The Property Management Shop
by Marc Wilson
Q. Over the last couple of years, I have had a policy of totally remodeling vacant units. New kitchens, new bathrooms, new windows and even some granite counter tops were normal operating procedure. I figured it was worth the expense. I’m not seeing the return on investment on a $20-25,000 total apartment remodel. What do you think?
A. Rents are falling, vacancies are increasing, the economy is imploding, the apartment rental business is getting more competitive on a daily basis and now you want to stop remodeling your units? Are you out of your mind? It reminds me of that old song… “You Picked A Fine Time to Leave Me Lucille.”
I do agree, however, with your statement concerning your immediate return on investment. The difference in market value between two identical units – one remodeled and one “tired”—appears to have decreased of late. In today’s climate, a $25,000 remodel could equate to a measly $150 monthly increase in rent. So let's see: $150 times 12 months equals $1,800 per year. This $1,800 per year is an immediate 7.2 percent return on your investment. What current investment do you have that generates a 7.2 percent return? Also, $1,800 at 10 times gross is an immediate increase in building value of $18,000. You invest $25,000 and you get an immediate return of $18,000 and a 7.2 percent constant return—not bad. Is the aforementioned financial analysis the most important reason to continue to remodel your “tired” apartments?
These numbers are certainly compelling enough, but there is another reason to remodel. If you have the best looking product at the most competitive price, you will get the best tenant. You will get a tenant with a high-paying job whose intention is to stay in the apartment for three to five years and then move out—the perfect tenancy cycle. Why will you get the perfect tenant? Because even in this market, you will receive multiple applications to rent your apartment, which will enable you to choose the “perfect tenant.” Tired apartments will not attract multiple offers and then you will have no choice as to your tenant profile. You will simply take what you are given.
No, the decision about whether or not to remodel an apartment should not be based on the current rental market or even the immediate financial consequences of the decision. Rather, the decision should be based on a couple of simple questions. Is the unit tired? Is the unit competitive? Is the unit better than the others in the neighborhood? If the answer is no, then remodel your unit. Remember, the economy will rise and fall over the years, but you will probably own your apartment building for your entire life. Treat your building like a prized long-term investment.
The opinions expressed in this article are those of the author and do not necessarily reßect the viewpoint of the SFAA or the SF Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for 15 years. Please send your questions concerning property management and/or apartment building sales to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can be reached at 415-229-1275. © Copyright 2001.