HOW RENOVATIONS CAN MAXIMIZE VALUE
By Dino Nicosia, Broker of Record, Investpro Realty
Everyone at one time or another, has made the conscious effort to create "a good first impression" - a rule of thumb that is applied across many situations in life, from nailing that job interview to getting that second date. When it relates to real estate, I truly believe that the 'first impression is everything'.
Many landlords make the assumption that as long as their building is full and vacancy is not an issue, spending money on upgrades and improvements is fruitless, unless it absolutely necessary.
With this type of attitude, you can expect the following chain of events to unfold. As the building deteriorates, looks tired and outdated, good tenants will slowly begin to vacate. The landlord, in an attempt to quickly occupy the unit, keeps the rent the same and in some cases lowers the rent in order to keep the building full. He believes that reducing the rent will be less expensive than renovations. WRONG!!!!
Gradually, the good tenants will be replaced with an undesirable tenant profile. As a result, the landlord will begin experiencing the following issues on regular basis;
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NSF cheques
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Need to serve Notices for non-payment
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Noise complaints and late night parties
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Units and common areas damaged or vandalized
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Police calls for disturbance
In addition to the above problems the value of the property will depreciate substantially for two main reasons.
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As the landlord reduces his rent and expenses continue to rise, the net operating income (NOI) will decline, thus reducing the property's value.
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A unattractive and poorly maintained property combined with an undesirable tenant profile will be less attractive to Buyers as well as to Lenders.
EXAMPLE
The following is an extreme example nonetheless, it is a true story regarding a neglected property with a bleak future and how it was restored in less than six months with the value increasing exponentially.
This 13 unit apartment building was purchased for $405,000 by an "out of town" Buyer. At the time of purchase the property looked tired and worn, and as expected, was primarily occupied by undesirable tenants. The property manager, who was hired by the Buyer to operate the property, experienced all the problems related to an undesirable tenant profile. As any prudent property manager would do, he began to evict the tenants one by one to address the issues at hand.
Fast forward a year later. The property was now occupied by only two tenants. The rest of the units were vacant. The property manager could not attract good tenants to move in, therefore the units remained unoccupied.
The problem of course was that the manager did not adhere to the principle of 'the first impression is everything'. They were spending money to renovate the units, but the common areas were left looking like a "war zone". The result - 85% vacancy.
This is how the second floor hallway looked at time of inspection
This is how the front lobby looked at time of inspection
I was approached by the Lender of the property explaining that the owner was in dire straights and needed to sell. I had subsequently purchased this property for $260,000 with a plan to renovate, improve the appearance, rent the units and increase value.
After only five months the renovations were complete and the property was fully rented with an improved tenant profile paying higher rents (compared to the previous tenants). The property was resold for $475,000.
Front lobby after renovations.
Front lobby after renovations
Again, the example presented above is somewhat rare although it effectively illustrates the point at hand – that first impressions can make all the difference.
I want to emphasize that maintaining your investment property is extremely important. Keep it in a good state of repair, especially the common areas, and give it that curb appeal. You should also note that a good tenant is likely to decide if they want to live in your property long before they see inside the unit itself. They have made up their mind once they have stepped into the lobby, thanks to that very first impression.
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