The multifamily market has been red-hot, and brokers are as busy as they’ve ever been. That said, some owners who've tested the sales waters have decided to hold their assets because they either didn’t like the potential sale price or, most likely, are unsure of where to put their proceeds.
As a property management firm, we regularly provide recommendations to owners who look to us to recommend ways to increase ROI while holding an asset.
Because of the strength of the market, most apartment communities have seen natural rent growth without any major improvements to the property. However, at some point, rent growth will taper, so properties have to do more than just rise with the tide. A solid plan that will increase rents further and faster can be a make-or-break for a property in the event of another crash or rising interest rates.
Owners who are planning a long-term hold have a variety of options to add value to a property, including renovating units and adding extra amenities. By making smart upgrades to unit interiors, owners can justify additional increases and set themselves up for lower expenses down the road. For example, many owners replace carpet with tile or vinyl planking because it will last longer without as much upkeep.
Refinishing countertops is the cheapest way to get a visible pop. In higher-end properties, owners are trying out recycled glass countertops instead of granite. The attractive product is in line with the cost of granite, but gives properties something a little bit different to tout to renters. Owners of C+ or B- properties are adding lineoleum countertops but with beveled edges, which visibly reduces the seam and gives the apartment a higher-end look without the cost of natural stone.
Cabinets are another quick and easy fix because they enable owners to add new doors and paint the boxes instead of replacing whole cabinet systems. For owners willing to dig a little deeper in their pockets, swapping out old white or taupe appliances for black or stainless steel immediately gives an apartment a more modern feel.
There’s a wide range of improvements that can be made and varying costs associated with making them. Before deciding on which renovations to do, it’s important to think through what you’re trying to get out of a rent increase. How long will it take to recoup the cost of these improvements? Can rents even rise to that level in your submarket? What will it cost to improve the units to a level that will justify those prices? These are all important questions to contemplate before you begin remodeling.
Quality is also key. When making upgrades for a long-term hold, it’s important to invest in long-lasting, durable improvements that won’t need to be replaced often. Preventive maintenance, too, is critical. By spending money on big-ticket items, like roofs, now, your properties will be better prepared to weather the next downturn, when replacement funds might not be as plentiful.
During the last recession, the owners who struggled to recover the most were those that pocketed the profits from 2003 through 2006 without reinvesting those funds in their properties. When the market took a turn for the worst, the properties that were starved for capital in the good times went into disrepair during the downturn. It’s important for owners to learn from the past and invest a portion of the current, record-high profits back into their assets.
It’s inevitable that at some point values will drop and the market will slow down. I believe it will be a less brutal downturn than a few years ago, but, at some point, the pendulum will swing back. One could compare it with a hurricane—owners should be investing in storm shelters and generators now so they'll be better equipped to withstand the storm and come out with their properties intact.