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What is Forced Appreciation in Apartment Investing? - Multi Family Real Estate

With Percy Nikora, Co-Founder

When I say 'forced appreciation,' what I mean by that is being able to drive up the value or, let's say, influence, or have a more direct impact on the value of a multifamily asset or real estate class. The way you would do that is, since multifamily is- really, the final value is based on the net operating income divided by the cap rate, the lower the cap rate, the higher the value.

In the markets today, across the country, the cap rates are somewhere between 5.5, 6.5 for the asset classes that we're looking at. What that means is for every dollar that you increase in net operating income, you're getting somewhere between a 15 to 20 times increase in the price, when you sell the asset. That's a very powerful feature.

Our entire goal is to drive that net operating income up, and there's a number of ways you can do that, but primarily by increasing the rents or increasing your gross revenue that's coming in. Then, at the same time, also putting in some processes in place that drive down expenses. We have a very close eye on what we call the expense ratio - what's the expenses as a ratio of the income coming in. There's a number of things that we can get into on what we do to optimize the expenses and increase the income so that your NOI is as good and healthy as it can be.

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