Cosmetic Cases: Let’s Talk About Unit Makeovers…
“Old ideas can sometimes use new buildings. New ideas must use old buildings.” – Jane Jacobs
Over the weekend during my relaxation time (yes, believe it or not I do have relaxation time), I was flipping through my options on Netflix and came across this show, called Motel Makeover. As you might guess, the name says it all – the show is about some unique design work done to spruce up a motel.
Out of curiosity, I turned it on. And I almost regret doing that because it got “my wheels spinning,” with my mind going off on all sorts of tangents. One thing led to another, and I started piecing together an idea for a blog post in my head that talks about some of the things that we do to “makeover” a multifamily property.
When I say “makeover,” I mean the type that CF Capital is involved with in apartment units – including both the “design stuff” and the “less juicy” parts of a renovation (see our post on asset repositioning and capital expenditures for more on this).
In all seriousness, the renovation process is an essential component in executing a value-add investment strategy, like ours.
But why is it so important?
How about we start our discussion by setting the stage of the decision that precludes a renovation – the decision to buy a multifamily property that needs a renovation
Buying an Apartment Complex with Renovation in Mind
There are tradeoffs to buying an apartment that needs renovation. Typically, these buildings are older and initially require higher costs to operate, even though the acquisition price may be “right.” In terms of rental competition, this building may be competing in the rental market with newer, more modern properties. This could mean you are further down on their list of priorities, and a lower demand (with increased supply) forces you to offer lower monthly rents.
However, there is great opportunity with an older apartment, and most of that relates to renovation and repositioning the asset within the submarket.
Which brings me back to my point earlier in this post – the “makeover” process is an essential component to executing a value-add strategy. Renovation aims to reduce the negative tradeoffs of the property investment by targeting things like appeal (increasing it) and operating costs (decreasing it).
We could even use “green” features to tackle those two tradeoffs, while highlighting it as an attractive feature in marketing. And it is no secret that this is becoming more and more important to our society today.
With that said, let’s walk through some of the more important areas that a real estate investor could focus on in a renovation process that would really drive the value creation process.
1. Improve the aesthetic and design
This is what people see when they walk by it and tour the property. Impressions taken by potential renters can either make or break their desire to join your apartment community. Here you want to update anything with a dated look that will still match the brand of the property. Remember, you never get back your first impression, so here are some easy guidelines:
Modern, sleek lines
Intimate, welcoming leasing offices with modern furniture
Updated, on-brand signage
2. Replace on the lighting and hardware
New lighting and lighting controls should reduce energy consumption and reduce costs to operate the property. Also, tenants enjoy the benefits of lower energy bills. With regard to hardware, appealing kitchens and bathrooms have the potential to make or break the first impression. Try to do both because a mismatch in update-drive appeal may have a worse result.
LED Light Bulbs, dimmers/timers, sensors for lighting
Lighter colors with these items, even stone and concrete
Touch-free and new/appealing fixtures
Refurbished cabinets with modern cabinet hardware
Reglazed/replaced tubs
3. Utilize technology, including automated systems
Smart technology and building automation systems (BAS) are amazing options for both tenants and property owners. For both parties, utilizing this should almost always reduce costs – operating costs for the property owner and energy bill costs for the tenant. Also, energy efficient options are great to reduce maintenance costs for the property owner.
Smart locks
Smart thermostats
Energy-efficient boilers, plumbing, and windows
4. Incorporate “green” features
There is a reason green building strategies are so popular. They are good for the planet and the people living in your buildings. But sustainable practices reduce operating costs, too. They also appeal to renters, who feel good about their living space and are more likely to renew (and be referrers, too!). In addition to all of this, there may be additional incentives or even tax credits available for investors incorporating green features.
LEED certified options
Ultra-low-flow toilets and showerheads
Non-toxic, energy-efficient materials
5. Include attractive amenities
Bottom line is residents are attracted to amenities. By adding amenities that your target resident is attracted to, you can improve and sustain occupancy levels. Find out what other apartments in the area aren’t doing and see if it makes sense to add. You can also discover the amenities that others enjoy at other properties.
Natural spaces for a park-like feel
Community spaces
Recycling programs
Fitness centers
Docking stations, WiFi, and package delivery systems
Closing Thoughts
Even doing just one or two of these during the renovation process could go a long way. If you’re an investor, keep in mind a few things to help push you over the hump if you’re still questioning whether or not to invest in renovations.
With the renovations, you will attract new, higher-quality tenants and retain ones that enjoy the upgrades.
With the renovations (more so the lighting, technology, and green features), you will reduce operating expenses, and more cash will flow through to your bottom line.
With the renovations process, you can frontload the capital expenditures and depreciate the new assets, which will reduce your tax base and increase your cash flow.
With the renovation process, you could be contributing to a cleaner and greener world, while also (potentially) reaping the monetary benefits by incorporating items that are energy efficient.
When renovating an apartment community, pay special attention to how you’re financing the improvements, and how that impacts your projected returns.
When considering an active or a passive investment, it’s always wise to thoughtfully consider the value-add strategy. One of the most important questions we ask ourselves at CF Capital is, “how might we add additional value to our residents?” This question usually leads to constructive thinking and creative business plan creation and execution. When we take care of our residents in this way, that value is returned to our investors as well.
If you’d like to benefit from being a part of this process by investing alongside our team, reach out anytime. We welcome you to set up a call to discuss your investment goals further
————————————————————————————————————————————————————
Interested in partnering with us? Join our investors list here.
