Return on apartment unit cap ex

[Arn Cenedella]

I would like input on the following question:

As an apartment investor, if you were to spend $5,000 on upgrading an apartment unit.....

How much of a rent increase is needed to provide your required return on investment of Cap Ex?

In case it matters in the analysis, assume market rent is say $900 to $1000 a month.

I am very interested to see what people think.

Thanks in advance.

[Mitch Messer]

Originally posted by @Arn Cenedella:

@Mitch Messer

NOI currently $50,000+-.

Cash on cash about 5%.

Got it! Also, I neglected to ask you how many units are in the apartment complex, but let's work with what we have.

So, if you wanted to maintain your existing CoCR, you'd have to increase total rents so that the new CoCR ((NOI + Rent_Increase)/(Investment + Cap_Ex)) equals the old CoCR (NOI/Investment).

I'm assuming there's no debt service payment and I'm also ignoring the fact than increasing rent would also increase management expense if your fee is a percentage of rent.

When I solve this, I calculate that you've got to increase total rents by $1,250, so for a 10-plex that would mean raising rents $125/mo per unit.

If your current rents are under $1K, this seems harsh to do in a single year, but a very reasonable raise over a 2-year period.