Terminology for "Upside Potential" / "Renovations for ++$"?

Question

Hi, I'm about to put a quad on the market that has been pulling $31k /year in NET profit but could be pulling more with a few more renovations. For the buyer I am submitting:

1.  a 2020 P&L

2.  a list of the renovations I have done to the building from 2019-current -- what is this called?

3.  a list of what could still be done to pull in another $5k/year -- what is this called?

An example for #3 -- for about $600 the basement can be divided into storage unit areas, locked doors for the tenants and that pulls in an extra $100 per tenant who opts in / who wants to rent one.

Help? Buyer wants the lists yesterday. Of course.

Mason Hickman · Answer

@Cathy Malmrose

You can call it upside potential or you could go with “Value add opportunities” and calculate the ROI on the projects.

I would not call it deferred maintenance; this is all upside.

Cathy Malmrose · Answer

@Wyatt Franta yes, it's the Upside Potential I'm referring to. There isn't any deferred maintenance. I went into this as a fun project to stay busy in retirement and I had money to burn. I didn't necessarily want to see how much I was spending and I'm having a hard time going back over receipts. Yes, I hope the market is strong enough that I'll find a buyer who can see they're getting a well-renovated property that won't need work for quite a while. I want to include the upside potential because I have already worked on permits, approvals and contractors.

Cathy Malmrose · Answer

Ka-ching! Yup, Value Add Items is the term I was looking for. Thanks!

Cathy Malmrose · Answer

Good question, but personal reasons. I agree RE is the best investment out there and I got really lucky by buying properties with such ridiculously good profit margins (current best is a house I bought for 19, renoed for 3 and it rents for 925/mo, in Flint, MI, a handful of others like it but that one is the best).

Good question but the only answer I'll give is that sometimes profit isn't the point.

Brent Coombs · Answer

@Cathy Malmrose, my question is: Why sell?  You've done such a good job promoting its virtues and profit-making prowess, how will its $ value be better invested?  Cheers...

Wyatt Franta · Answer

Hi Cathy,

#1 - You'll want to have a more 'current' P&L ledger for this. What most investors look at is known as a "Trailing 12 Months" or T-12 for short. They want to see how the property has been performing for the past 365 days. That way, they know if they're investing in something that's pristine, had some improvements made recently to increase cash flow, or currently needs improvements.

#2 - You are correct; improvements made to the property are known as capital improvements. Investors may request to see receipts for any and all capital improvements for the previous 1, 3, 5, etc. years. This allows them to get an understanding of what deferred maintenance is lingering, or what they'll need to budget for in the future, given the age of materials.

#3 - You can call this deferred maintenance (work that needs to be done in order to bring the property up to market conditions).

The example you provided wouldn't necessarily pass as deferred maintenance, however. Deferred maintenance has to do with existing structures/materials. Creative additions to a property to increase cash flow can be considered upside potential. It just needs to be legal & possible, of course.

Also, a buyer is demanding stuff from you in this incredibly one-sided seller's market? That's hilarious.

Cathy Malmrose · Answer

#2 would be called Capital Improvements?

Terminology for "Upside Potential" / "Renovations for ++$"?

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