What‘s your ecpected ROI on renovations?

Question

My colleague suggested the following as a loose rule of thumb for ROI expectations on general upgrades:

Ex:

For $100 rent increase:

$100x12 mos= $1200

$1200/20% (ROI)=$6000

Conclusion: $6000/door = $100 rent bump

Do you agree/disagree? I’m sure this is a pretty general ROT and will depend on your market and what upgrades you’re doing?

Always appreciate any input!

Todd Dexheimer · Answer

There are 2 basic types of investors:

1. The owner that never upgrades or only does so when the rents fall way below market

2. The owner that constantly upgrades to keep up with market rent. We do this and are able to stay competitive in the market.

This sometimes can get out of wack if a market gentrifies and you now need A class finishes, but usually if you change paint colors, etc when a unit turns, you will stay with the market without needing a major rehab

Spencer Gray · Answer

If you are achieving or exceeding market rate rents then why are repairs necessary? Have you already created value or did you buy with no upside left? If the market is so hot then why not sell and buy an asset where you can force value?

Max T. · Answer

No can do when you’re already at the top of the market. There’s only so much a person will pay for a 2 bedroom apartment. Doesn’t matter how nice the tiles are. And when your competition all have really nice time, you better have it too or your rents will drop!

Spencer Gray · Answer

@Max T. you should! The point is to force appreciation by raising rents.

Greg Dickerson · Answer

That’s one way to look at it. For larger  multifamily it’s all about CAP rate and IRR so the real question is how does the $1200 affect the NOI?

Max T. · Answer

I generally don't get rent increases from upgrades. But they keep me competitive to market.

Pat L. · Answer

Not at all we've done many & the last one (2017) was a a $2500 rehab with a new kitchen, scratch & dent appliances & a new shower stall base ($50) & .49cent/tile for the surround (we got the tile at an auction). The rent went from $625 to $850/month.

One of our best was a $6000 rehab on a large unit that had been vacant for 2 years. After closing on the property I split it into 2 units by adding a kitchen in one by opening up a closet & mudroom. Rents are now $950/side.

Another was rehabbed by 'necessity'. My daughter wanted a new kitchen in her home & her 5 year old cabinets were just too nice to toss. So we evicted an inherited, difficult tenant & updated the unit with my daughters old kitchen cabinets. Added new scratch & dent appliances $700, vinyl flooring (same auction), installed a new bath tub ($100) & tiled the surround (same .49cent tile). Rent went from $575 to $825.

Admittedly my wife & I do all the work ourselves, its a bonding thing!

Here's the kitchen we put in an old closet & mud room..

John Corey · Answer

Brian, how loose is loose? Are you using the calculation as a quick screening criterion (sort the dead ends from the maybes)?Lots of factors will come into play. I would be careful about any rule of thumb when preparing an offer. The devil is in the detail. And I would be very clear on plans B, C, and D. In case you find out that numbers from plan A do not play out as expected.

Bjorn Ahlblad · Answer

Interesting  thoughts. Upgrades are very different from sprucing up the basics and I think it also depends on where you are relative to market. As an example I did flooring and paint but it included removing a carpet like material from the kitchen and bathroom floor and replacing that with linoleum. Spent about 3500 each unit-I saw it as maintenance; however I was able to rent the units that received this treatment for 175/mo more from the new tenants. Partly because the previous rents were a little below market; but also because the units are that much more desirable with new materials. We have done this to 4 units with the same result each time. People's tastes change-perhaps it is marketing-people used to like carpeted floors today they want vinyl plank. So when I think it is just maintenance in the tenant's eyes it may be better because it follows today's trend.

I think as long as you do not over improve you will get a return. Over improving is just money down the toilet.