In a downturn, spending thousands of dollars renovating your units may not seem to make economic sense, as prospects become more cost-conscious, and you may not be able to generate much additional rent for the unit. For that reason, many owners halt all upgrade programs in a downturn. However, this can be a mistake.
During times of economic stress and rising vacancy, there is a flight to value. In some cases, this means people move up from Class B properties to Class A, now that the rents have come down to a range they can afford. For others, it means moving from a lower-quality area to a more desirable area. In any case, there will be much more choice from prospects as to where they live. And they will seek out the best value for themselves. This doesn’t necessarily mean the lowest cost. However, there is a focus on cost and you will have to give them more for their money or risk losing them.
Sometimes renovating your property is necessary to protect yourself from tenant flight. The cost of a vacant unit, sitting for months, can often impact your bottom line more than the cost of creating a desirable upgraded unit that rents quickly. Also, if you are planning to hold the property for a long time, there may be reasons it makes sense to renovate now but defer receiving the bulk of the rent increase benefit until later. In either case, you are playing defense.
Given the need to keep your cash flow positive, and the limited ability to boost rents in a soft market, what areas should you focus on? Let’s explore some of these areas where you can affordably add value.
Focus on Amenities your Tenants Want.
What are some of the things residents want now? The desire for a washer/dryer in the unit vs. using a laundry room is a top seller. Another winner is outdoor space. If you have a balcony, patio, or access to outdoor space, try to maximize its potential.
We owned a building that had a 10-foot-wide alley that ran behind it. This strip of land was the required legal setback from the property line when the apartment community was originally built. The apartment bedrooms all had windows looking out to this useless alleyway. We replaced one window in each apartment’s master bedroom with a glass door. We then built fencing between each unit connecting the building to the property line wall. Each ground-floor apartment now had its own private patio deck and small yard which allowed us to increase the rent we could ask. Even better, units that had previously sat unrented, rented quickly and for a premium now that they had a private backyard.
Whether focusing on your apartments or the common area, you want to think about the amenities residents are looking for today. For example, working from home is a big trend now. So, you need to assume each apartment will also be used as a home office. If you’re going to spend some money upgrading, make sure there are enough outlets in each unit for computers, printers, etc. and make sure your cable or other service provider can handle faster internet speeds. Extra cabinet space and storage space are always in demand as well.
Differentiate Your Property.
All property exists in a competitive environment. You must always be asking yourself ‘why would someone choose my property over the competition?’ Some of the areas to focus on include:
What would make your apartments memorable? Can you add some feature to your units that your market wants and is not finding elsewhere? Perhaps it is a fully decked-out closet with drawers and organizers inside. Maybe it is a technology upgrade not common in your price range such as smart access control or lighting that can be controlled via a smartphone.
One way to get more out of your upgrade dollar is to spend it creating something special in the common area. Spending $2,000 renovating a unit interior might not get you much upside in rent, but if you have a 30-unit building, $2,000 per unit gives you $60,000 to work with – and you can do a lot in the common area with that. Areas to focus on might be creating an upgraded grill area or outdoor lounge. If you have a more urban property, perhaps a nice roof deck will give your building a little more sex appeal.
Within the property, you can also differentiate some of your apartments. No rule states all of your 2-bedroom units need to be approximately the same price. Even within an apartment building or community, all real estate is unique. This can lead to having different upgrade levels.
We once managed a property that was 18 stories high. We renovated the top floor (we called it the penthouse level even though it was no different than the other floors) with higher-quality finishes. We were able to get nearly $300 per unit more for those apartments (about 15% more) because people were willing to pay for the ‘penthouse’ cache – even though the unit sizes and floor plans were no different than those on the lower floors.
In garden-style units, we’ve had buildings where the lower floor would rent for more because it came with a large patio. We had others where the higher floor rented for more because no one lived above them or because there was a slight view from the deck. If you’ve owned your property for a while, look for trends. Do certain locations or types of units tend to turn over more frequently? What can you do to make these least desirable units more stable?
Conversely, you can look at the more stable units, see where you can gain a few dollars, and then perhaps play that feature up even more. Small increases due to the different ‘unique features’ of each unit add up across the entire property.
Exceed Resident Expectations.
When deciding what to put into a unit, here is the key factor: Focus on the user experience. Apple created high demand for its Iphones by focusing on the small items that would make the user experience better. In the same way, you should think about what would make your residents’ lives a little easier and how can you make their experience better.
Think Convenience to the resident. Is parking important? Perhaps create some premium VIP parking (and charge extra for it). Need more storage? This can be a good source of extra revenue. If you can provide conveniences to your residents and potential residents, you can lease quicker, retain existing residents longer, and perhaps get a little extra revenue as well.
Provide ‘one step better’ items. If in your price point, residents expect a certain level of appliances or fixtures, think about buying the next level up. It will only cost you a few hundred dollars more, but you will get that money back in a quicker rental, and potentially higher rent (or at least not having to drop your rent as much). I have found this usually pays for itself quickly.
Focus on services as differentiators. Unlike physical upgrades, services your residents want do not cost a lot to implement. Whether it be making pets a priority at your community, holding events that aid in the creation of friendships at your community (like game nights, wine tastings, and barbeques), or focusing on wellness classes, there is a lot of opportunity to provide residents with experiences that will improve their quality of life, create friendships and bonds to the community, and increase the likelihood of lease renewal.
Play the Long Game.
Cash flow is #1. If you can ride out a downturn, you will be fine.
But you will need to be active. You need to decide now whether you should upgrade, and what you should upgrade, to maintain your occupancy, rents, and property value. Markets will come back. Don’t be short-sighted and stop all improvements just because there does not appear to be an instant payback.
There is an old proverb that goes “The best time to plant a tree was 20 years ago. The second best time is now”. Multifamily is similar. The best way to protect yourself from the impact of an economic downturn would have been to make your property more desirable to your prospective and existing residents. But, if you haven’t done that yet, the second best time may be now.
