What ROI do you look for in upgrade decision?

Question

I am looking for input on what other experienced apartment investors look for when making upgrade decisions. In other words, when you're considering investing in some kind of additional expense, how quickly do you want the upgraded items to pay for themselves in increased rents? I've talked to people that won't do it if it doesn't pay for itself in one year, and others who say three years. Obviously its a personal or organizational thing, but I'd love to hear the thought process others use.

As an example, I'm dealing with units that have some pretty bad kitchen and bath cabinets. In some cases they're still functional, but the doors don't close right, they've got 10 coats of paint on the hinges, etc. New ones are about $800-1000, which would take a long time to pay for themselves if I get $25 more rent. On the other hand, I've got a much nicer product that looks great when its time to sell, and makes for a quicker unit turn due to not needing paint.

Many items we're replacing are much less expensive, but I still have a tough time figuring out if they're worth doing. New lights, faucets, bathroom fixtures, etc. We're increasing rents quite a bit, but they rent so fast that I don't think the upgrades have much to do with it.

As always, thanks for any input!!

Tom Lafferty · Answer

I guess all situations have different factors to consider. Ours is completely full all the time, upgraded or not, so it's a matter of what it does to rents. I do factor in keeping tenants longer as well. Can't really measure that, but if we take care of the tenants, and are a little nicer than the neighboring properties without going overboard, it seems like it would matter. We'll probably sell in five years, and if the cap rate is similar then to what it is now, that $50 in rent adds $7500 in value. Multiply that by 32 units. That's the logic I've been using, but wanted to hear other views, so thanks!

Ben Leybovich · Answer

Some items create higher top-line numbers - gross potential. Other items improve desirability and thus lower vacancy and result in lower turn costs, thus resulting in lower economic loss and higher effective income. Many times, however, you'll get nothing in return - function of what you have and characteristics of the marketplace...In other words, while a bathroom should make sense, in some locations you can put gold-plated toilets and nobody will choose to live there anyway...get what I'm saying?

Bryan N. · Answer

I don't own apartments but my father does in CA. He does the kitchen/baths (when they are really outdated) and adds ceiling fans. He increases rents and retains better quality people longer. He also cases in the windows with wood trim. He said he found this really appealed to women and again got great results on increases and quality of tenants for a low investment cost.

Wade Sikkink · Answer

@Tom Lafferty I tend to think of those kind of things in terms of vacancy. For example, if putting new cabinets in reduces the vacancy in the unit by 1 month, then they are likely a good investment.We own a 14 unit building that has been neglected. We knew going in that we were going to have to spend about 2 years stabilizing the building. We are about 14 months into it and have turned over about half the units. On most, we do pretty much a full gut with the exception of cabinets and appliances that work. Our cabinets are original to the building (1973) but are in decent shape. They have never been painted and I just shore up any weak or broken areas. We haven't been replacing them yet because I don't think it will matter to my vacancy question. They work and don't look terrible, just dated.The other consideration is to resale. Our investment horizon is about 10 years or less. I'll either unload this property after my kids are out of college, or use it to trade up to something bigger. We are going to put new siding and soffits on the building this summer because it should help with resale. I'm pretty sure the siding that's on it now is original. Curb appeal matters when selling real estate.So that's how I tend to look at that stuff, not so much in terms of a hard ROI number, but in terms of vacancy and if it will meaningfully affect resale.

Casey Miles · Answer

It really depends on my cash on hand situation at the time as well as if I'm in a buying mode. If I have cash on hand and I'm not looking to buy any property in the next six months I'll generally make improvements with a 3 year or less ROI. If I'm tight on cash I don't do improvements unless the improvement needs to made just to get it rented which doesn't sound like it does.

Barton H. · Answer

I think bathrooms pay for themselves, but kitchens not as much.