How to Add Value to Your Multifamily Property

Multifamily apartment complexes are red-hot in commercial real estate. Obtaining a multifamily asset is a great way to build an investor’s portfolio, generate cash flow, forge partnerships, and allocate capital long-term. An important aspect of running a lucrative property is finding ways to add value. Maximizing a multifamily property can be challenging given legislative hurdles, tenant issues, and the rising cost of construction. Savvy investors have a comprehensive understanding of their return on cost when looking to maximize their investment dollar values to achieving the highest level of profitability. In order to achieve this metric, a property owner must minimize time and costs associated with renovations and value-add strategies.

Ways to Maximize Value:

1. Increase Curb Appeal

Looks matter, so making the building appealing to renters is one of the most important steps. Ensuring the property looks good upon drive up and having new photos of the property taken is the most efficient way to draw in new renters and attract buyers when it’s time to sell. There are several ways to ensure that your property is easy on the eyes in a cost-effective way.

• Paint: A new paint job on exterior and interior units is an easy way to freshen up a property. However, there are times when it is not a good idea to paint, such as using paint as a cosmetic fix to an underlying issue like water damage.
• Clean up the grounds: ensure that the landscaping is free of weeds or loose branches. An outdoor area can easily be ruined by debris and weeds. No one wants that.

2. Renovate Interior Units:

• Update cabinetry: Instead of completely tearing down a kitchen, little fixes can be made that will improve the room and keep it up to date. One change that can be made is to reface the cabinets through complete removal or staining. Another easy fix is to remove old knobs and drawer-pulls and replace with new ones.
  • The average cost to install new kitchen cabinets is $5,524, while staining costs an average of $0.57 per square foot.
• Add new lighting: Replace old fixtures with new, brighter models to open the space. Having plenty of bright lights can modernize the room and make it more welcoming.
  • Installation per new ceiling light depends on the fixture of choice, but on average it costs $165 per ceiling light to hire an electrician, on top of the cost of the fixture of choice.
• Tile: If the bathroom or kitchen tile is outdated and dingy, there are many options you can take to improve the look and quality. One is to regrout the tile, removing old and dirty-looking grout between tiles. Another option is to install new tile to brighten up the space and make the room more inviting. New tile will make the room more modern, showing potential buyers that you have been caring for and maintaining the space.
  • The average cost to install new tile is $10-$15 per square foot for porcelain or ceramic tile. Regrouting tile costs an average of $1.13 per square foot.
• Carpets: If your apartment units have carpeting, it is key to thoroughly clean the units or install new carpeting. Over time, carpets get stained, worn through, and become outdated, so it is essential to remove worn-out carpeting where it is needed and deep clean wherever you can.
  • The average cost to install new carpet is approximately $1-$4 per square foot.
• Outlets, Switches, and Plates: Older apartment units tend to have yellow-tinted, painted over, or outdated shapes and styles. Replacing old plates with new models is an easy way to modernize the space.
  • Replacing a light switch costs between $50-$150.

3. Complete Research and Compile Data

• Value of vacant versus occupied units: Knowing the ins and outs of your building’s occupants adds extreme value. It is key to know that occupied units provide cash flow and stability, while vacant units allow the property’s owner to make their own lease and ensure proper tenant screening.
• Research the market: It is important to know the market rents in your property’s neighborhood so that you are pricing accordingly. Look at recent listings, sales, unit sizes, and conditions in your area or neighboring areas to gauge a fair asking rent price.
• Analyze the return on investment: use the 1 percent rule that states a property’s monthly rent must be at least 1 percent of its purchase price to break even, and 2 percent rule to make a profit.
• Buyouts: Understand the lease buyout clauses already put in place in occupied units, and when implementing new leases.
• Organize paperwork: Make sure to have a copy of the rental agreements, rent increase notices, service contracts, on-site manager agreements, and any other written agreements to back up your P&L statement. It’s also important to have record of previous bills.

Client Success Story: 5-Unit Complex E Broadway, Long Beach, CA

Matthews™ assisted in the sale of a 5-unit multifamily building in Long Beach, CA for $1.9M or $280,000 per unit at just under a three percent cap rate. Over the past three years, the owners completed high-end remodels such as new hardwood flooring, granite countertops, refaced cabinets, interior and exterior paint, dishwashers, washer/dryers, ceiling fans, and light fixtures. In total the owner’s renovations costed about $500,000, improving both the interior, exterior, and landscaping value of the property by 35 percent. The property is now on the market for $3.3M with a 3.6 percent cap rate. The renovations attributed to a 74 percent increase in the property’s final list price.

Knowing Your Money Pits:

When investing in a multifamily building or complex, it is crucial to understand the money pits, so you know how your return on cost will be affected. Plumbing, electrical, roof, and building structure are all renovations that cost money, but do not directly contribute to higher rents from tenants. These costs can add up and make a seemingly great deal become a poor investment choice. This is where hiring an expert comes into play.

When bringing inspectors and contractors to a building, they should observe:

• Walls: cracks, structural holes, evidence of water leaks
• HVAC: What is the age, replacement costs, typical lifetime of the unit
• Roof: Leaks, Recent Replacements, Maintenance, Installation date, Spray or Rubber coated
• Electrical Meters and Voltage: Cotton wiring, Voltage output, Past Issues, Tenant complaints
• Plumbing: Copper or Galvanized, Mixed, PVC

Note: These costs are required to run a functioning rentable apartment but don’t lead to higher rents. In addition, it is crucial to comprehend deferred maintenance issues to recognize if an apartment will make sense to own and add-value to, or not.

Conclusion

The supply and demand of multifamily properties directly affects the value of your building, which is why increasing its value is crucial to long-term financial success and profitability.