SS219: Transforming Properties: The Untold Value of Minor Renovations

SS219: Transforming Properties: The Untold Value of Minor Renovations

One mistake I made on my first rental property was purchasing a property that required a major renovation. In this episode, Charles discusses minor and major renovation projects and how investors might experience similar returns.

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Talking Points:

  • I believe one of the most important calculations when investing in value-add multifamily real estate is the 36–48-month return on investment calculation. It is straightforward; you want to ensure that any renovations you perform to a rental unit can be recaptured through increased rents within 36-48 months. Since most renovations are more expensive than initially estimated, you can perform the calculation for 36 months. If it goes over by less than a third, you can be assured that you are still recouping your investment within 4 years, a 25% return on investment. It is the easiest method for determining how much money you should invest into a rental unit.
    • For example, installing a washer and dryer combo into a rental unit for $1,800. You estimate conservatively that you can now increase rents by $80 monthly. This upgrade is a no-brainer.
    • On the other hand, installing new cabinets and granite countertops costs $5,000, but you can only raise the rent by $100 per month; this renovation probably requires some changes. Maybe you can replace the front of the cabinets and hardware instead of replacing the cabinets. When your investment calculations take 48 months or more to recoup, you know you are starting to over-renovate for the area and property.
    • The goal is to find the sweet spot for your renovations, and the shorter the time frame to recoup your investment, the easier the decision.
  • As a more experienced investor, I realized that minor renovations are easier to perform, there is less unit downtime, and the returns can be similar to a major renovation.
  • A few common mistakes new investors make who take on major renovations include:
    • New investors that are not experienced
    • Investors without a solid team and network of contractors
    • Investors who grossly miscalculate the cost of renovations or the market rent for the unit once it has been renovated.
    • Investors that miscalculate the time required for the renovation and the unit’s downtime.
    • Lastly, investors who do not have a solid reserve fund for overages or unexpected costs.
  • There are a few main reasons why I prefer minor renovations over heavy lifts, also known as major renovations.
    • Requires less of a financial investment.
    • It minimizes the unit downtime.
    • You can usually recoup your investment within 12-24 months.
    • Less construction at your property makes it less intrusive to other current tenants.
  • What are some examples of minor renovations that are also good investments?
    • A fresh coat of paint within the unit, including the front door
    • A thorough deep clean
    • Replacing cabinet hardware
    • Installing new faucets
    • Adding a backsplash
    • Install a new bathroom vanity
    • Installing a new bathroom mirror or medicine cabinet
    • Installing in-unit washers and dryers
    • Replacing old carpet or refinishing hardwood floors
    • Replacing light fixtures or adding additional light fixtures
    • Lastly, add a new thermostat, outlets with charging ports, keyless door locks, or other smart electronics.
  • Throughout this episode, we have focused on in-unit repairs and upgrades. This strategy can also be utilized throughout a property’s common areas. Still, it requires a little more legwork on the part of the investor to identify items that could easily be replaced or upgraded. For example:
    • New outdoor lighting or additional outdoor lighting
    • New interior lighting throughout the common areas that is more energy-efficient
    • New signage
    • Simple landscaping. Remove time-intensive landscaping and opt for plants that require minimal maintenance while adding to the curb appeal.
    • Restrict tenants from storing anything outside of their units.
    • New exterior and interior common area painting.
    • Update interior common areas.
  • The easiest way to identify what projects to take on is by mystery shopping other apartments near the subject property. What have they done or haven’t done? What can you easily do that would dramatically increase the rentability of your units? If you were to rent at one property versus another, what are the pros and cons?
  • When we purchase a property, we walk the units and grade them by the amount of work that will be required to get them to a certain level, which will maximize the property’s value. Usually, there are some units that have already been renovated or have been mostly renovated, and you can use these as a guide since people are paying to live there, so you know there is a demand at some level. Usually, in-unit renovations are a longer-term project for mostly occupied properties since you are trying to minimize downtime by renovating certain units as they become vacant.
    • The second part is the common area renovations that are performed immediately upon purchase. This includes new roofs, common area upgrades, landscaping, exterior upgrades, signage, etc. These changes can be performed no matter how many units are vacant, can be completed rather quickly, and immediately add to the property’s curb appeal and rentability.
  • Minor renovations may seem simple and small. However, these investments will quickly unlock the property’s hidden potential that the current owner has overlooked. This approach will help you maximize your property’s value by taking a more calculated approach to real estate investing.

