Does it worth to spend 130K on the remodel?

Question

I am a newbie in apartment investment. Last year, I purchased one 7-unit in Mountain View in Bay Area. This year, I spent 130K to fully remodel one unit. After remodel, the rent increases by 2200 per month or about 25K annually. It will take 5.2 years to pay it back.

The good thing is that as the rent income increses, property value increases. Tenant profile and vacancy also improves. Lender is glad to increase the loan amount 130K with additional mortage payment 820 per month when doing refinance.

The bad thing is that remodel has lifetime, if the next remodel is 10 years later, it means it is depreciating at 13K per year. Or 8.6K for 15 years.

My question: Does it worth to spend this large amount?

Kevin VanderWall · Answer

I would not look at it only as “5.2 years to pay back.” I would look at it as a capital allocation decision.

If the remodel cost $130k and it truly increased rent by $2,200/month, that is $26,400/year in additional gross rent. After vacancy, higher property taxes, repairs, insurance, management, and reserves, the real added NOI may be lower, but it still could be a strong return depending on the final number.

The bigger question is: how much value did the $130k create?

For example, if the added NOI is $20k/year and the market values the property at a 5% cap rate, that could add roughly $400k in value. At a 4% cap rate, it could be closer to $500k. In that case, spending $130k may make sense even though the simple payback is 5+ years.

But I would be careful doing this across all 7 units unless the numbers are proven. One remodeled unit gives you a test case. I would compare:

• Actual rent increase, not projected rent increase
• Actual added NOI after expenses
• Added appraised value or refinance proceeds
• How long the upgraded finishes should realistically last
• Whether a lighter remodel could produce 80% of the rent increase for much less money

Sometimes a full luxury remodel is not the best return. A cleaner, durable, mid-grade remodel may get nearly the same tenant profile and rent bump with a much shorter payback.

So my answer would be: yes, it can be worth it if the remodel increased NOI enough to create more value than the cost. But I would not automatically repeat a $130k remodel on every unit until you know whether a smaller, more efficient scope could produce similar results.

Robert Ellis · Answer

The phrase that stood out to me was "I spent $130K to fully remodel one unit."

I made a similar mistake early on, except my focus was entirely on the renovation cost. I spent months second-guessing whether I had over-improved the property.

What changed my thinking was realizing the renovation wasn't competing against doing nothing. It was competing against every other place that capital could have gone.

In your case, the unit is producing roughly $25K more per year than it was before. The part that would make me nervous isn't the $130K. It would be spending $130K and only getting a few hundred dollars more per month in rent.

The other thing I learned is that good renovations don't usually die all at once. The flooring, cabinets, appliances, paint, and fixtures all age differently. Ten years later, I wasn't writing another six-figure check. I was replacing individual components as they wore out.

The question I'd be asking myself is whether the $2,200 increase came from bringing the unit up to where the market already was, or whether you created something materially better than the competing units around you?

Dan H. · Answer

I am often the contrarian, but in this case the responses are absurd.

Every one of these responses is bad and missing the key point.   The key point is commercial properties are valued based on cap rate and NOI.

An internet search indicates apartment cap rates in Mountain View ranges from 3.9% to 5.8%.  property value = NOI / (cap rate)

So $25k/year rent increase at 3.9% cap rate is

$25000/0.039= $641k increase in value

$25k/year rent increase at 5.8% cap rate is

25000/0.058=$431k increase in value

So the $130k expense resulted in a value increase of between $301k to $511k above costs.   This amounts to the following returns based on value alone

641/130 - 1 =3.931 which equates to a 393% return

Or

431/130 - 1 =2.315 which equates to a 232% return

On top of this you have the actual increase to the cash flow.  The $25k extra revenue is dwarfed (it really is so dwarfed by the appreciation that it really is irrelevant) by the appreciation gain but still nice.

This is a crazy question!   This is a grand slam return.   You should do this every chance you get.   Is there anyone that would not invest $130k to achieve a value increase a few months later to at least $431k ($331k gain).   If there is, never follow their financial advice.

I question if anyone that responded has ever had a short term value add as high as $331k.  I cannot tell that any have based on the uninformed responses.

If you can achieve the same rent increase for a similar expense, you should do this to each unit.  If we use the lower end of the price increase beyond costs as $331k, if you can achieve the same return your value increase would be 7 * 331k =$2.317m.  Note this is over $2m above your costs (I already subtracted your $130k cost out).   What about at the higher value add?  $641k * 7=$4.487m.   So a profit from the value add of between $2.3m and $4.5m.

As indicated there was some poor responses in this thread, but you have a grand slam investment opportunity here with a killer value add.

Good luck

Theresa Harris · Answer

It isn't unusual for it to take a few years to pay for renos.  You shouldn't have to remodel the until every 10 years-small things like paint or new flooring-perhaps, but that shouldn't cost $130K per unit.

Don't renovate to renovate, renovate because it needs it and make choices that hold up overtime (ie avoid fads, buy quality).

Alfath Ahmed · Answer

Most cali investors tend to usually look out of state because the cashflow works better, state is landlord-friendly, and usually you can setup a strong team. What you are doing is good but it i suggest other markets @Zhenyang Jin.

Find a different market where it is landlord-friendly, your dollar goes much further, and where there is tech, job, and population growth.

Connect with an investor agent. Have him connect you with his team of lenders, contractors, property managers. Look at off-market deals and buy them 80-85% of its true-value in turnkey shape or buy them at 75% of ARV for BRRRR/Flip deals.

Make sure to watch out for location, condition (Roof, HVAC, hot water tank, electrical, foundation, and sewer scope), and rentability.

When you re-finance, make sure deal cashflows and breaks even.

Greg Kasmer · Answer

@Zhenyang Jin - I would do what you can to preserve the work of the remodel. Hopefully the cabinets and bathrooms can be used longer than 10 years to save you some money down the line. As an alternative strategy you can also attempt to remodel another 1-3 units and then sell in a few years before they need remodeling again, but be able to recapture capital at a higher selling price when the NOI is higher.

Christian Grosskopf · Answer

From my perspective, a 5.2-year payback period on a major renovation in the Bay Area seems pretty reasonable, especially when you're not just buying higher rent but also increasing the value and quality of the asset. I wouldn't view the remodel as "depreciating" at $13k/year. Some components will wear out, but many improvements will continue to attract better tenants, reduce turnover, and support higher rents for years.

The fact that the increased rent more than covers the additional debt service after refinancing is a strong sign that the capital was deployed effectively. I'd be more concerned if the renovation only increased rent modestly or if the market wouldn't support the new rents.

Ultimately, apartment investing is about maximizing NOI. If a $130k investment produces $25k/year in additional income and improves the property's long-term desirability, I'd consider that money well spent.

Zhenyang Jin · Answer

@Dan H. Thanks for the insight and detailed calculation.

Amit Prasad · Answer

Hi, lets connect. I'm in CA too, I know the bay is expensive but 130k for one apt (no exterior work?) seems excessive.

James Flores · Answer

@Alfath Ahmed this is my plan. I invest in my backyard of ca. and used to live in Mountain View. But plan to do more in Ohio

Does it worth to spend 130K on the remodel?

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