25. Why and How Does Real Estate Increase in Value?

How does the value of any business increase? Of course, you know the answer to that question. If the business makes more money, its value increases. And if you own a part or share of that business, your part or share will increase in value. And how does the value of a build­ing increase? The answer is the same. If it makes more money for its owners, its value increases.

A building—I am not talking about a home but a building bought by a syndicate—is a business like any other business. If you can increase the income, the rent, and at the same time keep down your expenses, you make more money. Naturally this is not as easy as it sounds. You may not have full control over your expenses. For example, your property taxes may go up. Also you must provide reasonably good service to satisfy your tenants, who are the customers of your business. But anyhow you are not going to manage the property of the syndicate. So you do not have to worry about how this will be done.

Ordinarily, in a well managed building rents will go up when all other things become more expensive. Even if expenses go up in the same proportion, the dollar in­come increases and the dollar value of the building in­creases. Let us illustrate this. A building bought 10 years ago had a yearly rent roll of $100,000. Expenses amount­ed to $88,000. After all expenses were paid, the owner had a yearly net income of $12,000 or 12% of the rent roll. Ten years later the building has a rent roll of $200,000. Now the expenses have gone up to $176,000.

Rent roll and expenses have gone up 100%. The owner has still a yield of 12% of the rent roll, but the yield amounts to $24,000. Even though the dollar may have one half of its purchasing power, our property owner has not suffered any loss in purchasing power. He takes in twice as many dollars. If he went to sell the building to­day, he would not suffer any loss in his investment either. He could probably get twice the amount he could have gotten 10 years ago.

Things could be better or worse than in the example just given. The property owner's dollar income may have grown faster than the loss of purchasing power of the dollar, or at a slower pace. But in any event the real estate owner enjoys some measure of protection against infla­tion. He has a built-in growth factor.

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