Question about Apartment Building Math I found in a book?
Hello Everyone!

I am very interested in commercial real estate and am in high school. I recently read a book and was wondering if any experienced commercial real estate brokers/entrepreneurs could explain whether this author's theory is correct. 

**Basically:**  

You have a 10-unit property worth $1,000,000(easy math) and your NOI is $50,000. Meaning your cap rate is 5%. You want to increase the property value so you install a dishwasher into each unit and raise the rent by $50. Now your ROI is $56,000(50x12x10=6,000). So now using the same cap rate, your property is now worth $1,120,000. (56,000/x=.05) **Does this math work out? Are there other ways to increase the value of a property like this?**
[{"id": "i2incej", "text": "The math part works, yes. I think it\u2019s simplistically trying to show you how cap rates work. Your value is based on your income so if you increase your income you increase your value. \n\nMy problems with this are practical:\n-does installing a dishwasher justify a $50 rent increase (depends on your market, mid market rentals here would include it)\n-there is a cost to installing dishwashers beyond the purchase - installation and plumbing\n-usually each appliance gets $50 per unit per appliance from me in maintenance/repair/replacement per year so I don\u2019t know if $50 increase is the right number\n\nThe theory is correct though. I\u2019d increase $50 based on inflation and rising cost not value add with a dishwasherZ", "replies": [{"id": "i2nxeq9", "text": "Thank you for your help. I also was wondering about the $50 rent increase from the dishwasher. So the value of your property can increase when you raise the rent?", "replies": [{"id": "i2nyxq7", "text": "Yes exactly, raising rent raises value when you\u2019re looking at it based on income. Other ways of assessing value would be for the land cost and replacement cost.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i2inxhe", "text": "Cap Rate is just a ratio. If similar properties are seeing that same return ratio then that assumption is correct. But say the average rate for similar properties with dryer (simple variable) is actually 4%, then your property would be 1.120M. \n\nYou can solve back to any value based on a cap rate, but they key is to know the market and know what returns look like, then solve to them.", "replies": [], "depth": 1}, {"id": "i2ip7bw", "text": "The example is correct, but keep in mind that if vacancy rises a few percentage points you can lose that easy money very quickly. Or your labor costs go up because of a national labor shortage. Or if cap rates rise (um, I don\u2019t know\u2026maybe because a rising interest rate environment doesn\u2019t allow anyone to cash flow at the previous cap rates). \n\nSo yeah, the math works, but in practice it can be much trickier than the example lets on.", "replies": [], "depth": 1}, {"id": "i2is746", "text": "Controlling costs is the big one. If for example electric is included in that rent. Insulating pipes, and installing more efficient heaters, and water heater could reduce your expenses by $100/mo. Or the classic example with utilities is to establish a RUBS and eliminate the liability of that expense all together to drastically decrease your opex, and therefore increasing your ROI.\n\nThere are many levers to pull in CRE that influence value, increasing rental rate is just one.", "replies": [], "depth": 1}, {"id": "i2ix3pu", "text": "At its most basic form this concept is correct, but in application it is far more nuanced.   Yes if every dollar of additional rent hits the bottom line you have increased the value of the building $120k, but you have not created $120k of value as you have to deduct the cost to install the dishwashers, but you have still created value.  The difficult assumption is that every dollar of rent flows to the bottom line, because that\u2019s not realistic.   Additional amenities have additional costs to repair and replace over time (capital reserves).   Ultimately if you can make a profit of more than the cap rate (in this case 5%) on any incremental investment, you have created value for the property.", "replies": [], "depth": 1}, {"id": "i2j3698", "text": "There are lots of other ways to increase the value of property besides improvements like in your example.\n\nJohn T Reed gives a bunch of good strategies in his book, I\u2019d recommend it\u2026https://johntreed.com/products/how-to-increase-the-value-of-real-estate-2nd-edition-by-john-t-reed\n\nOr if you want something free, BiggerPockets has a lot of articles and podcasts that go through some of these strategies also.", "replies": [{"id": "i2nxzw2", "text": "Thank you so much for these resources!", "replies": [], "depth": 2}], "depth": 1}, {"id": "i2jhrf6", "text": "It's worth that to others, but, it's worth more to you, less *debt* (including the new appliances, plumbing, construction costs, etc.)", "replies": [], "depth": 1}, {"id": "i2l4lyh", "text": "Keep in mind, you buy the same amount of appliances for a studio as you do for a 3 bdrm", "replies": [], "depth": 1}]