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Real estate investors: A new quiz for you

Real estate investment and finance: test your understanding

Folks who enjoyed my earlier quizzes about real estate investment have asked for more, so have some fun with this new one!

Test your understanding of concepts and terminology that are important to real estate investors.
After each question, I’ll explain the reason for the correct answer!

Click on the image to start the quiz.

real estate investment

— Frank Gallinelli

Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 


Self-Storage Real Estate: Understanding Unit Occupancy, Physical Occupancy, and Economic Occupancy

self-storage

In my previous post, I discussed what I believe are some of the most important pros and cons of investing in self-storage real estate.

As with most real estate sectors, self-storage features some terms that are particular to this property type — specifically in how owners describe occupancy: Unit Occupancy, Physical Occupancy, and Economic Occupancy. Let’s review them:

Unit Occupancy

Unit occupancy is the most straightforward of the three. It refers to the number of occupied units at a self-storage property, expressed as a percentage of the total. For example, if a facility has 100 units and 75 of them are filled, then the unit occupancy is 75%. This metric provides a quick snapshot of the facility’s occupancy status but doesn’t account for the varying sizes of units or the revenue that’s generated by each unit.

Physical Occupancy

Physical occupancy, while similar to unit occupancy, takes into account the rentable square footage of each unit. This is the number of occupied, rentable square feet at a facility, also expressed as a percentage of the total. Physical occupancy offers what is probably a better picture of vacant vs. occupied space than unit occupancy because it considers the actual space being utilized. 

Economic Occupancy

Economic occupancy compares the actual rental income being generated in relation to the gross potential rent of that property. It takes several factors into account, including turnover periods between tenants, concessions and rent incentives, and late or unpaid rent. You might think of this metric as a sort of inverse cousin to the Vacancy and Credit Allowance that you see on an APOD (Annual Property Operating Data) for a typical income property.

A 100-unit storage facility with 95 units rented has a physical unit occupancy of 95%, but its economic occupancy might be lower (and concerning) due to factors such as short-term discounts, concessions, and delinquent rent. 

An Example

Let’s say we have a self-storage facility with 100 units, and we want to calculate the unit occupancy, physical occupancy, and economic occupancy for a given month.

Unit Occupancy:

Unit occupancy refers to the percentage of units that are rented out, regardless of how much of the space is being used.

At the end of the month, we find that 90 of our 100 units are rented out. So we can calculate the unit occupancy as follows:

Unit Occupancy = (Number of rented units / Total number of units) x 100

Unit Occupancy = (90 / 100) x 100

Unit Occupancy = 90%

Physical Occupancy:

Physical occupancy refers to the percentage of total rental space that is being used.

Let’s say that the average unit size in our facility is 100 square feet. That means we have a total of 10,000 square feet of rental space (100 units x 100 square feet).

At the end of the month, we find that our renters are occupying a total of 8,000 square feet of space. So we can calculate the physical occupancy as follows:

Physical Occupancy = (Total rental space in use / Total rental space) x 100

Physical Occupancy = (8,000 / 10,000) x 100

Physical Occupancy = 80%

Economic Occupancy:

Economic occupancy refers to the percentage of total potential rental income that we are actually receiving.

Let’s say that we charge an average of $100 per month for each unit. That means we have a total potential rental income of $10,000 per month (100 units x $100).

At the end of the month, we find that our renters are paying a total of $7,000 in rent (70 rented units x $100). So we can calculate the economic occupancy as follows:

Economic Occupancy = (Total rental income received / Total potential rental income) x 100

Economic Occupancy = ($7,000 / $10,000) x 100

Economic Occupancy = 70%

So in this example, we have a unit occupancy of 90%, a physical occupancy of 80%, and an economic occupancy of 70%. 

Conclusion

Understanding these three types of self-storage occupancy—unit, physical, and economic—is important for investors seeking to maximize their profitability. By monitoring and managing these three types of occupancy, you can keep an eye on your business’s financial health and optimize your bottom line with informed decisions about pricing, collections, and possible expansion.

