As a longtime specialist in multifamily property owner representation, I have been involved in numerous apartment renovations. While I’m not an architect or contractor by any means, I am an active part of the renovation process nonetheless. My primary goal as a leasing agent is to assist owners in determining which cosmetic renovations will effectively increase the rents they’re able to charge. It’s important to keep in mind that cosmetic renovations are only one part of the renovation budget as fixing crumbling walls or a chipped paint job are essential repairs, meaning that owners may not charge additional rent for undertaking them.
When owners are obtaining contractor estimates for renovations, I always advise them that they can only count the cosmetic renovations towards the payback time for charging additional rent. As an example, if the total renovation costs were $60,0000 and the cosmetic renovations cost $30,000, then the payback time in increased rent is calculated based on $30,000. The other $30,000 would be factored into the building budget. Otherwise, the payback time will seem extraordinarily long, thus making investors nervous.
Installing new closets, moldings or radiator covers are all considered cosmetic renovations as are upgrading kitchens and bathrooms, and all of these improvements can increase rents. In New York City, solid returns on cosmetic apartment investments are those that pay for themselves within three to six years. The return is based on how much of the cosmetic investment amount is returned to the owner in additional rent each month.
What is the Value of the Unit?
Identifying the most beneficial renovations for owners to undertake depends on the price point of the unit in question. Owners should not bother with any cosmetic renovations that will take more than six years to pay for themselves. For the most part, renovation budgets should be in line with the size of the apartment. A studio that costs $1,500 per month should have a cosmetic renovation budget of no more than $10,000. As a general rule of thumb, for every $100 you can increase the rent, spend no more than $6,000 on cosmetic renovations, and you will earn a full payback within four to six years. For a $200 monthly rent increase, spend no more than $12,000 while a $300 increase should mean you spend no more than $18,000.
In order to get maximum rent increases for spending the least amount on cosmetic renovations, owners should install dishwashers in the kitchens. In addition, granite countertops look far nicer than Formica ones and they last much longer as well. When it comes to kitchen appliances, stainless steel ones are easier to clean, look better, and can usually garner owners up to ten percent more in rent! Adding a backsplash in the kitchen is a nice touch and typically not very expensive. Owners often spend too much replacing kitchen cabinets when it would be far more beneficial to focus on appliances (specifically dishwashers) and backsplashes.
In regards to bathrooms, wall tiles are the most expensive element to replace. I often advise my owners to simply regrout and clean the existing ones. Floor tiles, on the other hand, are less expensive and fully replacing these usually costs no more than $2,500. Glazing over the old floor tiles or putting in marble flooring are also relatively inexpensive but nice alternatives for upgrading bathrooms. Replacing vanities, medicine cabinets and toilets are other ways by which owners can get the most bang for their buck.
Completing useful renovations is a smart investment in crafting a portfolio of beautiful apartments from which owners should be able to make a healthy profit. The major point to keep in mind is the difference between essential and cosmetic renovations. Once owners understand this and work out the numbers to earn themselves a timely payback, they will be well on their way to multifamily building renovation success!
Adam Frisch is managing principal of Lee & Associates Residential NYC, the first residential division of the national Lee & Associates brand.