A lot of people are getting involved in multifamilies these days, and that’s because multifamily investments can be very lucrative. The way that multifamilies are lucrative is in a value-add play.
A value-add play is where somebody buys a multi, and let’s say, the average rent per unit is $700. This price per unit isn’t bad, but maybe the market’s gone up, you’ve seen a lot of appreciation in rents, and maybe there are rundown, older apartments that could use a facelift—they haven’t been touched in 20 or 30 years.
So, you realize I can take that $700 up to $800 or $850. Think about that. A $150 bump per unit times however many units you have (let’s say, it’s 50) times 12 months, that adds up quick! That can be a very, very lucrative increase. And that rent increase flows back to your property value, making your property worth more.
$150 rent increase per unit x 50 units x 12 months = $90,000 increase in income
Some quick math: Say this property has a 7 percent cap rate, which is a correlation of the value of the property based on how much money the property makes after it pays expenses. If I divide that $90K by a 7 percent cap rate, it shows how much I’ve increased the property’s value.
$90,000 increase in income / 7% cap rate = $1.28 million property value increase
This post is not meant to be a numbers post though—it’s not a deep dive into numbers. What I’m showing you is why people who do value adds do it. It’s because you then increase the property value significantly. And they can recapture some of that through refinance or recapture that from a property sale—whatever that may look like—all by raising your rent 150 bucks.
Sounds pretty simple, right? But you’re going to have to create an environment where your tenants who are currently paying $700/month are going to be willing to pay you an extra $150. What you have to do is create a good value-add program. The question today is how do you do multifamily renovations without causing much tenant disruption? Well, it’s not easy. But it is possible.
Here are some value-add options.
How to Do Multifamily Value-Add Renovations Without Disrupting Tenants
This includes adding paint, flowers, shutters, etc. It’s giving a facelift to anything that’s outdated. Find ways to get more use out of common areas. Tenants will love that! They go to work, come home after, and the exterior’s been painted or you’ve built a playground for them or you’ve put some window shutters on. And if your apartment building has some common areas, meaning hallways and things like that, renovating those common areas is definitely something you can do without very much tenant disruption.
These are admittedly the most challenging renovations with tenants in place, but they are still very possible with the right plan and team. This type of renovation could include painting or replacing cabinets, new appliances, new floors, new kitchens, and new light or sink fixtures—just a general modernization facelift on an apartment.
Here are a few ways you can do that:
- Disturb tenants. Go to all your tenants and say, “Hey, we’re going to be asking you to move.” The strategy is to “kick them all out,” either by eviction, not renewing leases, or something else. So, then you’ll move everybody out, renovate the units, do a big bump on rents, and put new tenants in the property. Keep in mind that, with this strategy, you’ll have to be able to weather the storm of no one paying any rent during the renovation period.
- Roll out renovations. Start renovating units one by one in bite-sized chunks. You may have to incentivize in this instance. An incentive program might look like you going to 10 percent of your population at a time and saying, “Hey listen, we’re going to be renovating this unit. We’d like to offer you a full refund of your security deposit—no questions asked—if you’re going to be moving out.” Alternatively, you could offer a discount on the last month’s rent or pay them some money to get out. These are strategies to use if a property is fully occupied. But once you’ve done your first iteration of units, you can go to the next option.
- Move to renovated unit. Once some of the units have been renovated, you can offer tenants the opportunity to move into one of those. Ask the remaining population of renters to tour the new units. Ask them, “Aren’t they great? Wouldn’t you love to pay me this new rent amount?” Or if they need more incentive, discount them for the first few months. Sometimes landlords even mandate this move. Check with your local landlording laws. This has never worked for us.
- Menu option. Here’s how the menu option works: You give your tenants a menu-style list of upgrade options they can choose from. Let’s say a tenant’s lease is coming up. You can let the tenant know you’re going to ask for a small rent increase, but in exchange for it, I’m going to create a better unit for you. For $50 more a month, I will replace your appliances, change out your floors, change all your light and sink fixtures, give you washer/dryer hookups, install ceiling fans in the bedroom, etc. You could also offer them multiple menu items for a higher rent increase, but at some point, it’ll make more sense to just move into one of the new units.
So, the first option isn’t great, but sometimes it has to be done to get the value-add done. The other options are more so what I wanted to discuss here. We find that a hybrid of the last three is really what works best for us when renovating an apartment complex. It can even be a win-win for both you and the tenants who stay.