— Frank Gallinelli

FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.

 

software to analyze real estate investmentsonline video courses for real estate investors


Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Photo by Steve Johnson on Unsplash


Self-Storage Real Estate: Pros and Cons for Investors

self storage real estate

What is self-storage real estate?

Simply put, self-storage properties are built to contain many, often hundreds of individual storage spaces of varying sizes. It’s a booming market, forecast to be worth over $64 billion by 2026.

Individuals and businesses rent these spaces to store possessions like furniture, clothes, equipment, business records, inventory – just about anything one can imagine. The top five reasons people use self-storage are for moving purposes, lack of space at home, change in household size, downsizing, and business purposes.

These facilities have become increasingly popular among real estate investors for several reasons:

Steady Income

Perhaps the most compelling reason for investors to turn to self-storage is the likelihood of a steady revenue stream. The demand for storage units increased to 14.5 million in 2022, up by 970,000 since 2020, with owners seeing an annual return on investment of almost 17% over a nine-year span.

Recession-Resistant Investment

Self-storage real estate has proven to be notably resilient during difficult economic times. For example, census data show that self-storage revenue increased steadily during the pandemic and occupancy averaged 96.5% in the third quarter of 2021 compared to 91.5% in the first quarter of 2020. As people relocated and downsized, or needed to make room for home offices, they needed space to store belongings.

Even during the Great Recession of 2008, while most REITs suffered losses, self-storage showed a positive 5% return.

Lower Operating Costs

Compared to other income-producing property types, operating costs tend to be lower for self-storage units, typically around 35% of revenue. These spaces do not experience use as intensive as apartment, office, or retail properties, and have far fewer amenities. No late-night calls for clogged plumbing. On average, property taxes account for almost one-third of the expenses for this property type.

Stable Cash Flow

With a large number of relatively small units, the loss of an individual tenant does not typically impact cash flow the way it would with the loss of an apartment or commercial tenant. Also, when a unit does go vacant, it can usually be ready for a new tenant immediately, saving both the rollover time and cost usually needed for other types of space.

Advantageous Leases

Month-to-month leases are the norm, so owners can adjust rates quickly if market conditions change. Some owners take payment by automatic credit card or ACH billing, reducing the chances of default. No property owner relishes the prospect of an eviction, but in many states, the process is, at least, less difficult and time-consuming than it would be with an apartment or commercial tenant. And you may be able to recover at least some of your economic loss via a lien that permits you to auction off a unit’s contents.

Of course, anything worth having or doing comes with some challenges. Here are a few:

Market Saturation

One potential risk in the self-storage sector, as in virtually any area of real property, is the risk of oversupply.   To be sure, an essential part of your planning is to evaluate whether the market where you plan to invest is becoming saturated. This can occur if there is a spike in the construction of new facilities, if supply is starting to outstrip demand, or if institutional investors are beginning to dominate your market. Your due diligence needs to be focused to be on the lookout for these warning signs as you evaluate your long-term plans.

Management

While you probably will not have a lot of the management duties that are a familiar part of owning properties that are occupied by real people, there are still some hands-on considerations with self-storage real estate. Think of the property as your own retail establishment. You will probably need to have a person on-site during business hours to control access to the facility, deal with walk-in customers wanting to sign up, or make equipment like hand trucks or platform trucks available for use. Self-storage facilities in the U.S. employ, on average, 3.5 employees per facility. https://alansfactoryoutlet.com/blog/self-storage-industry-statistics/

Security

We doubt that you’ll keep the Hope Diamond or your Mickey Mantle rookie baseball card in your self-storage cubicle, but folks often do store valuable stuff. These facilities need to ensure that they have robust access-control systems in place and video surveillance. They also need to maximize security of the storage units themselves. Tenants will usually provide their own locks, but the units should be built with reinforced walls and doors to make them less vulnerable to forced entry.

