Apartment Owners Are Leaving Money On The Table By Avoiding Renovation
Today, there is no shortage of apartment owners upgrading their tired properties with unit renovations, clubhouse transformations and new amenities. These improvements work: Landlords can charge higher rents and implement new revenue streams like utility reimbursement, and they will likely sell their property for a higher price than if they never did the renovation. There is profit to be made in deviating from the status quo. However, too many apartment owners and their management companies are doing it wrong and leaving money on the table as a result.
New apartment construction targets the high-end renter who can afford condo-like quality and every amenity a renter never knew they needed. The average renter watches their favorite home improvement show and knows what a modern unit looks like. That person, who represents the majority of the renter population, does not want to settle for anything less. Nevertheless, reality eventually sets in, and the average renter makes a compromise within their budget for a unit that is either renovated enough, has amenities they personally value or has a particular location advantage.
What is keeping apartment owners from offering up everything the average renter wants? The answer is either it’s too expensive or the property is too old. Granite or quartz costs more than laminate, and carpet is cheaper than luxury vinyl tile. Changing the property’s name yourself is easier than paying a marketing company to create a cohesive new brand. It’s difficult — and expensive — to add amenities to an efficiently constructed apartment building from the 1960s. Where do you put a lobby where there wasn’t one before? Creativity is sorely lacking in the apartment industry, and it’s costing owners.
There is no doubt that a modern renovation with white shaker cabinets, large linear pulls, wood flooring, quartz countertops, a gray color palette, five-inch white baseboards, LED light fixtures and stainless-steel appliances costs more than a budget big-box home-improvement store renovation. However, it lets you charge more in rent, too. Spending $15,000 on a one-bedroom renovation at a modern specification sounds daunting, especially if your apartment complex has a large number of units and you are uncertain about how much more rent you can charge.
To earn a modest 15% annual return on investment from that $15,000 renovation, the rent needs to be at least $187.50 more per month than what a comparable non-renovated unit would rent for. Assuming no change in expenses, though there would certainly be savings in utilities and repair and maintenance costs, the extra $2,250 in annual income at a 6% cap rate would generate an extra $37,500 of property value per unit. Not only has this created more income and value in the short term, but in a difficult market it offers downside protection since it is much easier to lease a modern unit than one that is 30 years old.
All an apartment owner needs to do is either tour a new apartment building or watch a home improvement show to learn about today’s renters’ desired style. It takes much more creativity to add or update amenities and create a viable brand. Sure, the units are now renovated to a modern specification, but why does someone rent this unit? Without a brand or a story, they are choosing it because of a competitive (i.e., lower) price or because of the location. Branding and marketing helps give potential renters a reason to lease in your building. It allows you to differentiate your property in a sea of mundane apartment units. If a renter can perceive value in a brand, they’ll pay you more in rent.
Fight the urge to call your building “The [insert street name]” and instead come up with a name and story that’s unique to your building, the neighborhood or the larger region. Then, find a way to insert high-value amenities like bike storage, Wi-Fi or fiber optic internet, a fitness center, a lobby/lounge or even a creative landscape plan. It’s impossible to guess what extra lift you’ll get in rent from these additional improvements, but it does impact the value at sale. A buyer will fall in love with the improvements and see the transformation and brand as a long-term hold. That type of buyer is price-insensitive and will validate your decision to spend more in capital to do a complete renovation that maximizes both rent and sale value.
SAN FRANCISCO OFFICE:
2 Embarcadero Center, 8th Floor
San Francisco, CA 94111
729 Washington Ave N, Suite 600
Minneapolis, MN 55401
Please subscribe me to the Calvera Insider.
GET INSIDER UPDATES
GET INSIDER UPDATES
Performance data listed in this website or is otherwise provided by Calvera Partners, LLC, or its affiliates (“Calvera”) with respect to a particular property or project represents past performance calculated for the relevant project and does not purport to reflect the overall performance of any private funds managed by Calvera, which may include other projects, as well as charge additional fees or carried interest, or have additional expenses, which would reduce the overall performance of the project from the perspective of a fund investor. Past performance does not guarantee future results; Current performance may be lower or higher than performance data presented. Calvera is not required by law to follow any standard methodology when calculating and representing performance data; the performance of any of Calvera’s projects may not be directly comparable to the performance of other investment vehicles or funds; and qualified potential investors can contact Calvera Partners for more current performance data of any private funds managed by Calvera.
This website is provided for informational purposes only. Nothing contained in this material is an offer or solicitation to buy or sell any security. In addition, (i) any securities offered to investors that respond to any general solicitation or general advertisement made by Calvera, may be sold only to accredited investors; (ii) such securities will be offered in reliance on an exemption from the registration requirements of the Securities Act and such securities offered are not subject to the protections of the Investment Company Act or required to comply with specific disclosure requirements that apply to registration under the Securities Act; (iii) Neither the SEC, nor any state securities regulator, has passed upon the merits of or given its approval to any securities offered by Calvera, the terms of the offering, or the accuracy or completeness of any offering materials or the accuracy or completeness of any of the information or material provided by or through this website; (iv) the securities will be subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and (v) investing in securities involves significant risks, and investors should be able to bear the loss of their investment. Please click here for additional important disclosures.