Remodel or buy additional?

5 Replies

Hi BP!

I'm considering remodeling my 10 unit apartment building in Minnesota.  Rents are currently affordable.  The building has been 100 percent occupied since we purchased it 2.5 years ago.  The units and common areas are definitely showing their age.

I'm wondering if anyone has advice in how to compare 2 options: Rehab the 10 units & common area, vs purchasing an additional rental home/duplex or quad.  I could put $100K toward either option.  I currently own 2 other quads and 2 other SFHs.

Some things I'm thinking about:

- Current tenants might like rehabbed units, but may not like higher rents.  

- I'd feel good about having nicer units.  Current units remind me of the 1980's. 

- Is one option better short vs long term?

How do I go about taking the emotion out of this decision and choosing the alternative that makes the most business sense?

I like having nice things, and tenants that put value on having nice things as well. I rarely ever have to replace things due to wear and tear or neglect. However, these are the same people that are 1-3 years away from owning their own homes; not the people who are perpetually renters. If you plan to hold long term, it's all market dependent. In a recently or mid gentrifying area, I'd probably buy low, fix, and sell after having all the numbers work. But if the area is stable then it only makes sense to replace with things that don't bump the rent too much.

I haven't yet had to do any extensive remodeling personally, but I can say confidently that it isn't always the best option even with aging units. For the exact reason you said—sometimes tenants won't like higher rent. A couple years ago one of my colleagues completed a huge remodel of several units that were mostly being rented to grad students / recent grads. He raised rent about 15% and they went unoccupied for almost a year—where previously even in an aging state they were renting themselves.

A remodel could be an awesome next move. Just make sure you understand the area and who you're renting to, and make sure it's what somebody wants, even if it's not the demographic you're renting to currently.

If you have 100% occupancy for 2.5 years then you are probably below market. You could increase your return just by bumping up rents as units turn over.

Mortgage rates are low and banks are lending. I would use this time to acquire more properties. Focus on cleanup when rates are bad or inventory is unavailable.

Rents are currently affordable and no vacancies for 2.5 years...Nathan is correct your rents are probably below market and should be raised.

In regards to your reno I would base my decision on whether the 100K expense would increase the value of the property by 100K.

Using your market cap rates applied to the potential rent increases does that equate to a 100K increase in value. 

If not then renovating is a definite no.

Thanks for your replies everyone!

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