High-End Apartment Building Real Estate Rehab
Setting Yourself Apart From Your Competition
Undertaking an apartment complex real estate rehab or renovation, and then increasing the rents accordingly, is a great way to increase the value of a commercial property. In fact, when you are looking for multi-unit real estate to acquire, it is always a prudent strategy to look for apt. buildings that are in dire need of cosmetic upgrading.
The question then becomes, "How much of an upgrade should I do?"
Well, a typical real estate rehab of an apartment complex will involve a "vanilla" style upgrade. In other words, nothing too fancy, just make it look clean and presentable. Here are some examples of the typical things done in a "vanilla" rehab of an apartment complex unit...
- new carpets (neutral colors, low to medium grade, typically bought in bulk for apartment buildings)
- fresh interior paint job (usually white or off-white)
- new appliances (very basic, low end models)
The common areas of the building and property can also be "rehabbed". Hallways and entrance ways receive a fresh coat of paint, new flooring and brighter lighting. The exterior of the building receives fresh paint and perhaps a new roof if needed. The landscaping is "spruced-up" as well to give the apartment building some curb appeal.
Now, if you have bought the property at the right price, kept your real estate rehab costs under control, and were able to raise your rents to market value (the rents were below market when you bought, right?) you are in business as they say. The value of your commercial real estate investment has risen substantially along with your monthly cash flow. But, is there another option other than the "vanilla" rehab when it comes to apartment buildings?
In a word, yes.
Another option is the "high-end" rehab. And yes, it can work for apartment complexes, not just single-family homes. I know of two colleagues of mine that have implemented this strategy on their apartment houses with success. Here is how it works, and the theory behind it.
When you undertake a rehab of an investment property, you want to make sure that when it is complete, your real estate investment has increased in value by more than the cost of the rehab. Pretty straight-forward stuff. And because commercial real estate investment properties are valued based on their NOI (net operating income), it follows that in order to add value to your rental property, you have to increase the NOI. This increase comes in the form of increased rental revenue in this example.
We have seen from the previous example of the "vanilla" real estate rehab that simple, relatively inexpensive upgrades will usually get the job done. But what if we upped the ante a bit. What if we...
- spent a bit more money on the apartment suite (just calling them "suites" rather than "units" adds value doesn't it?) upgrades (nicer carpet, better appliances etc.)
- added some "extras" to the mix (little things like crown moldings, high-end light fixtures etc.)
- landscaped and finished the exterior of the apartment building to give it a "higher-end" curb appeal
and then charged above average rents? The question(s) become would it work, why would it work and why would you do this?
Would it work? Yes it works, but of course you have to analyze each real estate rehabbing scenario separately to make sure that the extra money you spend is worth it. Use the same basic formula as above. Ie. is the money you are spending on the apartment property rehab less than the overall increase in the value of the apartment building? And in the case of the high-end real estate rehabbing, is the extra money you are spending on the renovations creating extra value as compared to the "vanilla" real estate rehab?
Why would it work? No matter what business you are in, and no matter what you are selling, there is typically a portion of the market that will pay more for the "high-end" goods. And it is the high-end goods that bring in the largest profit margins. This may be true when you are marketing apartment building rentals as well.
Why would you do this? Two reasons come to mind. First, you would/could undertake a high-end real estate rehab if you figure that you would earn a greater return on each "rehab" dollar spent compared to a regular rehab. And second, you can set your rental property apart from the competition, by offering a unique product. In a market where vacancies are high, this USP (unique selling proposition) just may help you keep your building full.
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