As fate would have it, the day after I closed on the property, they stopped paying rent. My property management team spoke with them about this several times over the course of a few months. We asked if they were having a hardship or if we could work out a payment plan, but never got a response and unfortunately, had to bring them to court. They were evicted from the property. It was not something we wanted to do and was certainly our last course of action.
After they moved out, we had a crew come in and clean the unit. I went to the property and talked with a contractor and pointed out some places where we could make some modifications to walls and door openings to make the place more open. I had them renovate the entire unit. New kitchen, new floors, paint. On the next page are some before and after pictures to give you an idea of the changes we made. The renovations were not cheap. The unit was a disaster and we had to replace the hardwood floors. We even removed portions of walls.
Factoring everything in, the cost for fixing this unit was $19,121. The previous rent for the unit had been $900 but we knew we would be able to rent the renovated unit for $1,195—an increase of $295 per month. The increase in rent would pay for the renovation in a little over 5 years: $19,121 / $295 = 65 months (5.4 years). But here is where the magic comes in.
Increase Rents +$295/unit
# of Units X 1
12 months X12
Annual Rental Income Increase = $3,540/yr
The property was in a market where the cap rate is 6%. Here what’s happens when we apply our valuation equation:
Net Operating Income $3,540/yr
Cap Rate /.06
After removing the renovation costs, we have about $40,000 in profit: $59,000 - $19,000 = $40,000. This is a return on investment of 210%!
Adding value to your property can be a wise investment. It improves the quality of life for the existing residents, giving them a nicer place to live. This can reduce vacancy and turnover costs. In addition, owners can see a significant increase in
their monthly cash flow and a meteoric rise in the properties valuation as a result. Implementing a value-add strategy can be a win-win for everyone involved.
MATT PICHENY Founder, Best-Selling Author, and Tony Award Winner Picheny, LLC (646) 522-1369
Matt Picheny is a real estate investor, Tony award winner, and author of the #1 best-selling book, Backstage Guide to Real Estate. He is focused on developing passive income streams that enable investors to write their own story and choose how they want to spend their time. Matt has over 15 years of experience revitalizing and elevating communities through real estate investment and has invested in over 10,000 apartments nationwide. He is a licensed real estate agent and has earned both Commercial Real Estate & Real Estate Finance certificates from Boston University. Matt is a member of the Forbes Real Estate Council, the Fast Company Executive Board, and is an advisor to a Proptech company.
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