This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
Dealers in improved property can do many things to create additional value. They can modernize old buildings by putting in modern show windows, which will result in increased rental; by changing a loft to an office building, or vice versa; by changing an old dwelling into a combination store and loft, office or bachelor apartment; by putting in a passenger elevator where there was none. They can increase income by reducing expenses, changing the heating plant, or taking out an old style hydraulic elevator which consumes coal summer and winter and requires a high-priced engineer, for one of the electric type. In private dwellings they can change the front and turn a high stoop into an American basement, put in modern plumbing, add an extension or another story, or install an electric elevator. In apartments they can change the combination or the number of rooms, modernize the entrance hall, redecorate, and put in open plumbing or steam heat; or furnish better elevator and hallboy service, etc.
In some cases no structural change is necessary. The operator can realize a profit by increasing the net return through procuring a more desirable mortgage, either in amount or rate of interest. Or he may buy the land, regardless of the value of the building, because he realizes that the property is worthy of a better or different type of improvement and figures on its demolition.
It is most important in purchasing improved property to be certain either that the building is or can be made suitable to the character of the neighborhood's needs. One must know the value of the structure. But very often, though the land has a fixed value, a purchaser will pay far in excess of this value, plus what it would cost to construct the building erected thereon. This is due to the income the building is capable of producing when the value of this property is figured on an income basis.
Many operators, anticipating a change in the neighborhood, rent an old building for what it will bring, and carry the property at a loss until they can realize a profit from someone who will tear it down or alter it.
In changing neighborhoods, it is desirable to take less rental and have leases so arranged that they can be cancelled and possession had at a given time. Sometimes it is necessary, in order to find a tenant under these conditions, to stipulate a sum to be paid should possession be desired before the specified termination of the lease.
It is almost invariably the operator who discloses to the public the possibilities of a new section. He is the pioneer and deserves reward for his foresight. Not infrequently, however, he is too far ahead of the times; is unable to hold out until his anticipations are realized, and suffers losses. Take, for example, a man like Ham-merstein, who foresaw the great future of 125th Street and built the Harlem Opera House and the now Proctor's Theatre near Park Avenue. He then anticipated the great theatrical center at Times Square and built the New York Theatre block on Longacre Square, between 44th and 45th Streets on Broadway. He had to sacrifice the 125th Street properties to try to save the Longacre, and then lost that. He was then laughed at for his follies; but it is only a few years ago that the New York Theatre was sold for less than a million dollars, and to-day it is worth much over two millions. Though many lost money on Fifth Avenue property, between 26th and 42nd Streets, to-day it is as scarce as rare diamonds.