Greater Baton Rouge Business Report: Making the most of it: enhancing the value of your property mea

You don't need tea leaves or chicken bones to predict that interest rates are about to go up. That means real estate buyers' dollars won't go as far, and the market will cool as a result. So if you plan to sell property before the slump, now is your last chance to pump up its value.

Every piece of real estate is an investment property, and the same basic rules apply for maxing out the investment in a mall, an office tower or your own bungalow. The key question in each case is what should you do to increase your property's worth, and when should you do it?

Knowing what to fix

Think of paying for deferred maintenance--the big things that need to get done but don't add much value--as insurance. You may not make money on it, but without it you risk big losses.

Roofs are the perfect example, says Wesley Moore, an appraiser with Cook, Moore. "If you don't spend the money to replace it, you risk bigger problems, like water damage in the walls and wiring," he says.

Plus, a visibly dilapidated roof makes buyers wonder what else is wrong.

According to Harvard's Joint Center for Housing Studies, upgrading roofs and front elevations typically recoups about 80 percent of the costs. Small-ticket items such as new paint, floors, light fixtures, windows and detailing can also add value--particularly in visible, public spaces.

Other deferred maintenance issues may not be worth fixing. Paying to upgrade invisible things, like outdated wiring, for example, will rarely pay off.

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Making big changes pay off

Renovation is how owners keep the value of older buildings competitive with new ones, says local architect Kevin Harris.

"Keep what you've got as intact as you can," he advises. Then isolate the few improvements that will get the most bang for your buck. On a house, that usually means building a master suite or remodeling the kitchen.

On apartments, condos and office space, Harris advises owners to "identify what gives the building its character" and focus on preserving and enhancing those features. "That might be exterior features, or it may be a beautiful lobby."

If a feature has no particular distinction, Harris recommends being thrifty. "Sheetrock looks just like plaster," he observes.

Harris also advises paying close attention to layout. "The inside of the building has to work, or you're wasting money. Layouts either have to be totally flexible for tenants, or else very, very well thought out."

Sometimes the right building is in the right location, but it's set up for the wrong thing. You can change that and tap pent-up demand by converting a property's use. Struggling office space may work better as condos. Warehouses may work best as retail. And defunct retail--for example, the gargantuan Goudchaux's/Maison Blanche building just east of downtown--may yearn for an office rehab.

But with great rewards come great risks. Know the market you're converting to, and the barriers to entry.

Marketing

A dollar of marketing will not net you a dollar of profit, but if you're working on the margins in tight markets, it is essential. The key elements of marketing real estate are branding and word-of-mouth reputation.

The first is easier to control and essential, but Harris cautions that reputation is the make-or-break element for property value.

"It takes a very long time for a property to build a reputation," he says. A quick media splash may be tempting but in the long view, managing your reputation by maintaining the property and being deliberate about tenant mix can be just as important.

Managing costs

Increasing revenues is well and good, but controlling costs is equally important. Costs include taxes, insurance, utilities, management fees and ongoing maintenance. Of those, taxes are the only non-negotiable item, but in Baton Rouge they are also low.

Moore notes that insurance costs can be whittled down by installing sprinklers and fire alarms. Security systems can do the same, but only in private residences.

Any owner who pays for utilities can save by installing better windows, better heating and cooling systems, and timed thermostats. But it might take a long time to recoup costs from those investments, so think twice if you're not in for the long haul.

As for the costs of buying services like management and maintenance, Moore notes that bigger operations have more cost-cutting leverage. "The owners that get the best pricing are the ones with the greatest buying power."

Engineering the finances

Another way to cut costs is to refinance at lower rates, which is what just about every homeowner in America has been doing in the past several years. But Moore advises that low interest rates alone do not make refinancing a good move. "It depends on your goals," he says.

If you're looking to hold for 15 or 30 years--or even 5 or 10, a long time in commercial real estate terms--the lower rates are worth the illiquidity that comes from a longer amortization period, fees and penalties for early exit.

But if you want the freedom to sell in the short term, it may be worth paying more to keep your option to exit. Moore points to the local apartment resale market as a cautionary tale. Willing buyers are out there, he says, "but everyone has locked themselves into long-term financing," so no one can sell.

Interest rates also affect the timing of capital improvements. Major rehabs and conversion to new uses are best made when money is cheap. But smart planning can double your advantage, says Moore. If you use a short-term loan to renovate, you can then have the property reassessed and borrow the new, higher maximum at the lower rates.

Timing the market

Finally, winning at real estate requires playing the market well. But that's not easy. Anyone can buy a cheap property, but how do you know if you're "buying low" on a promising investment, or just buying a lemon?

Similarly, Harris notes that the best time for capital improvements is not when the market is peaking or going down, because "you have to wait a whole cycle to recoup your investment." The right time is before a down-market turns up. But how do you know when that is?

Savvy and experienced real estate investors follow market indicators, but Harris counsels that patient investors can avoid gambling on timing by holding for more than one up-and-down cycle. "Real estate always comes back up," he says. "If you own when the market's going down, hold it. Ride out the wave, or you're going to lose any investment you've put in."

HAL COHEN covers real estate and legal issues. Reach him at hcohen@businessreport.com.