What’s the most obvious way that you can add value to your apartment property?
It’s not a trick question, I promise. I could never be so cruel. ;-)
Renovations, right?
Anytime you can make improvements or upgrades, you can increase the value of your multifamily property.
However – use caution before diving into an extensive list of renovations. It takes long hours of research, consulting with your real estate agent and planning your strategy before you should even think about picking up a hammer.
Hey Moguls, Chris Urso here again, and today I want to talk about planning strategic renovations for your properties. To do that, I’m going to give you an example of a capital budget that my team has put together for a property we’ve owned for awhile now.
Every 6 months, we like to re-forecast our capital budget so we can determine what improvements or upgrades we’d like to make. Properties are fluid, markets are fluid – so it’s always good to revisit your budget as things change.
Knowing how to strategically plan renovations for your properties is key to your success as a multi-unit property investor. If you go overboard, you can end up losing money big time when you’re ready to sell. And if you don’t do enough to improve your properties, you’ll never be able to make a solid profit when you sell.
“Strategy is a style of thinking, a conscious and deliberate process, an intensive implementation system, the science of insuring future success.” ~Dr. Pete Johnson
So – the perfect balance of appropriate improvements without digging yourself into a financial hole is what you’re hoping to strike. And I can help you with that!
As I go through this real-life scenario, keep in mind that no matter how small or large your property is, you should be able to apply some of these insights to your situation.
Let’s get to it!
The Game Plan: Strategic Reno
So, let me get this started with a few basic stats about this multifamily property:
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This is a property made up of 266 townhouses
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We turned over about 60% of the tenant base in the first 12 months
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We put in about $500,000 of capital to fix initial issues on the property
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Now the property has been performing at 95%-99% occupancy, and we’ve been able to steadily increase rents
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We now believe we can take the property to the next level, in anticipation for a sale in the next 12 months
Now that you have a basic rundown of the property, I want to hit on some of the objectives that we’re planning.
Let’s Get Physical: The Fitness Center
So, first of all, on this property we have a “fitness center.” And I use quotes because it’s not a very impressive fitness center. It’s basically a dark, dingy house with some fitness equipment in it. Not a very motivating environment, to say the least.
Most of our tenants in this townhouse property are blue collar, working class professionals or groups of college students who are living with roommates. These are the types of families and individuals who just want a clean, affordable and safe place to live. They’re not necessarily looking for the high-end amenities and facilities.
So, our plan is to knock down this grungy “fitness center” and create a new common community space. We’ll have nice grilling stations, a dog park, and some play equipment for children.
Cost: $120K
The Daily Grind: Deferred Maintenance
We also have some deferred maintenance items to fix up too…
We’re talking: cleaning up the gutters, doing some additional grounds work, etc. It’s not doing upgrades, per say, but instead it’s just fixing up the property to increase its longevity.
Cost: $50K
The Hills are Alive: Landscaping
Next up, we have landscaping to take care of around the main “focal points” such as the leasing office, our signage, etc.
Notice that I haven’t even mentioned anything that’s actually inside the units yet. Curb appeal is very important!
We want to make sure we create a sense of a welcoming community to not just our residents but to everyone around us as well.
Cost: $15K
They See Me Rollin’: The Parking Lot
Now, this is a big property – 266 townhomes spread over 15 acres with multiple parking lots.
We don’t feel the need to re-do all of the parking lots, but we’re going to focus on the one that houses our leasing office, clubhouse and pool. That’s where prospective residents and current residents all come, so we want that to be nice and slick. (Plus, we want it to be impressive to potential buyers when we’re ready to sell the property.)
Cost: $15K
Now for the Beautification: The Unit Interiors
We’re not disregarding the interiors completely. We talked to our real estate agent, let him know that we’re getting ready to sell in 6-12 months, and asked what we could do to make sure the property shows well.
Our agent said that if we can take a small portion of the units (maybe 5%-10% of them), test out some upgrades and increase the rent on those units, that’s an optimal way to show the next buyer what the value add is.
So we’re going to allocate $200,000 to renovate 20 units. We’re going to very strategically map out our renovation plan and look at our current rent prices.
We believe that if we invest $10,000 into each unit, we can get a $100/month rental increase – which is a fantastic return on investment, and the broker can now “sell” that to the next buyer.
Cost: $200K
One Cool Dude: The HVAC System
Finally, we’re allocating funds for HVAC replacement. Now, this is not a “sexy” investment, but it’s necessary when you’re buying a 1970s property in the southeast because the air conditioning units get worked vigorously about 8-9 months a year. And nobody likes unhappy, hotheaded tenants.
Cost: $100K
The Bottom Line: Where This Brings Us
In addition to the budgets I listed above, we also have reserves of $150K – should any of the projects go over budget. This is a crucial part of your overall budget; don’t skimp on the reserves!
So, including the reserves, we have about $805K in improvements planned. That’s A LOT of money. And that’s also why we spent months (MONTHS, people!) researching the market and determining our strategy for which improvements and repairs will add the most value to the property.
We’re not just spending money because we want to. We’re doing it because our ultimate goal is to:
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Increase rents
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Increase occupancy
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Decrease tenant turnover
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Lower delinquency
And, in turn, these things will help us – (*everyone smile!*) – create VALUE.
Just to give you guys an idea, here’s a little more helpful math:
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We bought this property at about $35K per unit
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With our renovation budget, we’re all-in at about $45K per unit
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After renovations/improvements, we’re expecting to sell for between $52-55K per unit
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Now, that’s a spread of anywhere from $7-$10K per unit
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On 266 units, that’s a total of nearly $2.6 million of value that was created from our renovation efforts in less than 24 months
And that’s why we spend the dollars that we spend – it’s a great return on investment to spend $805K in order to add nearly $2.6 million in value!
We’re very confident that those numbers are achievable, based on the market numbers we’re seeing.
Now it’s Your Turn
And there you have it! This is a great example to help jump start your thoughts on what you can do to improve your property/properties. The bottom line is:
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Do your research
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Consult your real estate agent
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Determine what will add value and ultimately give you the best return on investment
Ask Me
So, do you have a repair or renovation idea that you’re still debating? Ask away in the comments below!
Do Your Research. Look at comparable properties in your area and determine what types of improvements those owners are putting their money toward. Also look at the rent prices so you can determine how much higher you might be able to raise rents.
Call Up Your Realtor. They often have the best insight on which improvements will woo potential buyers the most. Ask several real estate agents, if possible, to get more than one perspective.
Draft Up the Plans. Get estimates from several contractors for the work, and determine your estimated budget for each renovation. Always include a reserve fund for unforeseeable overages.