquor license for a bar.
The third type of asset it’s more difficult to estimate, but it could add significant value to a property. It’s termed an intangible asset, and its value is based on the rights and privileges which it grants the owner.
Intangible assets must provide future economic benefit to the owner. Despite the use of the word intangible, it does not mean that the asset itself has no physical substance. Instead, it refers to the fact that the benefit of the asset does not come from the assets physical substance. You must be able to prove that it exists by providing evidence.
1. Creating Income Property Value During The Planning Stage
There are several opportunities for investors to add property value during the life-cycle of the property. The first stage is the planning stage.
One example is a technique called land assemblage. Land assemblage refers to the common practice of identifying adjacent lots which can be combined. The combination of the lots automatically adds value since the larger lot would allow a larger property to be built on the spot.
Other methods for increasing income property value include campaigning for zoning changes, which allow a more profitable property type to be built on a land. The value of a particular property isn’t solely determined by its location. One effective way to increase or decrease the property value without making any changes is a zoning change.
If you want to get the zoning changes for your property, keep in mind that it might be difficult to convince a committee to change the zoning. However, there is no way to be absolutely sure a zoning change will be approved. And even if there was, you wouldn’t want the seller to be aware of the fact and to raise the price of the property.
So how can you know whether or not you will get approval for the zoning changes?
The best way is to examine the zoning changes that have already been made in the area. If you notice that the zoning committee has recently approved several similar zoning changes in the area, that there is a good chance they might approve your request.
Another possibility is to find out if the city has any plans of re-urbanizing, or re-developing the area. There is a city master plan that shows what officials would like the city to look like. If you find your property’s location, you can uncover whether or not there are any zoning changes planned for the near future.
Use common sense as well. While a residential building located in the middle of a commercial area doesn’t make sense, it is equally unlikely that the laws will change allowing an income property in the middle of a residential neighborhood.
2. Adding Space Through Easements
Easements give one party the right to use the property of the second party for a fee.
This can either increase the income property value, for example by adding more usable space to a retail business. Or it can decrease the value, by removing access to parking or other amenities.
Easements can present special challenges as they can refer to surfaces below ground, utilities, or common walls. However, some investors are able to take advantage of easements. For example, a mall in Virginia was able to use a zero lot line division in order to sell the mall’s parking lot to a large apartment complex developer.
3. Proactive Maintenance
Over the course of time, the physical aspects of a commercial property will deteriorate.
It is not uncommon for owners to push off repairs and regular maintenance, since, in the beginning, these are minor or not urgent. However, delayed maintenance causes the value of the property to decrease. It can become difficult for owners to “catch up,” since now the damages and resultant costs have accrued, significantly cutting into the property’s profits.
If investors continue to ignore these tasks, by the fifth year the owner will find profits significantly low due to tenant vacancy or demands for lower rent (due to decreased operations).
By now the only way to begin fixing the problem is by a significant outlay of money – a capital infusion- which would still not be enough to bring the property back up to previous performance levels.
Make sure to schedule regular maintenance of the physical property. That includes landscaping, another surrounding land, and the mechanical infrastructure of the property. Doing this prevents a natural decrease in profits, and thereby ensures the income property value does not decrease due to avoidable circumstances.