How to Do Value-Add Renovations Without Disrupting Tenants

How to Do Value-Add Renovations Without Disrupting Tenants

4 min read
Matt Faircloth

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, N.J., is a developer and owner of commercial and residential property with a mission to “transform lives through real estate.” DeRosa creates partnerships to finance select real estate investments and has a proven track record of providing safe, profitable investment opportunities to their clients.

Experience
Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to hundreds of units in residential and commercial assets throughout the East Coast. Under Matt’s leadership, DeRosa has completed tens of millions in real estate transactions involving private capital, including fix and flips, single family home rentals, mixed-use buildings, apartment buildings, and office buildings.

Matt is an active contributor to the BiggerPockets Blog and has been featured on the BiggerPockets Podcast three times (show #88, #203, and #289). He also regularly contributes to BiggerPockets’ Facebook Live sessions and teaches free educational webinars for the BiggerPockets Community.

Matt authored the Amazon Best Seller Raising Private Capital: Building Your Real Estate Empire Using Other People’s Money. The book is a comprehensive roadmap for investors looking to inject more private capital into their real estate investing business and is a must-read for anyone looking to grow their business by using private lenders and equity investors. Kirkus, the No. 1 trade review publication for books, had this to say about Raising Private Capital: “In this impressively accessible introduction to a complex subject, Faircloth covers every aspect of private funding, presuming little knowledge on the part of the reader.”

Matt and his wife Liz live in New Hope, Penn., with their two children.

Education
Matt earned a B.S. in Industrial and Systems Engineering with a minor in Business from Virginia Tech. (Go, Hokies!)

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A lot of people are getting involved in multifamilies these days, and that’s because multifamily investments can be very lucrative. The way that multifamilies are lucrative is in a value-add play.

A value-add play is where somebody buys a multi, and let’s say, the average rent per unit is $700. This price per unit isn’t bad, but maybe the market’s gone up, you’ve seen a lot of appreciation in rents, and maybe there are rundown, older apartments that could use a facelift—they haven’t been touched in 20 or 30 years.

So, you realize I can take that $700 up to $800 or $850. Think about that. A $150 bump per unit times however many units you have (let’s say, it’s 50) times 12 months, that adds up quick! That can be a very, very lucrative increase. And that rent increase flows back to your property value, making your property worth more.

$150 rent increase per unit x 50 units x 12 months = $90,000 increase in income

Some quick math: Say this property has a 7 percent cap rate, which is a correlation of the value of the property based on how much money the property makes after it pays expenses. If I divide that $90K by a 7 percent cap rate, it shows how much I’ve increased the property’s value.

$90,000 increase in income / 7% cap rate = $1.28 million property value increase

This post is not meant to be a numbers post though—it’s not a deep dive into numbers. What I’m showing you is why people who do value adds do it. It’s because you then increase the property value significantly. And they can recapture some of that through refinance or recapture that from a property sale—whatever that may look like—all by raising your rent 150 bucks.

Sounds pretty simple, right? But you’re going to have to create an environment where your tenants who are currently paying $700/month are going to be willing to pay you an extra $150. What you have to do is create a good value-add program. The question today is how do you do multifamily renovations without causing much tenant disruption? Well, it’s not easy. But it is possible.

Here are some value-add options.

How to Do Multifamily Value-Add Renovations Without Disrupting Tenants

  1. Exterior Renovations

This includes adding paint, flowers, shutters, etc. It’s giving a facelift to anything that’s outdated. Find ways to get more use out of common areas. Tenants will love that! They go to work, come home after, and the exterior’s been painted or you’ve built a playground for them or you’ve put some window shutters on. And if your apartment building has some common areas, meaning hallways and things like that, renovating those common areas is definitely something you can do without very much tenant disruption.

Related: 12 Creative Ways to Add Major Value to Apartment Buildings

  1. Interior Renovations

These are admittedly the most challenging renovations with tenants in place, but they are still very possible with the right plan and team. This type of renovation could include painting or replacing cabinets, new appliances, new floors, new kitchens, and new light or sink fixtures—just a general modernization facelift on an apartment.

5000-renovation

Here are a few ways you can do that:

  1. Disturb tenants. Go to all your tenants and say, “Hey, we’re going to be asking you to move.” The strategy is to “kick them all out,” either by eviction, not renewing leases, or something else. So, then you’ll move everybody out, renovate the units, do a big bump on rents, and put new tenants in the property. Keep in mind that, with this strategy, you’ll have to be able to weather the storm of no one paying any rent during the renovation period.
  2. Roll out renovations. Start renovating units one by one in bite-sized chunks. You may have to incentivize in this instance. An incentive program might look like you going to 10 percent of your population at a time and saying, “Hey listen, we’re going to be renovating this unit. We’d like to offer you a full refund of your security deposit—no questions asked—if you’re going to be moving out.” Alternatively, you could offer a discount on the last month’s rent or pay them some money to get out. These are strategies to use if a property is fully occupied. But once you’ve done your first iteration of units, you can go to the next option.
  3. Move to renovated unit. Once some of the units have been renovated, you can offer tenants the opportunity to move into one of those. Ask the remaining population of renters to tour the new units. Ask them, “Aren’t they great? Wouldn’t you love to pay me this new rent amount?” Or if they need more incentive, discount them for the first few months. Sometimes landlords even mandate this move. Check with your local landlording laws. This has never worked for us.
  4. Menu option. Here’s how the menu option works: You give your tenants a menu-style list of upgrade options they can choose from. Let’s say a tenant’s lease is coming up. You can let the tenant know you’re going to ask for a small rent increase, but in exchange for it, I’m going to create a better unit for you. For $50 more a month, I will replace your appliances, change out your floors, change all your light and sink fixtures, give you washer/dryer hookups, install ceiling fans in the bedroom, etc. You could also offer them multiple menu items for a higher rent increase, but at some point, it’ll make more sense to just move into one of the new units.

Related: 5 Affordable Ways to Add Value to Your Rental Property

So, the first option isn’t great, but sometimes it has to be done to get the value-add done. The other options are more so what I wanted to discuss here. We find that a hybrid of the last three is really what works best for us when renovating an apartment complex. It can even be a win-win for both you and the tenants who stay.

I hope this helps you guys. Have a great and profitable week!

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What other renovating strategies have you heard about or done? I’d love to hear from you!

Leave your suggestions in the comment section below.

A lot of people are getting involved in multifamilies these days, and that's because multifamilies can be very lucrative. The way that multifamilies are lucrative is in a value-add play, often through renovations. But how can you renovate a property when there are tenants living there? I'll explain.