Unrenovated/outdated vs. Renovated unit rents?

[Paul Hormann]

I have a 7-unit apartment building in Maryland, just north of DC and I've been slowly renovating the outdated units as tenants move out. The apartments haven't been updated in maybe 30-40 years and still have stoves with pilot lights, but are still perfectly livable. The renovated units look great with all new stainless steel appliances, new kitchens, bathrooms, new flooring, etc., and I am increasing the rents by about 30% of what I was getting (may even be able to get more, since the current rents are below market and haven't been raised in 10 years). However, the renovation cost is getting pricey and I have some long-term tenants that really want to stay in the building. I'm trying to figure out what I can raise their rents to without renovating their units (or just minor upgrades) where it would be worth it for me to let them stay. I will be looking to potentially sell the building in the next few years and want to get the NOI as high as possible, but am unsure if a $50-100/mo rent increase would justify a $14k renovation per unit.

Can anyone comment on the differences in rents you're seeing between renovated units and unrenovated/outdated units with everything else being the same?

[Marcia Maynard]

As a landlord, you have a chance to make a positive difference in the lives of other people, as well as improve your financial position.

It's possible to enjoy positive cash flow and still keep good long-term tenants in their homes without raising rents above the level of affordability.

It's a stark reality that many fixed-income folks are finding themselves unable to stay in their homes because of real estate investors who focus on profit over people. So, I applaud you in looking at what it would take to keep your long-term tenants in place and still meet your financial needs.

We've been in the same position as you with our 8-plex, which was run down when we purchased it 10 years ago. We first focused on catching up with deferred maintenance and safety improvements, without raising rent. 

Then we began doing functional and cosmetic improvements. We've been able to raise our rents by $30 - $60 at a time, without any problem. As long as we're a bit under market, our outdated, clean, functional, units readily rent. We're able to keep up with our expenses and still keep our units affordable. We don't need to raise our rents every year. We've never raised rent by more than 10% and rarely at that.

Happy tenants, happy landlord. Our tenants don't need and don't want stainless steel appliances. Our tenants are fine with clean and functional apartments, even if they're a bit outdated. We enjoy fewer turnovers, which saves us loads of money. Our longest term tenants are at 28 years and 24 years and counting. Most stay 5 - 10 years.

A few years ago we were turning over two units at the same time. One had the original avocado green kitchen counter tops from the 1970s. They were in perfect condition, so we kept them. The other apartment had updated off-white counter tops. The new tenant chose the apartment with the 1970s retro green over the more updated apartment. The rent was the same. This surprised us, until we overheard the teenage daughter say to her mom that the green was "cool". Guess everything old becomes new again!

My advice, don't over-improve. Keep an eye on your cash-flow. You will do fine and your tenants will be happy!