I recently purchased a C class property in a C- to D neighborhood in Austin Texas. After takeover I had a list of the rehab and remodel projects to be done and got started right away. I repaved and striped the parking lot, replastered the pool and brought it to code, rehabbed the laundry room and changed all of the exterior common area light to LEDs.
Now that most of the exterior items had been addressed it was time to begin testing our unit upgrade program. My plan called for spending roughly $3,200 per unit and achieving a $75/unit premium in rent, this would reflect a 28.15% ROI or about a 3.5 year pay back on the investment.
After proving the concept on a few units I got to thinking, what else could I do to increase the value. After a bit of thought I decided I was going to offer upgraded granite countertops as the next test. The thought was to spend aim for a $50 premium for the better countertops.
Don’t Let Others Talk You Out of It
Many of my friends that were also multifamily owners told me that “you can’t do granite in the hood!?” WHY NOT?? No one, that I knew at least, had ever done it because conventional wisdom said that the residents in the submarket would never go for it. That was for B class properties or higher, they said. Never one to blindly follow dogmatic answers or thoughts, I was going to try. Worst case, it wouldn’t work and I would be out a few dollars for the test.
How did it go?
This property was primarily 650 square foot one bedroom / one bath units so that’s what I started with. I found a company locally that would demo as well as provide and install the countertops for$1,750 per unit (kitchen and bathroom). Doing the math that comes out to a 34.29% ROI. My required ROI to move forward with a project is 20% so it was a go for the test.
Two weeks later the job was complete and the make-ready was finished and ready for marketing. I told the staff that $50 was the goal but if they had to they were free to drop to $30 to preserve my 20% requirement.
After another few weeks of tours they did indeed lease it for the full $50 ask, fantastic!!
Are You Looking At The Whole Picture
This in itself was a success but as I dug a little deeper into the numbers I found the effective cost, versus the upfront cost, was only $1,350. Why the difference? By installing granite which is a much tougher material than laminate or formica, it reduced the need to resurface the unit on every turn (yes we averaged resurfacing the laminate tops every time we had a move-out as the tenant base was really rough on this property).
Each time we resurfaced the 1br units we were spending about $200. Industry average unit turnover is 50-55% (50% of your property will have a move-out annually). So, for each five year period you would turn the unit 2.5x but for easy math and conservatism we will assume 2 turns every 5 years. By taking the savings on the resurfacing into account you subtract $400 from your $1750 initial cost to come up with an effective cost of $1,350. Now take the $50 premium which is $600 per year and divide it by the effective cost and you have a 44.44% ROI. Not bad for a project that would never work in the “hood”!
While the $600 per year doesn’t seem like much, if you roll your proven test out to just 24 units you now have $14,400 per year in added income which results in a $240,000 bump in value using a 6 CAP.
Bottom line here, don’t do or not do something because others say you can’t. Always do your research and test before moving full steam ahead but as an entrepreneur we need to always be thinking outside the box and challenging conventional wisdom. If I had listened to those telling me how and why it wouldn’ work I would have lost out on the adding return on our investment.
WANT YOUR OWN COPY OF MY BOOK ?
Known in the real estate world as the Apt-Guy℠, Bruce Petersen is a serial syndicator who started with a 48-unit building and has now syndicated over 1,100 units. As the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce also mentors people on how to invest in apartment complexes.