Transcript:

Charles:
Did you know that the fastest way to boost your property’s rental income isn’t always a major renovation, but possibly a few small strategic upgrades? After renovating hundreds of rental units and analyzing thousands of multifamily properties, I’ve uncovered why minor renovations typically outperform large policy renovations. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re talking about transforming properties, the untold value of minor renovations. If you’ve ever wondered how to maximize your rental properties value without overspending, this is the episode for you. What small changes can dramatically increase your rental properties appeal? How do you avoid wasting money on renovations that don’t pay off? And what’s the quickest way to recoup your investment without overspending? So let’s get started. I believe one of the most important calculations when investing in value add multi-family real estate is the 36th to 48 month return on investment calculation. It is straightforward and you wanna ensure that any renovations you perform to a rental unit can be recaptured through increased rent within 36 to 48 months.

Charles:
Now, since most renovations are more expensive than initially estimated, you can perform the calculation for just 36 months. If it goes over by less than a third, you can be assured that you’re still recouping your investment within four years, a 25% return on investment. Now, it is the easiest method for determining how much money you should invest into a rental unit. For example, installing a washer and dryer combo into a rental unit for say, $1,800, and you estimate conservatively that you can now increase rents by $80 monthly, this upgrade is a no brainer. On the other hand, installing new cabinets and granted countertops cost $5,000, but can only raise rent by say, a hundred dollars a month. This renovation probably requires some changes. Maybe you can replace the front of the cabinets and the hardware instead of replacing the full cabinets. And when your investment calculation takes 48 months or more to recoup, you know, you’re starting to over renovate for the area and for the property.

Charles:
And the goal is to find the sweet spot for your renovations. The shorter the timeframe to recoup your investment, the easier decision. As more experienced investor, I’ve realized that minor renovations are easier to perform. There is less unit downtime, and the returns can be similar to a major renovation. Now, a few common mistakes new investors make who take on major renovations include new investors that are not experienced investors without a solid team and network of contractors, investors who grossly miscalculate the cost of the renovations or the market rent for the unit once it has been renovated, and investors that miscalculate the time required for the renovation and the unit’s downtime. Remember, during the unit downtime, you’re not making any money. And lastly, investors who do not have solid reserve fund for overages or unexpected costs. Now, there are a few main reasons why I prefer minor renovations over heavy lifts, also known as major renovations.

Charles:
And this is requires less of a financial investment. It minimizes the unit downtime, which means I can get, as tenants move out, I can get a renovated very quickly and get a reread that very quickly as well. And you can usually recoup your investment within 12 to 24 months if you’re using strategic different types of repairs and upgrades, and it’s less construction at your property and makes it less intrusive to other current tenants. So if you have tenants either have a building or a house and there’s construction people coming and going at all times during the day and it’s very loud you’re gonna have a lot of mad tenants at you. And if you’re just doing minor renovations and it just lasts a day or two, it’s gonna be a much easier thing to deal with tenants. They might not even ask you or tell you anything or complain about it.

