For multifamily property owners, it is now more crucial than ever to proactively utilize the best and most cost-effective ways to increase both ROI and NOI. Value-add renovation projects at multifamily communities generate a higher return on investment by increasing a property’s occupancy and through rent increases. As a result of the pandemic, some owners have been cautious about moving forward with their capital improvements due to either financial concerns and/or concerns about having contractors on site that could potentially spread the virus. The safety of their communities and the physical and financial health of their tenants has been a primary focus.
Management staff has developed new protocols in line with CDC guidelines in an effort to provide a safe environment for both staff and tenants. With these new protocols in place many owners have continued with their budgeted renovation projects. There is little reason to delay property improvements as long as the servicers and contractors are mindful of project safety concerns, follow CDC guidelines, and are performing these projects efficiently.
The multifamily renovation process has obviously changed during this pandemic. Owner and management company representatives, as well as designers, architects, and contractors, have had to implement new procedures in their renovation process. For servicers, an initial site visit by private appointment is important. Being able to see the property and space involved first-hand, helps to make the process more effective and mitigate the risk of potential errors. Once the initial assessment has been completed, the design phase and pre-construction process can take place in their own offices with updates over video conference.
During the planning and construction and/or installation phases, everyone must follow the new protocols established for the property. Making scheduling adjustments to accommodate social distancing between staff, residents, and contractors is a big factor. Other considerations such as budgeting for proper sanitization, with a heightened disinfecting and cleaning process is important.
Value-Add Renovations and ROI
With the effects of a recession upon us, choosing multifamily improvement projects carefully is more important than ever before. It’s essential not to over-improve a property or a building in order to maximize ROI. Updates should reflect the asset class of the property and should be designed to drive occupancy and increase rents. Upgrades that bring a property up to a standard that is in line with anticipated rents has become increasingly important in order to attract the right tenant base.
When acquiring an existing property, a capital investment upfront will allow owners to both reduce ongoing operating costs and position the property for the targeted tenant. Looking for opportunities in areas where maintenance or upgrades have been deferred or ignored is key. The property will become more attractive to potential tenants by making initial improvements that the previous owner ignored.
Areas to invest in for increased ROI:
1. Exteriors & Curb Appeal
The exterior of the building and visual aesthetic of the landscaping provides the first impression of renters. Because of this, one should consider: does the building entice renters or encourage them to move on to other options? An attractive exterior paint scheme with good looking siding, attractive shrubbery, fresh mulch and fresh floral accents will catch the eye of people driving by the property.
If the siding or balconies need repair, replace the damaged pieces in order to keep the building in good shape so you do not have any deferred maintenance in the future. Attractive signage can also really make a difference in improving curb appeal.
New siding is a more capital-intensive investment that certainly drives curb appeal; however, it should be carefully considered in terms of the ROI it will produce for the owner overall. If the exterior consists of brick that is cracked or just plain ugly, consider repairing problematic areas and painting it. This can provide an entirely new look that appears modern and clean looking.
2. Security Matters
Ensure that the doors and windows in each unit lock effectively, as well as the front and back doors to the building. Install new locks or doors, if needed, for an efficient and maintenance-free fix to help tenants feel safe and secure.
If security isn’t properly in place, your target tenants will most likely not be interested in renting at your property. This is a relatively capital-light upgrade that is often built into the initial capex budget for interior upgrades. This will save on operational costs as well, with less maintenance repairs looming on the horizon.
3. Property Rebranding
When an owner acquires an existing property that is dated, has areas with deferred maintenance, or has taken over a property that was poorly managed, it is most likely the case that is has a poor reputation online and on the ground. In these types of situations, it can be a great solution to rebrand/reposition the property so that it has a chance to have a fresh start with regards to reputation and leasing.
Give the property a new name that is easy to spell and say, memorable, and appropriate for not only the asset class, but the location and target tenant base. With a new name, you’ll need a new sign package, new marketing collateral, an updated website as well as a fresh new paint scheme on the exterior.
With a full property rebrand/reposition, you’ll want to consider all design related capex upgrades – exterior paint, interior unit upgrades, clubhouse, model unit, pool furniture, playground, or dog park depending on what type of tenants will make up the majority of occupancy.
4. Interior Units
Many owners of class C and affordable housing properties make the mistake of over-improving kitchens and bathrooms. This asset class does not necessarily call for granite countertops or hardwood flooring, when other, less expensive materials can still deliver a much-improved experience for renters.
Newly updated features such as a more modern wall/trim paint scheme, lighting, new cabinet fronts, hardware, resurfaced or laminate countertops, black or stainless appliances, and vinyl plank flooring in the wet areas can be an easy and attractive fix that will produce increased rents as well as reduce ongoing maintenance costs.
5. Clubhouse & Model Unit Upgrades
Although it is tough to quantify actual return on investment by upgrading the main amenity areas and a model unit, these projects play a huge part in reducing turnover and increasing the quality of life of the residents and staff. Reducing turnover will increase a property’s occupancy which in turn will increase net operating income due to increased rent collection. Improving these areas are also a great marketing tool for luring in your target tenant base and signing new leases.
Focus on setting the tone and creating a vibe with an aesthetic that will appeal to your ideal tenant base while maintaining overall property cohesiveness. An upgraded model unit not only serves as a great showcase for your new interior upgrade package, but also helps new renters envision ways in which they can style and decorate their living space.
Moving Forward with Proper Execution and a Streamlined Strategy
One important thing to point out is that making piecemeal upgrades can be counterproductive. In an effort to conserve immediate cash, we’ve seen some owners stage their improvements–particularly on the exterior and common areas–over a longer period of time. As a result, they lose the opportunity to present a re-branded and overall upgraded asset that is worthy of achieving higher rents. While the cost may be higher upfront to complete these projects during a shorter time period, this upfront capital spend will result in more impactful changes to tenant satisfaction and attraction, along with the lower maintenance costs that will start to pay off right away.
Uncertainty surrounding the future of the economy and real estate investment markets will be with us for some time. While we manage our way through this time as an industry, it’s important to do what we can to improve ROI in existing multifamily properties. While the market may bring challenges, there are always creative value-add solutions that can bring new opportunities for increased revenue and ROI.
Thanks for reading,
Megan McDowellFounder, Modern Gem Design, Inc.