Conclusion

The self-storage real estate sector, with its potential for high returns, recession-resistant demand, and relatively low operational costs can offer compelling investment opportunities. It’s also important to acknowledge that challenges exist, like hands-on management responsibilities, robust security demands, and the possibility of market saturation. Investors who approach this sector with careful due diligence and a realistic understanding of the pros and cons should find themselves in a position to capitalize on the growing demand for self-storage facilities.

— Frank Gallinelli

FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.

 

software to analyze real estate investmentsonline video courses for real estate investors


Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Photo by JOSHUA COLEMAN on Unsplash


Real estate investors: Got your Cap Rates, NOIs, LTVs, Net Worth All Sorted?

Test your knowledge of real estate and finance

Looks like folks enjoyed my first quiz, so I hope you’ll have some fun with this new one too! Test your understanding of concepts and terminology that are important to real estate investors.
After each question, I’ll explain the reason for the correct answer!

 

— Frank Gallinelli

 

software to analyze real estate investmentsonline video courses for real estate investors


Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 


Have some fun with my quiz for real estate investors

Test your understanding of real estate and financial finance concepts

Investing in real estate? Got a handle on TVM, OpEx, Basis, Metrics?

I invite you to have some fun with this quiz. Test your understanding of some key concepts important to real estate investors.

Click the sample below to launch.

 

— Frank Gallinelli

 

software to analyze real estate investmentsonline video courses for real estate investors


Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 


Seven Mistakes to Avoid When You Invest in Rental Property

financial success with rental property

Real estate has probably been the best vehicle for building wealth since, well, forever – and income-producing real estate (aka rental property) may be the type of real estate that offers the greatest opportunities to small and mid-size investors.

But nothing worthwhile comes without a few potential pitfalls. You can and certainly should prosper as an investor, but to do so means being mindful of some mistakes that could derail your success. Let’s consider a few of the most important:

 

Mistake #1: Lack of Due Diligence

Pardon my Latin, but due diligence is the sine qua non of real estate investing. As I have written in many places before, two types of research are essential to investing successfully in real estate.

One is to vet the property itself. That means a physical inspection with an eye out for any underlying issues such as deferred maintenance and possible code violations. If you don’t feel at home around power tools and electric panels, hire a professional inspection firm. They should provide you with a comprehensive report and perhaps save you from costly surprises.

The second part of your due diligence concerns the market. No property lives in a vacuum, and you need to understand the local market dynamics before you jump in. How strong is the demand for rental properties in this location; how much inventory is there for units like the ones in this property; what are the prevailing rental rates; what is the business and employment climate, and are the any changes on the horizon? Ready to add artificial intelligence to your toolbox? A source of multifamily market data that I encountered recently is HelloData.ai, which claims to have real-time data on over 25 million units nationwide. Use every means at your disposal to understand the market that you’re about to become a part of.

(Please note that the HelloData link is an affiliate link, which means that we may earn a commission at no cost to you. I only add links that I believe will add value for my readers. For a 10% discount at HelloData.ai, use this link or enter this promo code: realdata10)

Mistake #2: Misjudging Financial Info

A very common mistake that investors, especially beginners, make is overestimating the potential rental revenue and underestimating the operating expenses. The seller or the seller’s broker will probably give you some revenue and expense data for a property they want to sell, but be cautious about taking all or even some of this data at face value. Get copies of the current leases, and, if possible, inspect accounting reports that show actual revenue collected and expenses paid. Gaps in the revenue stream can be a tip-off to chronic vacancy.

Don’t simply look to see if the amount of any expense item seems suspicious. Look also to see what might be missing from the data handed to you. The most common expense I see omitted in seller presentations is property management. Even if you think the current owner – or you as the new owner – are treating ownership as a DIY project, the bank appraiser won’t agree. Time is money and any time you spend on management is a cost.

Are you going to have professional fees for lease and tax preparation? Do you need someone to shovel snow, or cut grass? Put yourself in the shoes of the owner before you buy, and project your cash flow realistically.