Charles:
Now, what are some good examples of minor renovations that are also good investments? So a fresh coat of paint within the unit, including a front door, a thorough, deep, clean, replacing cabinet hardware, installing new faucets, adding a backsplash installing a new bathroom vanity, installing a new bathroom mirror or medicine cabinet, installing in-unit washers and dryers, replacing old carpet or refinishing hardwood floors, replacing light fixtures or adding additional light fixtures. Lastly, add a new thermostat outlets with charging ports, keyless door locks, or other smart electronics, which is becoming a, a big hit in all types of properties from older properties to newer properties. And throughout this episode, we focus on in-unit repairs and upgrades. And the strategy can be also be utilized throughout our properties. Common areas still requires a little more legwork on the part of the investor to identify the items that could easily be replaced or upgraded.

Charles:
And this could be, for example, new outdoor lighting or additional outdoor lighting. And this is one of the big ones that I did. My dad really pushed this when I started buying apartment complexes is that he always liked a lot of outdoor lighting. And now whenever I buy properties, that’s the, one of the first things I still do is putting on a ton of outdoor lighting. And so you’re leaving your car or you’re walking anywhere on the property, it’s illuminated and it’s a pretty inexpensive thing to add. And with new bulbs and electronics and LED and all this stuff, sodium lights, it’s actually pretty inexpensive to operate ’em as well. New interior lighting throughout the common areas that has more energy efficient. So like in the hallways or where mailboxes are new signage, simple landscaping. Remove time sensitive landscaping and opera plants that require minimal maintenance while adding to the curb appeal.

Charles:
So also ones that require probably less water too, especially if you don’t have inground sprinklers restrict tenants from storing anything outside of their units. This is a big one. We had this with one of our properties that we own outside of Atlanta, and the property was great. And then I, you know, I, I went there, I was actually with my wife and we saw the property and one thing that I saw that like killed the whole vibe of the whole property that I thought was people storing stuff out front in their units. And once that was removed, those items were removed, people had to put ’em behind like on their little patios or somewhere else. It was something that really cleaned up the whole kind of aesthetic of the whole property. It’s amazing how little small things can change when someone drives into your neighborhood or or onto your property, what they think a property, you know, on what they think of the property right off the bat.

Charles:
New exterior and interior common area, painting and update interior common areas. So that might be just changing any type of, you know, maybe kind of handrails or any doors maybe making the locks if it’s keys, maybe making with a fob. Anything like this that’s going to enhance the security or enhance the whole aesthetic of the property. And these are usually inexpensive compared to major renovations that we might say that are typical for CapEx, like new driveways or new roofs or something like this. And the easiest way to identify what projects to take on is by mystery shopping other apartments near your subject property. So what have they done or haven’t done? Okay, and what can you easily do that would dramatically increase the rentability of your units if you were to rent at one property versus another? What are the pros and cons?

Charles:
This is also something if you have a property manager, ask them what they would do. They’re in a lot of units. They should probably be in a lot of units that are near yours or that are the similar class and size. So ask them what other people are doing or what you could do. Or before you do something, ask them, is this a good idea? And that gives you another frame of reference from someone that probably has a little bit more experience in that sub-market for sure. But in real estate investing in general, and when we purchase a property, we walk the units and grade them by the amount of work that will be required to get them to a certain level, which will maximize the property’s value. Usually there are some units that have already been renovated or have been mostly renovated, and you can, you know, you can then use this as a guide since people are paying to live there.

Charles:
So, you know, there’s a demand at some level for these units. Usually in-unit renovations are a longer term project for mostly occupied properties, since you are trying to minimize downtime by renovating certain units as they become vacant. The second part is the common area of renovations that are performed immediately upon purchase. And this includes new roofs, common area upgrades, landscaping, exterior upgrades, signage, et cetera. These changes can be performed no matter how many units are vacant and can be completed rather quickly and immediately add to the property’s curb appeal. And the rentability minor renovations may seem simple and small. However, these investments will quickly unlock the property’s hidden potential that the current owner has overlooked. And this approach will help you maximize your property’s value by taking a more calculated approach to real estate investing. So I hope you enjoyed, please remember, rate, review, subscribe. Simply comments some central show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

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