How to Capitalize on Capital Improvements at Multifamily Properties
By making the right capital improvements, property managers can increase the value of their properties and create a more attractive environment for tenants.
Maximizing property value and increasing revenue are two of every property manager’s key objectives. And while it might sound expensive to launch a capital improvement project, or several capital improvement projects at your property, with careful planning and oversight the results could be worth it.
Overall, consumers pay more for upgraded properties because they offer enhanced quality, modern amenities, improved aesthetics, energy efficiency, better functionality, and in some cases, a sense of prestige. These factors contribute to a higher perceived value and desirability of the property, justifying a higher price in the market.
Sherry Yarborough, director of multifamily management with Drucker + Falk, AMO, says “Investing in improvements at an older property allows for the opportunity to provide an upgraded unit at a more reasonable price point than newer developments that have been added to the market over the past few years. We’re focusing primarily on upgrading unit interior finishes because that’s where we see the biggest return on investment.”
Yarborough’s team spends roughly $16,000–$20,000 per unit on new countertops, stainless steel appliances, vinyl plank flooring, hardware, lighting, and cabinets. Returns on their investments have been between 12% and 20% due to the increased rental rates they’re achieving, as renters are willing to pay a premium to live in an upgraded unit.
Where to start?
There are countless ways for property managers to make capital improvements to their properties—improvements that increase value and attractiveness to residents. Some of the most common improvements to build NOI include:
Enhancing interiors. Investing in interior upgrades like new flooring, countertops, appliances, lighting fixtures, and hardware can significantly improve the appeal of the property to tenants. Cosmetic changes to modern and desirable finishes can command higher rental rates, and attract tenants who are willing to pay a premium for upgraded units.
Improving energy efficiency. Employing sustainability measures is front and center for property managers around the world. Implementing energy-efficient efforts not only reduces operating costs, but also appeals to tenants who are increasingly conscious of environmental sustainability. The 2022 AMLI Sustainable Living Index reported that 88% of residents surveyed are concerned about climate change, and 43% said green features factored into their decision to live in specific apartment communities.
Property owners can invest in energy-efficient appliances, LED lighting, smart thermostats, low-flow plumbing fixtures, and other green technologies to enhance the property’s energy efficiency and reduce utility expenses.
If residents pay for their own electricity, solar power can reduce costs. These savings can be reflected in higher monthly rent. And, if electricity is included in your residents’ rent, installing solar can reduce your monthly operating costs. Solar panels produce electricity for more than 25 years, so installing them can help maximize NOI for your property. Even if you choose a solar lease, you can see savings.
Upgrading common areas and amenities. Creating attractive and functional common areas and amenities can significantly improve the overall value and attractiveness of a property. This can include upgrading lobbies and fitness centers, building green spaces, allowing more natural light to enter common areas, and creating shared workspaces. Providing amenities that promote health and wellness, such as air purification systems, outdoor exercise areas, or bike storage facilities can also be appealing to tenants.
More recently, renters started seeking flexible floor plans, such as turning a home office into a gym or a bedroom. Kitchen pantries are also becoming more popular to save time and reduce shopping trips. In addition, buildings that use natural ventilation and air purification systems are trending since the pandemic.
Increasing safety and security. These days no one can be too careful. Increased gun violence, mental illness and social unrest make us all targets, at home and everywhere else. Capital improvements that enhance safety and security are highly valued by tenants. Property managers can invest in installing security cameras, access control systems, adequate lighting in parking areas, and secure entryways to support a safe living or working environment.
Applying technology. Incorporating technology into a property enhances the tenant experience and attracts tech-savvy tenants. In fact, many consumers expect these amenities at every property. Property managers can invest in high-speed internet connectivity, smart home features, and mobile apps for communication, maintenance requests, and even local restaurant recommendations. With the surge in electric vehicles, consumers also expect buildings to be equipped with charging stations that charge their vehicles quickly.
Property managers should consider capital improvements now because investing in the enhancement and modernization of properties not only increases their value and attractiveness to tenants, but also positions them for long-term success in a competitive market. In a rapidly evolving industry, staying proactive and forward-thinking through capital improvements is the key to staying ahead and unlocking the full potential of a property.
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What are the drawbacks of making capital improvements?
While making capital improvements to properties offers numerous benefits, real estate managers should also be aware of potential drawbacks. Before launching an expensive and time-consuming project, consider the following:
Upfront costs. Capital improvements often require a significant upfront investment. Property managers must consider the financial implications of undertaking such projects, including the availability of funds and the potential impact on cash flow. Talk to your service providers and finance team to analyze the expected return on investment.
Disruption. Depending on the scope of the project, the construction or renovation process can cause disruptions to tenants and ongoing operations. Noise, dust, restricted access to certain areas, and temporary inconveniences can impact tenant satisfaction and potentially lead to turnover during the construction period.
Uncertainty of ROI. While capital improvements have the potential to increase rental income and property value, there’s no guarantee. Market conditions, changes in tenant preferences, and other factors can affect the success and profitability of improvements. Property managers should conduct thorough market research and feasibility studies to assess potential risks and rewards.
Extended timelines. Capital improvement projects take time to plan, execute, and complete. They also inevitably include delays—delays in obtaining permits, sourcing materials, or unforeseen construction issues. The longer the project takes, the longer the property may be unavailable for full occupancy or generating optimal rental income.
Regulatory and compliance risks. Property managers are well aware of regulations and compliance locally, at the state and national level. Capital improvements must comply with building codes, zoning regulations, and other legal requirements. Failure to meet these obligations can result in fines, delays, and additional expenses.
It’s important for real estate managers to conduct thorough cost-benefit analyses, consider market conditions, and carefully evaluate the potential risks before embarking on capital improvement projects. Strategic planning, market research, and ongoing assessment are key to mitigating the drawbacks and maximizing the benefits of such investments.
Actively seek and consider tenant feedback to understand needs and preferences. Regularly communicating with tenants, vendors, suppliers and employees by conducting surveys can provide valuable insights into areas where capital improvements can be made to enhance overall satisfaction and attract new tenants.
By making the right capital improvements, property managers can increase the value of their properties and create a more attractive environment for tenants, leading to higher occupancy rates, increased rental income, and overall economic success.
Source: Wealth Management