Apartment Building Upgrades = Increase Value?...Not Always

[Clint Williams]

So should you update or upgrade your apartment building to get ready for sale? This is a can be a tricky decision to make because there are several factors involved. If you just want your building to look pretty again then its just a personal decision. BUT If you want to increase the value here are some questions to ask yourself....

1. First and foremost what kind of upgrades are we talking about? Curb appeal, mechanical systems, or actual unit upgrades?...Mechanical system upgrades are not noticeable and usually only increase value when the upgrades are more efficient and will decrease your expense cost. They are usually your highest cap ex so I recommend only upgrade these as necessary.  So focusing on curb appeal and actual unit upgrades...

2.Does your building have low occupancy?.... If so then this might be an easy decision, if you know by upgrading your building you can drive up your occupancy then definitely it's your only choice.

3.If occupancy is not a problem can your upgrades increase your rents?... So every tenant wants new appliances, new cabinets, new flooring, etc but if your rents are already at market levels then this would not be beneficial to you. You need to increase NOI to justify upgrades so if not your rents it needs to come from somewhere.

4. Can your upgrades change your selling cap rate?... So can your upgrades change the grade of your property from maybe a "D" to "C" or "C" to "B" then this could affect your selling cap rate not always. There are many factors within your market that will help with this decision.

 A little story about a specific property that spurred me to post this.... We were negotiating on a 35 unit building they were asking about 1mm. He had purchased the property 3 years earlier for 750k. They then proceeded to sink 250k into upgrades. 

After evaluating the financial analysis we came to the conclusion that this property was still worth closer to the original purchase of 750k. Because we are local to the property I knew that is has always maintained a very high occupancy but just totally outdated and not very physically attractive. We knew it was its location that kept it 94% rented and rents close to market rates.

The Broker said that he would not budge on price because he has spent 250k upgrading it to make it nice. He just could not realize that it would not be worth at least that much more. He had been used to flipping houses the broker told me and thought this would work much the same way.

In the end his upgrades did not increase the value so please take time to evaluate the  upgrade plan to your apartment buildings because we know its not the same as upgrading a house.

Please share any other factors to look for so we can all learn. Thanks

Clint Williams