Fresh paint. New cabinets. In-unit washers and dryers. The list of updates you can make to your properties is just about endless. But will upgrading a bathroom or installing new signs really improve your community's financial performance?

The answer: Maybe, maybe not. “It's so tenant-specific,” says Paul Daneshrad, CEO of StarPoint Properties in Los Angeles. “That's the key to renovation, which is understanding your tenant profile. What are they looking for? What do they demand? What do they need?” In this edition of Conference Call, multifamily executives talk about what works—and what doesn't—in apartment renovation.

What's your company's approach to renovations? KEITH KNIGHT, vice president, capital improvement, Home Properties: We look for every opportunity to improve our properties, looking from the inside out and the outside in to discover what we can do to help reposition a property. ... I've traveled to all of our 150 communities [42,000 units], and when I visit, I meet with our regional vice presidents, regional property managers, construction managers, property manager, and the superintendent. We do a full walk of the property, identifying all the different projects we want and need to do. [Home spent approximately $84 million on revenue-generating renovations in 2004.]

PAUL DANESHRAD, CEO, StarPoint Properties: We really focus on adding value and maximizing yield [in our 3,000-unit portfolio], so with any type of upgrade (with the exception of life-safety issues), we're going to be looking at return on investment. ... [Our upgrades] can go from disaster-ridden projects with earthquake, flood, and hurricane damage, which require as much as $40,000 per unit in work, to very moderate rehabilitations where we just paint and add amenities for more like $2,000 per unit. [StarPoint spent $12 million on renovations in 2004.]

What is a typical renovation? DANESHRAD: A typical renovation is going to be taking a B property in a B location and spending about $7,000 a unit on curb appeal: paint and colors, amenities, the leasing office, and in the units, bathrooms and kitchens.

Why the leasing office? DANESHRAD: We teach the three-minute rule, which says you've got three minutes to convince a tenant that this is the place to rent. Whether you're buying a home or renting a home, it's an emotional decision, so first impressions are very important.

KNIGHT: With as many properties as we have, I don't know we have a typical renovation. Community centers [which can include a leasing office, gym, and other amenities] are very big with us. ... We certainly consider landscaping, painting, siding, window replacements, and [new signs]. ... Apartment upgrades can range from simple kitchen-and-bath in-kind replacement to moving walls, opening kitchens up, and adding a bathroom, washer/dryer, or air conditioning. It depends on the market.

Where are renovations worth it? KNIGHT: We're in a state of continual improvement in all regions, but significant renovations make sense today for us in Long Island, New Jersey, Washington, Baltimore, Boston, and Fort Lauderdale.

DANESHRAD: It does not work well in ... markets where supply and demand is out of check. Houston's a great example of that. We'll do enough so we're competitive with neighboring properties, but we wouldn't necessarily upgrade properties to push the rental rates.

How do you decide what to include in a renovation? KNIGHT: We'll test the market, especially with a new acquisition. We'll do a complete upgrade on an apartment—that may include the bathroom, a mill-work package with six-panel doors and a kitchen upgrade. Then we see what rent we can get for it. Depending on the ability of the market to absorb that apartment at the new rent, we get a feel for whether we need to increase the scope of work or pull it back.

DANESHRAD: We test the market by doing three different units and seeing where the tenant profile gravitates. We also do an extensive rent survey.

What really makes rents pop? KNIGHT: Apartment upgrades. It's also a very identifiable return on investment because we know exactly what we're putting in and the rent premium we are able to charge.

What individual components have the biggest financial impact? KNIGHT: The kitchen. If we're in a market where we can open up the kitchen walls and give the apartment an open floor plan, that has the most impact. We can't do that in every market, because the investment to move the walls and re-do the electrical may be prohibitive.

DANESHRAD: Kitchens always seem to have the highest return, no matter what class property or what class area the community is in. The second thing we'll look at is curb appeal and the paint. Paint sometimes has a higher return on investment than kitchens, because it's relatively inexpensive and it impacts every single unit. We use designers to help us choose with our colors, because we want our communities to stand out. ... At one property in the Inland Empire, we have 38 different structures spread over lots of land, so we painted every building a different color: bright yellow, reds, oranges. It gives the property a village feel. People loved it.

ROB E RT LAZAROFF, vice president, The Michelson Organization: We've added fitness centers and cyber cafés. We've also introduced sports bars, with a number of TVs, so we have more social opportunities. It helps residents get to know each other and helps us with resident referrals.

Do different types of renters have different expectations for updates? LAZAROFF: In the past, yes. Prior to 9/11, we were doing extensive renovations—kitchen cabinets and counter-tops—because we could get the rents. Interest rates were higher, and we were getting a clientele that would pay for it. Now, that clientele is buying [homes], so [renters'] focus is more on price.

What renovations don't work? DANESHRAD: For us, not working means the lowest return on investment, because I think that everything adds an incremental value. Infrastructure updates obviously adds value to the building, but may not get you a penny more in rent, because residents can't see it, they can't feel it, and it doesn't add any value to their lifestyle.

KNIGHT: It's very property-specific. You have to be careful not to over-improve the property and over-invest.

LAZAROFF: If it's a very competitive market, you can upgrade your [property] and still not see it in rents. But maybe your occupancy goes up, you don't have to give so many concessions, or you are able to retain a resident you might not have kept.

What's a successful renovation? KNIGHT: One that sticks out to me is Westwood Village on Long Island. We've done a complete renovation there—landscaping, roof, windows, and unit upgrades. We're achieving the highest rents—or close to it—in the company, with an average rent of $2,030, an increase of 30 percent since we purchased it.

LAZAROFF: We had a property in an extremely strong location in St. Louis, with big units. We put in probably about $10,000 per unit and were able to raise rents by $250 to $275.

DANESHRAD: Ours was probably a building we bought after the Northridge earthquake in California. It had been severely damaged by the quake and was only about 20 percent occupied. As we did the seismic corrections, we also updated the units: new cabinets, faux granite counters, upgraded bathrooms, [and more]. We added a gym, upgraded the pool area, redid the leasing office, painted entire building, and installed controlled access gates to the parking area. Occupancy moved from 20 percent to 95 percent within the first nine months, and rents went from an average of $625 per unit before the earthquake to $900 per unit after the earthquake and renovation. On a capitalized basis, that added almost $11 million to the value of the building.