Of the three main apartment syndication strategies, two (value-add and distressed) involve making improvements to the physical property or the operations in order to increase the revenue or decrease the expenses, resulting in an increase in the value of the apartment.
Regardless of whether you decide to pursue the active or passive apartment investing route, understanding the various ways to “add value” is a must.
As an active apartment syndicator, it is your job to identify the value add opportunities in a prospective deal in order to create a business plan that maximizes the projected returns for your passive investors.
As a passive investor, you need to be capable of analyzing a distressed or value-add syndicator’s business plan in order to determine if the opportunities identified are conducive with the property type, market, resident demographic, etc. and if they will result in an increase in revenue and/or decrease in expenses.
Five syndicators looking at the same apartment deal will create five different value-add business plans. Therefore, the ability to identity value add opportunities has a direct impact on not only the return projections but also the syndicator’s ability to even acquire the property in the first place. Generally, the most creative syndicator will underwrite the highest projected returns and, as a result, be able to find more deals that meet their investment criteria.
I break down the value-add opportunities into two categories – simple and advanced. Simple opportunities are more creative, require little to no capital or effort to implement and can be add to most sized apartments. Whereas advanced opportunities require more capital and more effort and usually only make financial sense on larger projects, with some only making financial sense on luxury apartment communities. However, the opportunities in both categories will result in an increase in property value and allow the community to standout against its competitors.
1. Add washer and dryer: install washer and dryer units into all or a select number of units and charge a monthly premium. Another option is to create a laundry room and install coin-operated washers and dryers.
2. Stainless steel appliances: if the units have dated or black/white appliances, such as refrigerators, dishwashers, microwaves and/or stoves, upgrade to new stainless-steel appliances and charge a rental premium.
3. Appliance upgrade packages: for units that already have newer or nicer appliances, charge a rental premium.
4. Appliance rentals: offer rentals for common items like vacuums and carpet cleaners. This will also reduce the expenses associated with turnovers.
5. Upgrade light fixtures: installing new light fixtures is a quick and inexpensive way to make for a more aesthetically pleasing unit.
6. New hardware: Of course, units with new cabinetry in the kitchen and new vanities in the bathroom will demand a higher rent. However, a more inexpensive way to update the look of the kitchen and bathroom is to install new hardware, which includes new cabinet/vanity handles, sinks, toilets, faucets, showerheads, etc. Additional new hardware upgrades are new door handles and installing curtain rods.
7. Ratio Utility Billing System (RUBS): Implement a RUBS program, which bills back a portion of the water, sewer, trash, electric and/or gas expenses to the residents.
8. Parking: Rather than implementing the more advanced parking upgrades, charge a monthly or yearly fee for a guaranteed or premium location parking spot.
9. Pet fees: charge a one-time deposit or monthly fee for residents with pets. This strategy is best for apartments that already allow pets but do not collect a fee.
10. Location/view premiums: Each unit has its own unique view and location, with some being better than others. For units with better locations and views, charge a rental premium. Examples are first floor units, units near the front of the community or amenities, units with a view of a body of water or fountains, units with better surrounding greenery, etc.
11. Bike rack rental: depending on the market and resident demographic, install bike racks and rent them out for a monthly fee. Bike racks are best when the resident demographics are Millennial or Gen X.
12. Clubhouse rental: for large communities that have a clubhouse, offer to rent it to residents for special events at a flat fee.
13. Upgrading property management software: use the latest and greatest property management software to accurately calculate the market rents to ensure you are charging the correct rental rates.
14. Short-term leases: depending on the market, offer short-term leases or offer furnished units and list them on services like AirBnB or work with a corporate housing provider.
15. Demographic based amenities: construct specific amenities based on the demands of the renter demographic. From a generational perspective, Millennials prefer a resort-style living experience. They value convenience and flexibility so they will often seek apartment communities that offer high-tech amenities and services. These include free coffee in the common areas, high-speed Wi-Fi, in unit USB charging ports and a modern fitness center with fitness classes offered. Gen Xers also prefer high-tech home furnishings, but also concierge services and family-friendly features like playrooms, playgrounds and areas that offer family-friendly activities. Additionally, Gen Xers want easy access to washers and dryers and fenced in backyards. Finally, Baby Boomers demand larger living spaces (both individual units and common areas), state of the art fitness centers and common areas that offer fitness classes and social gatherings.
16. Patios or balconies: build patios for the ground level units and/or balconies for the non-ground level units and charge a rental premium.
17. Fenced-in yards or patios: increase privacy by constructing fences around the yards or patios of all or a select number of ground level units and charge a rental premium.
18. Carports: build a select number of carports and charge a monthly or yearly fee.
19. Extra rooms: add extra bedrooms, bathrooms, dining rooms, living rooms, sunrooms, etc. by erecting walls in larger units or building additions onto existing units.
20. Dog Park: if the apartment community has a large amount of unused green space and depending on the renter demographic, fence in an area and create a dog park. But don’t forget the poop bag stands!
21. Storage lockers: install storage lockers in the clubhouse and rent them out for a monthly or yearly fee.
22. Vending Machines: buy or rent vending machines and install them in the common areas.
23. Billboards: depending on the traffic and building codes, install billboards on the grounds and lease them to local businesses.
24. Daycare, after school or summer programs: attract the family demographic with the convenience of a childcare facility for daycare or after school/summer programs.
25. Coffee shop or convenience mart: I’m not talking about building a Starbucks or CVS/Walgreens. Just a small shop or cart that offers coffee and/or snacks, similar to those found in hotel lobbies.
26. Fitness center: update or construct a fitness center and offer free fitness classes like yoga, aerobics, spin, etc.
27. Miscellaneous: other advanced/luxury upgrades that can be offered for free (i.e. with the costs built into the rents) or a monthly/annual/one-time fee include a car-sharing service, 24-hour concierge, cooking classes, dry cleaning/laundry service, free Wi-Fi, iCafe, package delivery management, personal shoppers, pet grooming, rock-climbing wall, rooftop terrace, spa/massage center, tech/business center and a wine cellar.
Whenever you are analyzing a prospective apartment deal, run through this list of 27 simple and advanced upgrades to determine if they make financial sense based on the property type, market and renter demographic, which is accomplished by ensuring that the required capital investment is returned, and then some, during the projected holding period. And always make sure the projected rental premiums are confirmed by the property management company and are supported by the rental comps in the area.
What do you think? What value-add opportunities are missing from this list?
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