Ideas to Avoid Overspending When Renovating Your Multifamily Deals

Capital Expenses, or CapEx, is money spent to improve or maintain your property.

A common mistake many real estate investors and syndicators make when renovating a property is to overspend on CapEx. Specifically, they spend cash on upgrades and improvements that may look nice in or on the property, but will not yield more rent because of the overall location or how much rent you're able to pull in.

I see many investors get caught up installing granite counter-tops, stainless steels appliances, wood flooring, and other custom features. You may need to do this for a Class A property, but with Class B properties, it may not be needed. When you're planning on spending thousands per door, you will need some serious rent growth to get a decent ROI. Do you know if can you bump rents with those finishes in a B or B- property?

Other things to consider in your budget are the increased vacancy loss due to increased turn times to complete the renovations and overhead costs related to managing, planning, and inspecting the work. For large projects, you also need to consider the cost of the disruption the renovation causes elsewhere on the property.

For example, will you need to reduce rents on all or some of the unrenovated units to make up for the inconvenience the new residents will put up with, or will you need to reduce your exceptions on renewals while your crews are working on the renovations?

These are some low-cost upgrades that often have more bang for their buck because of how noticeable they are:

1. Entryways: If you put down a small area of ceramic tile at the door, it not only makes a good impression, but it also provides the tenant to remove their shoes before walking on the carpet.

2. Bathrooms and kitchens are what move units. Consider some low-cost options like kitchen back-splashes as may get noticed even before the flooring does. Most apartments units have short wall spaces making it a low cost for a high impact.

3. Simple touches like wall plates are cheap and easy. A new faucet and cabinet handles are much less expensive than new appliances and can really spruce up the look of the bath and kitchen.

4. Something as simple as a curved shower bar like what you see at your nicer hotels makes for way more improved resident comfort at very low cost.

What I'm saying in to test and measure your upgrades depending on your asset class and location.

Here is a guideline you can use when modeling your CapEx budget: Understand the financial impact of the capital improvements that you add to a property. Don't improve a property without knowing the financial benefit those CapEx expenses will generate for you. The standard for larger multifamily says that your CapEx should pay for itself in 5 years or less. This means that every time you underwrite a property that needs some renovation or repairs, you need to determine the financial benefit you will get as a result of the CapEx you plan on spending. When you figure it out, make certain to document how it will perform as your partners and the bank will ask. Better yet, you can include your due diligence in your proforma plan once you assume control of the property.
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