Fixer-Uppers...how nice to make them?

Question

I am in the process of closing on an 8 unit building in a great neighborhood.  The property has been poorly managed in the past and we feel that there is a lot of potential to tap into there.
Our goal is to renovate one unit at a time as them become vacant (it is fully rented as of now).  I was wondering if anyone had any advise and or tools to use in figuring just how much to dump into each unit?
They are lower end units now (class D) and will never make it past mid-range (class C+ B-).  The units currently rent for $525 each and believe they could fetch ~$750 if done right.  The market is there.
Is it a matter of targeting a desired “payback” period and work from that?  5 yr @ +$225 increase is  $13,500?
Any thoughts…
Are there any pros in considering leaving them in the condition they are in now?  It would still be a good deal but I feel that it would be hard for us to keep our hands off of them.

Jon Holdman · Answer

Pretend to be a prospective tenant and make some calls.  Arrange a few showings at similar buildings in the same area and have a look.  You want to somehow be a better deal than those other units.  That could mean better overall condition for the same rent, cheaper rent for similar condition or some amenity that's desirable but uncommon such as storage or air conditioning.

Getting from $525 to $750 would be a huge leap in my area. 1/1 apartments similar to what you describe typically rent for around $525.  There's really nothing you can do to make them go for $750.   You would have to pick them up and move them to a nicer area and add A/B amenities like playgrounds and swimming pools.

Will Barnard · Answer

%15k per unit goes a long way. For such a price, you should be able to paint, new flooring, new bathroom (full get and rehab), and new kicthen with money left over for common area items like plumbing, roofs, mechanicals, etc.

As for your numbers, you are correct that by improving the NOI, you improve the value. So if your exit plan is to rehab, stabalize, increase NOI, then sell, you may have something here.

Jonathan Sowinski · Answer

Thanks for the input…I have done some market research and that is where I got the $750 number (I should probable limit my estimate to $700).  As I had mentioned the units in question have not had the proper management and it shows, both in the condition of the property as well as the tenants that are currently in there.  However, the location is great.  The other units that I have seen in the area were similar in size, age and amenities…they were just overall more aesthetically pleasing, slightly more updated and cleaner.

These units are 2/1 but still on the smaller side and super dated.  Two of the units had been remodeled in the past to combine the two BR into one larger BR and convert the DR into the 2nd BR while expanding the Kit into a pantry to make an EIK.  This layout seems to be more attractive in my opinion so that is the extreme case.

Obviously that is where we go from just making them “rent ready” to bringing them into a different value class.  The only problem with that is if we went to the extreme we would want to update the bath and kitchen as well and now we are talking $$$.   This scenario would also provide an opportunity to get to the remaining outdated mechanics and prevent the eminent emergency repairs on the 100+ yr old plumbing.  Preventative maintenance?

The hope would be that the updates (and higher rent) would ultimately also attract better quality tenants that would take a little more pride in where they lived limiting the overall wear and tear, less vacancy and longer lease periods.  Also possibly less overall “service calls” with the newer mechanics.  Is that just hopeful thinking?

Now we are getting into a looooooong term payback (>5 years).  But I have also read in other posts that the valuation in the increased rent would provide a much higher sale price if I wanted to sell near term.

@ $525 = $25,000 (NOI) X 10 (cap) =  $250,000 (existing value)
@ $750 = $47,000 (NOI) x 10 (cap) = $470,000 (future value)

So with those #s if the renovation cost is $15,000 per unit I could still potentially bring in ~$65k after sale fees?  It would just be hard to keep the cost per unit to <$15k.

Thoughts?

Rick Madden · Answer

I would tour similar apts in the area and take pictures and if you have a contractor to go with you that would be helpful as well. You can go as a prospective buyer, get a feel for what the market is offering and when you renovate bring it up to the market equivalent.

Will Barnard · Answer

Jon gave some solid advice. Typically, you can do a full make-ready on an apartment unit for $3k. You would have to get $125 per door more just to break even after 2 years. Now, typically, when buying an apartment complex that is in bad condition, a buyer must account for having to do these make-readies just to get the unit rentable. If that is not the case in your situation, then spend as little as possible while performing some due diligence as Jon suggested. Offer better quality at same price. 
Remember that apartment dwellers are typically going to ruin the unit over time so using some durable items will help your longevity of the unit.

Fixer-Uppers...how nice to make them?

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