Mistake #3: Inadequate Financial Planning

Related to the previous caveat is the lack of financial planning. Are you budgeting realistic amounts for repairs and maintenance? Do you put money aside in a reserve fund so you won’t be blind-sided the day the heating system gives out, or the roof needs replacement, or some other unforeseen expense occurs? Are you accounting for revenue that might be lost in future years due to turnover, vacancy, or leasing commissions? Keep in mind that your property taxes, insurance, and mortgage payments are going to come due, and you can’t play kick-the-can with these. You need to forecast future cash flows realistically.

Mistake #4: Not Buying at the Right Price

Speaking of forecasting future cash flows (shameless self-promotion here): that’s what our Real Estate Investment Analysis software has helped investors do for more than 40 years.

What a seller is asking for a property should not be the driving factor in what you decide you’re willing to pay for it. Keep in mind that buying a rental property is akin to taking on a business. It’s not like putting money in a bank account and collecting a nominal return, but involves both a degree of risk and a measure of personal effort. You need to make a multi-year forecast of the likely revenue, vacancy, expenses, and debt service, as well as an estimate of funds to earmark for reserves, needed improvements, and replacements (like that heating system I mentioned). In that way, you can forecast your future cash flows and make a data-driven decision about the price at which this property will give you an acceptable return on your capital invested.

Mistake #5: Poor Tenant Screening

You probably wouldn’t buy something on Amazon without first checking some of the reviews. As a landlord, it’s even more important to be proactive and maintain a thorough screening process for potential tenants. But also keep in mind that there are some legal and ethical Dos and Don’ts you should observe, as described in this National Association of Realtors® article. Perhaps your best move is to use a professional service. Investopedia has reviewed what it feels are the 7 best for 2024, including First Advantage and RentPrep.

Mistake #6: Not Having a Professionally Drafted Lease Agreement

A comprehensive and well-written lease agreement serves to protect both landlord and tenant. It specifies key provisions like rent payment terms, security deposits, termination date, and renewal options. But it can also provide clarity for both parties about tenant and landlord obligations, maintenance responsibilities, trash removal, recycling policies, quiet hours, pet restrictions, and other practical day-to-day concerns. Keep in mind that there may be state or local laws that govern the content of leases, particularly for residential property. A well-written lease is a good way to avoid misunderstandings that can escalate into legal disputes or financial losses.

Mistake #7: Ignoring Legal and Regulatory Requirements

Being in business of any kind – and investing is a business – seems to grow more complicated and more regulated every day. If you’re into residential, be sure you’re up on fair housing laws and landlord-tenant ordinances. Be aware of all disclosures and forms you could be required to give to new tenants and any rental licenses you may need to secure. With all types of real estate, be aware of local zoning and building codes and make it your business to be compliant. Ignorance of codes or regulations, or trying to cut corners, is not likely to end well.

A Final Word

Income-producing real estate can be your vehicle for generating passive income and building long-term wealth, as it has for many others, so long as you commit yourself to careful due diligence, thorough financial analysis and planning, and effective management. Invest wisely. By avoiding the mistakes I’ve discussed here you should be able to optimize the success of your rental property investments.

 

–Frank Gallinelli
online course for real estate investors
Image: nattanan23 at pixabay https://pixabay.com/users/nattanan23-6312362/

Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services. Photo by Brandon Griggs on Unsplash
The software programs, applications, and websites mentioned in this blog post are provided for informational purposes only. The inclusion of these tools does not constitute an endorsement or recommendation by the author or the blog.
Readers are advised to exercise their own discretion and make informed decisions when considering the use of any software programs or applications mentioned in this blog post. Users are solely responsible for their actions and are advised to carefully review and adhere to the terms and conditions, privacy policies, and licensing agreements of any software they choose to use.

