John Caulfield, Multi Family Executive – May 28, 2014
Rehab ROI: Which Upgrades Cause the Biggest Rent Bumps?
Home Properties is focusing on kitchen upgrades to help increase rents in newly renovated units.
In April, Home Properties got started on a $3 million, three-year renovation of Stone Hill Apartments in Brookhaven, Pa. a complex of 11 three-story buildings with 205 units that Home Properties had purchased in November 2013.
This company is upgrading these garden apartments’ kitchens with maple cabinets and brushed-steel finishes. The units’ bathrooms will now have tub surrounds, two-tone paint and six-inch wood baseboards. Lighting, plumbing and electrical services are being improved. And, in response to resident feedback, Home Properties is installing energy efficient windows and sliding glass doors.
The initial results of this acquisition and renovation have been positive in terms of bumping up monthly rents for a two-bedroom apartment to $1,040, from $918 in December, thereby exceeding the 10 percent return on investment target Home Properties typically shoots for on interior rehabs, according to its senior vice president of property management Bernie Quinn.
But Home Properties is like a lot of property owners that can’t say for certain which combination of improvements produces the biggest bang for their investment buck. Figuring out what amount of spending will lead to what percentage rent increase, they say, is more art than science, with the ever-present possibility that a renovation exceeds what renters value and will pay for.
“An appliance package might produce a great return in one market, and do nothing in another because demand isn’t there,” observes Forrest White, director of asset engineering for Phoenix-based Alliance Residential.
Cost vs. Value
There are many variables that impact rents—the age of the building, where it’s located, its tenant profile, and the surrounding competition being among the more prominent factors. Investors and lenders can also require renovation and maintenance expenditures on timetables that don’t always correspond with a property owner’s investment schedule. Consequently, any return on upgrades is likely to vary widely from property to property.
Still, property owners say it’s reasonable to expect renovation dollars to generate rent bumps anywhere from 10 percent to 30 percent.
“You can’t change the age of a product or change the ceiling heights. But you can achieve some gap closure” with competing buildings through renovations, says Robert Lee, COO JRK Properties.
The Los Angeles-based company targets rent increases of at least 20 percent from renovation expenditures that typically range from $4,000 to $7,000 per unit. JRK’s London Apartments property in Atlanta, on which it spent in excess of $10,500 per unit to renovate, has seen rents rise by more than $200, and Lee thinks they could increase eventually by $300.
When Michigan-based Village Green purchases and renovates a building, its goal is to keep overall spending to between 60 percent and 70 percent of what it would cost to build something new. Rent appreciation, says Village Green’s COO Diane Batayeh, pivots on “showing renters value.”
Florida-based Gables Residential has been seeing “incredible returns” from “super punch” renovations that are limited to interior improvements and for which Gables spends an average of $2,300 per unit. Rent increases of $75 to $100 are sometimes triple the Gables’ ROI threshold, says Cris Sullivan, its executive vice president.
Gables is one of several property owners for which installing wood (or wood-like) flooring has proven to be their most productive improvement, kitchen upgrades come next, although minor and inexpensive changes as simple as improving an apartment’s lighting can also be ROI winners.
Equally important to property owners’ efforts to rebrand a building and generate sufficient investment returns is the quality of improvements they make to landscaping, signage, amenities and common areas. “If your buildings don’t have good curb appeal, people will just drive by,” says Keith Knight, Home Properties’ vice president of capital improvements and national accounts.
Owners report that replacing carpeting with vinyl, tile, or wood flooring promises the greatest return on their investment, to say nothing of the fact that these surfaces are durable and easier to maintain. In some of its assets, Greystar Real Estate Partners does little else but replace floors, says its executive managing director of investments Wes Fuller. (Greystar spends on average $6,500 per unit for interior upgrades that typically justify $150 per month rent increases, Fuller says.)
The Bascom Group, in line with its tenants’ preferences, mixes plank flooring with carpeting in different rooms and in common areas, says Paul Zakhary, the company’s director of portfolio operations and renovations. This combination helps create a “condo look” that is reinforced by other improvements like backsplashes in kitchens, washers and dryers (“a no brainer,” says Zakhary), and pendant and track lighting.
Adding washers and dryers is scoring well with other property owners, too. McKinley recently renovated a 319-unit apartment complex in Winter Park, Fla., in which it installed stackable washers and dryers in the units’ closets. Those apartments, says the company’s CEO Albert Berriz, now capture $50 to $80 more in rent per month.
Alliance Residential focuses on improving kitchens, which are usually right off the entrances of its rental units, “so visually they have a dramatic impact and set the stage for the entire apartment,” says White.
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