Which Renovations Offer the Best ROI for Multi-Unit Properties?Paul Winterowd
There is a tried and true philosophy in residential real estate that declares, it’s best to target the worst home in the nicest neighborhood, and add value through renovations. Logic begs the question then, does this same idea apply to multifamily housing? Those looking for a strong, immediate ROI on their real estate investments may do well to look for older properties in desirable areas that may simply need upgrades or uncomplicated repairs. Through a quick, multifamily property flip, you can easily find yourself commanding top dollar for your rental units.
The next question is–which property rehab efforts will give you the most bang for your buck? A precise list of repairs and renovations, their value as an incentive to rent, and their costs may be challenging to create given the many factors involved in determining realistic rent amount, but it will be worth it. These can include:
- The location of the property
- The property’s age and current amenities and condition
- The profile of the tenants in the area
- The rental values of comparable, competing units
Potential Projects Proven to Generate Returns
In spite of the variables linked to renovations, there are a few, key rehab elements that have proven themselves to be safe bets, allowing property owners an opportunity to experience a significant increase in rent. The most common are:
- Exteriors: Upgrading the landscaping, signage, and common areas serves to reinvigorate a property’s curb appeal—a major influence on a potential tenant’s decision to rent from you. A great, first impression is crucial—after all, it’s the first thing tenants and their guests see when they arrive.
- Flooring: Replacing standard carpet with tile, vinyl, or wood flooring offers two advantages—it gives a space a more modern, cleaner look, and it’s easier and less expensive to maintain, allowing for added savings in time and money for the tenant.
- Amenities: Simply by adding washers and dryers (or hookups) to your units, you increase both value and convenience, eliminating a resident’s need to leave the unit to take care of laundry.
- Kitchens & Bathrooms: Any experienced realtor will tell you kitchens and bathrooms sell homes, and this sentiment holds true in rentals as well. Tenants also spend a lot of time in these spaces and current finishes and amenities will go a long way to commanding a premium on the rent.
When establishing a benchmark for a reasonable return on your rehab investment, it’s important to set realistic expectations. Most experts agree that a 10 to 30 percent bump in rent is achievable.
I recently had a tenant move out of one of the units I own. Her words were that she “couldn’t live without a washer & dryer, dishwasher, and electrical outlets in the bathroom any longer.” Long story short I address those issues as well as a few other things in the kitchen and bath. Monthly rent increased from $700 to $1,125. While the additional cash flow is great, what I find really compelling is that revenue translated in to an increased value in the property of over $70,000 if we assume a 7% cap rate.
Multifamily property rehabs are potentially lucrative opportunities and should be part of your investment program if you are willing to be patient during the renovation. One key factor in the success of such a venture is having access to funds to facilitate needed upgrades to the property. Through specialized services such as Value Add and Sub Rehab loans, Bonneville Multifamily Capital can provide that access to you.