Property Management: Exploring Trends and Tools for Savvy Investors

multifamily property management

For those of us whose experience with rental property goes back a few decades (maybe even more than a few), the term “property management” conjures up images of ledger books for recording rent payments and expenses, receipt pads for tenants who paid by cash, and a plumber or two on our landline’s speed dial.

Things have changed, and much of that change is being driven by technology.

Perhaps what hasn’t changed is that sound and effective property management still plays a vital role in your success as a real estate investor, giving you the best opportunity to maximize returns, promote tenant satisfaction, and ensure property longevity. Let’s explore a few of the key trends and tools that make up today’s property management landscape.

Tech-Driven Solutions for Property Management:

“Proptech” stands out as the industry buzzword du jour. Today you can find a tremendous number of platforms and applications serving the residential and commercial real estate industries – more than we can cover in this blog post – but let me mention a few that may be of particular interest to owners of rental properties.

            Data Analytics and Performance Tracking:

Several platforms can help you streamline your day-to-day operations, such as financial reporting, maintenance tracking, lease management, rent collection, tenant screening, and more. Most offer detailed reporting and analytics capabilities where investors can track key performance indicators. Among the most frequently reviewed providers in this space are Buildium, Yardi Breeze, Rent Manager, Appfolio, and Rentec Direct.

            Real Estate Investment Analysis Software:

The certain precursor to successful property management is in first choosing the right properties to buy and manage. Professional-grade investment analysis software can take the guesswork out of forecasting future cashflows and return-on-investment, and help you make informed buy/don’t buy decisions. You won’t be surprised to learn that we believe that our RealData software, with its 40-year track record, will be your best choice to help you make those decisions. The Express Edition of Real Estate Investment Analysis stands out as a robust and affordable option for multifamily and small commercial, while the Professional Edition can help you discover the true investment potential of virtually any type of commercial or residential income property.

            “Internet of Things” and Smart Home Integration:

You can integrate smart devices such as thermostats, security systems, and locks into your property management toolbox, allowing you to monitor and control various aspects of your properties remotely. Tools like Nest, Ring, and SmartRent offer features such as remote access control, energy management, security monitoring, and automated maintenance notifications, all of which can improve tenant satisfaction and save you both time and money as a landlord.

            Virtual Tours and Online Marketing:

With the rise of virtual 360-degree tours, you can certainly grab some attention and market to potential tenants by offering online property viewing. Tools like Matterport and Realync enable property managers to showcase their properties remotely, saving time and resources. If a picture is worth a thousand words, then…

 

Sustainable and Environmentally-Friendly Practices:

Sustainability is gaining prominence in the property management industry as more investors recognize the long-term benefits of environmentally responsible, aka “green,” practices. By implementing eco-friendly measures, such as energy-efficient lighting and appliances, low-flow plumbing fixtures, and the use of sustainable materials, you can reduce operating costs while aligning with sustainable development goals. I discussed some important sustainability issues in greater detail in a previous blog post and invite you to check it out.

 

A Final Word:

Property management continues to evolve, and investors need to stay updated with the latest trends and leverage relevant tools to maximize their returns. The integration of technology, data-driven decision making, and sustainable practices are shaping the industry. By embracing these trends and tools, investors should be able to achieve greater profitability in their real estate investments.

What tools and techniques are you using in your property management, and what are you finding to be most valuable? Please tell us about your experience implementing best property management practices.

–Frank Gallinelli
online course for real estate investors
Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services. Photo by Brandon Griggs on Unsplash
The software programs, applications, and websites mentioned in this blog post are provided for informational purposes only. The inclusion of these tools does not constitute an endorsement or recommendation by the author or the blog.
Readers are advised to exercise their own discretion and make informed decisions when considering the use of any software programs or applications mentioned in this blog post. Users are solely responsible for their actions and are advised to carefully review and adhere to the terms and conditions, privacy policies, and licensing agreements of any software they choose to use.

