How Apartment Renovations Can Improve ROI
Rehab market has changed, but opportunities for creating good ROI through apartment renovations still exist
As rents become more competitive and apartment inventory approaches its peak this year, the case for rehabilitating older properties in some markets may be strengthening.
Done right, a modest upgrade of a 20- or 30-year-old multifamily community can offer renters a lower price point than new construction. At the same time, the investment is lower and turnaround time to market much quicker.
An updated older property may not look as flashy as a brand new mid-rise, but it will be close enough to satisfy the appetite of renters who seek modern conveniences and the latest amenities.
“There is plenty of demand in most of the markets that we’re in,” says Portico Property Management President Darren Williams. “Even if there is new product down the road, they’ve only got 300 units. Once those are gone, you’ve got to live somewhere.”
Apartment rehabs still make sense in the right markets
While opportunities are far fewer in the urban core than when the latest apartment cycle began about seven years ago, rehabs still make sense in the right markets. Actually, renovating older properties got its legs early on as apartment demand began shifting in high gear. The market was filled with products built in the 70s and 80s that were ripe for upgrading.
Most of those have been gobbled up in the big metros, but Portico is seeking rehab projects in tertiary markets and farther afield. The timing for apartment renovations is just as good as any, even as inventory levels are nearing their peak. New inventory – most of it is in the urban core these days – is taking longer to build and costs more as materials continue to rise.
New opportunities are out there as the migration to the suburbs by younger renters continues. At a recent National Multifamily Housing Council Research Forum in Plano, Texas, RCLCO Managing Director Adam Ducker said 71 percent of households under age 35 in the top 50 metros live in the suburbs. The figure is slightly higher in Sunbelt metros.
Portico, which operates 6,500 units mostly in Texas, has a track record of rehabbing properties of all classes in Dallas, Houston, Austin and San Antonio. As renters flocked to the urban core, some of the more obvious opportunities were updating older downtown properties.
However, as the rehab market in the urban core tightened, the company, whose portfolio extends to six other states, was forced to get choosier about where it looks for opportunities. The suburban market holds promise but not all are the same.
“Much of it urban core has been picked clean,” Williams said. “It’s forced us to get somewhat creative.”
Property age and demographics are drivers of a successful rehab
Age of property and demographics are key drivers that determine whether or not an older property is a good investment, especially in the suburban market. The idea is to spend a few thousand per unit without pricing rents out of the demographic.
A 20-year-old product with nine-foot ceilings, washer and dryer connections and need of a little updating is a good bet to compete with newer construction, Williams says. Units may require $5,000-$6,000 each in modest upgrades of appliances, flooring, lighting, paint and some hardware. Because the work only takes the unit off the rent roll for a couple of weeks, the amount of lost rent is minimal.
Williams said that type of investment usually will yield $100-$125 more in monthly rent – a favorable return – and elevate the property closer, but just under, the price for a newer development in today’s market. It’s what he calls his “draft-behind” strategy, which has proved successful in several markets.
“If you put it right next to a brand new product, same bones, same suburban style, we can make that product look just as good as we can,” he said. “We give it a new paint job, new siding, new appliances, countertops and back splashes, to the untrained eye, we could bring someone in and they won’t know the difference. That’s a really good opportunity.”
Apartment renovations for older properties take extra consideration
The older the property, however, the more the window closes on opportunity to bring it up to today’s standards. Greater investment of money and time − like installing cabinets and countertops and rerouting plumbing to create washer/dryer connections − can get dicey. The expense and downtime resulting from remodeling can reach a point of no or little return. Even lower ceilings can be a turnoff.
“If I put a 1979-built property with eight-foot ceilings and no washer/dryer connections in next to that newer property, I can’t make it the same,” Williams said. “It’s cost prohibitive.”
Also, the average income of the people living in the community or in surrounding areas must be considered, especially when considering a project that already is well-occupied. Too much enhancement could price existing renters out of the market. However, if the property can draw from prospects in surrounding areas who have the income to support the increased rent, the investment may make sense.
Three keys to a successful apartment community rehab
Williams says the key to a successful rehab revolves around what the market demands, knowing demographics and testing the product before it is launched. Also, having a good designer in your toolbox doesn’t hurt.
When a rehab is being considered at an existing property, Portico puts wood on concrete to see how the market reacts. A unit is renovated and residents are invited for a tour, where the upgrades are featured and the new rent price disclosed.
“We get immediate feedback,” Williams said. “They’ll tell us if we’re crazy to ask that much or if they definitely want it. The secret to success is don’t commit until we can test it. The market is going to tell us.”
Williams says Portico doesn’t pretend to know all the answers about what trends are hot and cold. The company retains designers to make those calls.
And just because a national trend may sound inviting, it doesn’t mean that renters within a certain demographic are on board.
In recent years, Portico has focused on updating apartments with newer technology, like plug-ins compatible with USB 2.0 ports. A property in Frisco, Texas, is undergoing installation of smart thermostats, a fairly inexpensive upgrade that more renters are demanding.
But not every upgrade has to be très chic. Portico recently asked residents at one Texas property what upgrade they’d most like to have.
“The No. 1 answer was ceiling fans,” Williams said. “That’s about as low-tech as you can get. We were thinking about all this fancy stuff and our residents want ceiling fans. We can swing that for sure.”