How Lowering Water Costs Increases Asset Value
Focus on Your CAP Rate’s Effect on NOI Savings
Income Properties or Investment real estate’s market value is determined by applying the Capitalization Rate (Cap Rate) to the property’s Net Operating Income or NOI. A project with $1,000,000 of Gross Income and $900,000 of Operating Expenses has $100,000 of NOI.
Different asset classes, different markets and different market conditions all contribute to different Cap Rates.
If the market is willing to pay $2,000,000 for the above property with $100,000 of NOI, that means the property has a 5 Cap Rate. $100,000 / .05 = $2,000,000. Or if similar properties are trading at a 7 Cap in that market, the property mentioned would have a market price of $100,000 / .07 = $1,428,571.
If a property owner or manager can increase rents or decrease expenses and those dollars flow to the bottom line, NOI increases.
How Saving on Utility Bills Increases Your Cap Rate
So for a property with a market Cap Rate of 5, decreasing water expense $1 would yield $20 of increased asset value ie $1 / .5 = $20. Or for a 7 Cap Rate property it would increase asset value by $14.29
If you are spending $10,000/mo on water expense or $120,000/year a 10% reduction in water expense pushes an extra $12,000 to the bottom line or NOI. This immediately increases the market value of the property with a 5 Cap by $240,000 or a 7 Cap by $171,429.
It is About Increasing Your Asset’s Value
Some people say this is about being “Green “, while it is “green”, that is not what this is about.
Other people say this is about using less water, while your bills will state lower usage that is not what it is about. Others say it is about increasing NOI, while you are getting close, that is still not what this is about. This is about increasing asset value. That is why real estate investors, owners, and managers are in business, to increase asset value. “Buy low, sell high”
While calculating ROI and Payback using the investment and the operating savings may be interesting and get more discussion, property owners should focus on the big picture:
“What will this do to my property’s market value? What is the ROI on spending say $20,000 to increase the market value of the asset by $171,000?”
Where else can you get such a return!