Is it Good to be Green?—The Long-Term Benefits of Implementing Energy-Saving Improvements in Commercial Property

energy-saving improvements to commercial real estate

Environmental awareness and sustainability have become increasingly important in recent years, and this is certainly true of the commercial real estate industry. Commercial property owners who implement energy-saving improvements can not only help the environment but at the same time unlock a number of long-term benefits for their businesses.

     1. Cost Savings

According to energy.gov, commercial buildings waste up to 30% of the energy they consume. Investing in energy-saving improvements can significantly lower overall operating costs. Some common measures include:

• Lighting upgrades17% of all electricity consumed by commercial building is from lighting. Incandescent bulbs are energy hogs. Replacing them with LED bulbs can result in a significant cost savings. According to EnergyStar, LED’s provide the same brightness as tradition bulbs, but use 90% less energy and can last 15 times longer. Traditional bulbs also release 80% of their energy as heat, raising the cost of air conditioning.

• Utilizing natural lighting — Increasing natural lighting via skylights and south-facing windows where possible, and using energy-efficient blinds and shades can help reduce the need for artificial lighting.

• Insulation and weatherization — Ensuring that the building is properly insulated and weatherized can prevent energy loss and reduce heating and cooling costs by as much as 10% according to the EPA. Windows, doors, and walls are the first places to look, but don’t forget the roof, HVAC ducts, outlets, and pipes.

• Using power management settings on computers and other hardware — Per EnergyStar, each office desktop computer wastes up to $50 a year. This is an easy way to reduce electricity use.

• Getting an energy audit — Contact your utility company to learn what services are available, but in many locales there are different audit levels, varying from free to paid. Some utility companies offer rebates or other incentives to customers who follow through on audit recommendations. An energy audit can help define what options are worthwhile and what their costs and potential savings could be; and a consultation with your CPA to review the cost-benefit balance can reveal the actual tangible return on investment for any of the cost-saving strategies.

• Getting a competitive quote for electricityIf you’re in a deregulated state, you may be able to choose your electricity supplier and lock in a rate that is lower than what you would get from your utility company.

• Installing solar panels — While solar can be good for your bottom line and for the environment, and perhaps even reduce your dependence on the grid, it’s important to weigh some potential offsetting factors. Does the roof have adequate structural integrity, or must you upgrade that first? Does the building get enough days of full sun? Could future adjacent development block direct sunlight? Are there regulations about hookups or fire department roof access that you need to anticipate? Is your electricity bill — especially if you’re a landlord responsible solely for common area utilities — sufficient to justify the initial capital outlay? A professional solar company should be able to give some reasonable projections of the time need to recover your costs, and help you make an informed decision.

2. Increased Property Value and Rental Premium

From a strictly metrics-based viewpoint, energy cost savings should increase net operating income and therefore increase value.

On a more subjective scale, energy-efficient buildings are highly sought after by environmentally conscious businesses and tenants, as they offer lower operating costs for tenants as well as owners, and present a reduced environmental impact. Does that translate into sales and rental premiums?

Although it may be difficult to quantify, there seems to be widespread agreement that the so-called “green premium” is alive and well. The US Green Building Council cites significant sales premium in LEED-certified buildings and CBRE offers a detailed study of rent premiums. Such premiums are of course a function of location as well as property type and class, but in general they all seem to confirm that energy efficiency measures have a positive impact on asset value and on rent.

And on the other side of the coin is the so-called “brown discount.” The value of buildings that don’t measure up in regard to energy conservation may take a hit, sometimes up to 30%, due to the growing demand for “green” buildings.

3. Enhanced Tenant Satisfaction and Retention

Commercial tenants increasingly favor buildings that prioritize sustainability and energy efficiency. Implementing energy-saving improvements sends a strong message to tenants that the property owner is committed to providing a high-quality and sustainable environment.

By reducing energy costs and creating a comfortable and healthy indoor environment, commercial property owners can significantly enhance tenant satisfaction. Satisfied tenants are more likely to renew their leases, leading to higher occupancy rates and reduced turnover, which ultimately improves the property’s long-term financial stability.

