Return on Renovations
Paul Daneshrad could hear the excitement in his friend's voice. His friend, a physician and investor, was calling to tell Daneshrad about the new, tumbled-marble bathrooms he was installing at one of his properties. When the subject of cost came up, the doctor said the improvements were running him about $4,000 per unit. "My question back to him was, 'Well, how much more are you going to get in rent?'" says Daneshrad, CEO of StarPoint Properties in Beverly Hills, Calif. "He answered, 'I'm not really sure, but I just love the way it looks.'"
For the good doctor, Daneshrad points out, the upgrade was all about the pride of ownership. But for most multifamily owners, renovating an apartment project needs to produce a solid return on investment. Industry-wide, that's defined as doubling the money spent on improvements within two to four years, or, on a capitalization basis, to improve a property's asset value by 30 percent or more.
Knowing which improvements ensure those returns–and avoiding the ones that don't–can make the difference between upgrade decisions that maximize your renovation ROI and those that throw good money after bad.
Know Your Residents
Before you can decide between granite and laminate, hardwood or vinyl, you need to know what your residents will pay for. After all, giving renters add-ons they don't need–or can't afford–doesn't help you or them.
"If you're in a Class C market, people aren't going to pay for crown molding and hardwood floors," says Bennett Neuman, vice president of acquisitions at the Chicago-based Laramar Group, which specializes in acquiring and repositioning multifamily properties in its $1 billion portfolio. "But extra storage space and a functional, well thought-out kitchen might have more appeal."
Figuring out what your residents value can be as simple as asking them. "If you're confused, send out a survey," says Daneshrad, whose firm manages more than 2,000 units in high-growth markets. "You'll be shocked by the response, because they'll tell you exactly what they want, what they need, and what they'll pay for." Listening to residents' specific suggestions and structuring your renovations around those needs could save both time and money in the long run.
"One of the most common mistakes with renovations is to overspend," says Sandra Cath, vice president of asset management at San Francisco-based BRE Properties, a public apartment REIT that owns more than 23,000 units throughout the West. "The trick is to keep some objective distance and provide what customers need."
Financially, the key is to measure the increase in rent that a specific improvement garners against its typical lifespan. That's why meaningful–and dur-able–items such as granite countertops pay for themselves over time, while others, such as high-end carpet, don't. "A Berber carpet is going to cost you an additional $2,000, but you're only going to get an extra $10 in rent for it per month over a two- or three-year lifespan," Daneshrad explains. "That doesn't make sense. But if we're going to put in granite countertops, which have a life expectancy of five to 10 years, then we're okay with a three- to four-year return on capital."
Redo Kitchens and Baths
Your most meaningful renovation ROI will come from the kitchen and bathroom. When done right, these functional places in the apartment will provide a wow factor for potential residents and your property's bottom line.
In many cases, kitchen and bath renovations can bring in an additional $100 to $300 in rent per month, depending on your market. "That's where you see the bling," says Steve Davis, head of the renovations services group at
The Home Depot Supply, which offers consulting services and products for multifamily renovations. "It's the countertops, it's the cabinetry, it's the lighting and fixtures."
It's also where your renovation ROI will come from. "You get your money back from kitchen upgrades," says Richard Giannotti, executive vice president of asset quality at Richmond, Va.-based United Dominion Realty Trust, which completed 5,400 kitchen and bath upgrades in 2005. "People love them. We're getting a substantial bump in the rent when tenants see that fresh, new kitchen in there."
Achieving that impression goes beyond resurfacing and touch-ups. Like any other investment, to get the return you want, you need to spend money first. "Don't just put the kitchen in the same little slot where it was before," Giannotti says. "Change the layout, open it up."
The good news is achieving the "bling" factor doesn't have to break the bank. For instance, the introduction of faux stainless appliances, as well as those with high-end solid black finishes, has made achieving the luxury look more feasible. The same is true with granite countertops, as prices have dropped by as much as 35 percent in recent years.
Like kitchens, improvements in the bathroom generate solid returns. New cabinets, double sinks, and quality vinyl flooring can net more rent. "The advances in vinyl, in terms of designs and patterns, have exploded," says Cath. "You can get a lot of quality and an upscale look, but still only pay vinyl prices."
Choosing materials along a quality spectrum is also critical to keeping costs down. "When clients do a mix of good, better, and best, they get an attractive return on investment," Davis says. "You don't have to put the absolute best plumbing fixtures in on a top-notch pedestal sink in the bathroom if you spent money on granite in the kitchen."
Other amenities with proven ROI include washers and dryers, and extras such as ceiling fans and hardwood floor entryways. Even contemporary color themes can make a fresh impression on tenants. "Earth-tone colors get noticed," Davis says. "As long as it's not just that same old cloud white that's been out there forever, we hear a lot about what paint does as an attraction."
Think Beyond the Unit
Don't limit yourself to just thinking about physical improvements. A community composed mainly of family renters will likely be willing to pay extra for a washer and dryer, or even just a washer-dryer connection in their apartments. But for a complex of young, single professionals, contracting with the local dry cleaner to provide on-site services might be a better option. "That's what we call a high-value amenity," says Daneshrad. "For young professionals, the convenience and cost savings are tremendous. They'll usually pay for that sort of thing."
In some cases you can provide the amenity and generate an additional revenue stream by renting out a dedicated drop-off and pick-up space to the vendor in the building. Similar offerings might come in the form of personal trainers, spa services, or even an Internet café with wireless connectivity. Even if residents don't pay extra for those items, such offerings can make your property more competitive.
"Adding wireless Internet connections is not a very expensive investment, and it might set you apart a little bit, particularly if you can offer it in the common areas," says Neuman of the Laramar Group. "That type of thing can be hard to quantify, but it makes a difference."
–Joe Bousquin is a freelance writer in Newcastle, Calif.
How to Maximize Your Renovation ROI
- Ask renters what they want.
- Upgrade kitchens and baths.
- Install washers and dryers or washer-dryer hookups in properties with lots of family renters.
- Evaluate the life-span of improvements versus expected increases in rent.
- Let your own emotions or wants dictate renovation decisions.
- Make improvements without first researching your market.
- Install combination, single-unit washer-dryers, whose maintenance costs can eat returns.
- Go overboard on the high-end.