When does a value-add a MF property make sense?

[Andrew Caldieraro]

Hi,

I'm curious what guidelines you follow to determine if adding value to a MF apartment makes sense?  For example, lets say that updating each unit can increase rents by $100/month.  What is the max that you'd spend doing these value add updates for it to make sense to get a $100 bump in rent?

[Bruce Petersen]

@Andrew Caldieraro

It's a simple formula but you have to first decide what your required return is. Many people will go forward if the money spent gets them a larger ROI than their current or projected COC return, others may decide they want 20% minimum return to justify the spend and time.

Once you have decided what your return threshold is you just run the numbers:

ROI = added revenue (annual) / cost of job

Let's say that after doing a detailed market survey you determine that you can get another $100/month but that it'll cost you 5k per unit upgraded. ROI = 1200 / 5000

ROI = 24%

Now that you know this is does it meet your threshold? If not keep working the numbers with new inputs until you get to where you need. You also back into it by taking the known ROI you require and multiply that by the spend, this will tell you how much you need in a rent bump to justify it.

Me personally, I use between 20-25% ROI as my threshold.

Another thought to this is if you can do this for 20 units and do secure the $100 rent bump then you just made the property worth 400k more assuming a 6 CAP or 300k if using an 8 CAP. this will help when time to sell or do a cash-out refi or supplemental loan.

Hope this helped.