4. Management Benefits

Energy efficiency measures can extend the lifespan of a building’s systems and increase its overall value. This can make the property more attractive to potential buyers or tenants, potentially leading to higher rental income or sale price.

5. Tax Incentives

The tax regs are always a moving target, but you can find the IRS regs for “Energy efficient commercial buildings deduction” as of this writing (1/2024) here. In short, it appears that eligible improvements for years 2023 and later are for interior lighting, HVAC, hot water systems, and building envelope. The deduction amounts are the lesser of:
The cost of the installed property, or
The savings per square foot calculated as:
$0.50 per square foot for a building with 25% energy savings
Plus $0.02 per square foot for each percentage point of energy savings above 25%
Up to a maximum of $1.00 per square foot for a building with 50% energy savings

A final note: Kermit the Frog didn’t find it easy to be green, but you might find it much more appealing. Energy-saving improvements in commercial properties can provide you with substantial financial returns and management benefits, making them worthwhile investments for you as a property owner.

 

Have you implemented any energy-saving improvement in your commercial property? Please share your experience.

— Frank Gallinelli

 

software to analyze real estate investmentsonline video courses for real estate investors


Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services. Image generated with AI – January 13, 2024 at 3:45 PM

The Evolving World of Short-Term Rentals

short-term rentals

The rise of home-sharing platforms like Airbnb has been a boon to property owners, especially owners of smaller income properties, but it has also prompted municipalities to introduce regulations on short-term rentals (STRs). Many places impose restrictions, such as requiring permits or licensing, limiting occupancy, and restricting the number of days permitted.

Regulations vary widely from state to state, city to city, and perhaps even within neighborhoods. For example, California provides a statewide definition of what constitutes a short-term rental — a residential dwelling rented out for a period of fewer than 30 consecutive days — but also has a matrix of local regulations and nuances. 

Some areas of the State may prohibit STRs entirely, while others impose a variety of restrictions. Los Angeles, for example imposes a 120-day annual cap. San Diego has a tiered licensing system. San Jose has a 180-day cap but is more lenient toward owner-occupied properties. Clearly, one size does not fit all

New York City imposed new rules in September, 2023 requiring hosts who list their properties as STRs to register with the city or face fines of up to $5,000.  

This apparently augments their underlying law (known as the “Short-Term Rental Registration Law”) which provides

  • “You cannot rent out an entire apartment or home to visitors for less than 30 days, even if you own or live in the building.
  • You must be present during your guests’ stay if it is for less than 30 days.
  • You may have up to two paying guests staying in your household for fewer than 30 days, only if every guest has free and unobstructed access to every room, and each exit within the apartment.
  • Internal doors cannot have key locks that allow guests to leave and lock their room behind them. All occupants need to maintain a common household, which means, among other things, that every member of the family and all guests have access to all parts of the dwelling unit.”

Critics of the law say that it amounts to a de facto ban on STRs, protecting the city’s hotel industry. 

Chicago also has restrictions on STRs, perhaps the most notable being that one-night rentals are prohibited. Apparently, this may have been driven by the desire to curb the use of one-rentals parties for loud parties.   

If there is one thing we can safely say about STR regulations is that there is a lack of consensus. They may even be related to specific neighborhood. 

The demand for STRs seems to grow unabated. They can provide extra income for property owners, and affordable accommodations for visitors. But at the same time, restrictions try to ensure public safety, limit noise and disturbance, and maintain adherence to zoning ordinances in order to protect the interests of owners, renters, and neighbors.

As the STR industry continues to evolve, it is essential for property owners and managers to stay informed about current and changing regulations, so as to ensure both their compliance and success.

Postscript: March 19, 2024 CT Post reports proposed bill to allow towns to license short-term rentals.

Do you own or operate short-term rental property? Share your experience navigating the opportunities and restrictions.

— Frank Gallinelli

 

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Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services. Photo by Sonnie Hiles on Unsplash

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