Capital improvements are essential for anyone purchasing a multifamily real estate asset. They can help increase the value of the asset and can even provide certain tax benefits. However, there are many different types of capital improvements. Each one impacts the overall value of an investment differently. We’ve briefly touched on the concept of capital improvements in a previous blog post, but there’s much more to cover on the subject. Here is a deeper dive on capital improvements and how they benefit investors like you.
Overall Benefits
Capital improvements to a multifamily real estate asset serve multiple purposes. They can increase the quality of life for tenants, which can lead to increased renter retention and help make the property more desirable for new tenants. Of course, giving tenants more desirable living conditions also offers the potential for increased profitability through increased rents and reduced costs related to tenant turnover. However, it’s critical that the improvements being made to the property are of value to both the property and those residing there.
Security Improvements
Improving the security for a multifamily asset can work to protect your investment while also giving tenants added peace of mind. Smart locks, security cameras, upgraded intercom systems, and other enhanced features may help reduce the risk of crime in the area. Research conducted by UNC Charlotte showed up to 60% of would-be burglars would choose a different target if they saw evidence of cameras or alarm systems on a property. By helping deter crime, real estate investors/investment groups may be able to lower insurance costs, minimize the risk of property damage, and provide a more secure, safe environment for tenants.
Security upgrades don’t just have to be limited to cameras and intercom systems. Adding extra lighting to walkways and parking lots provides better visibility at night, which can deter vehicle crimes and provide an added sense of safety. Video doorbells, improved window locks, and secure locations for mail/package delivery are all small upgrades that can have a big impact on renter safety and satisfaction.
Green Improvements
Providing energy-efficient upgrades to buildings also provides a host of benefits. Not only can real estate investors help reduce their carbon footprints; they can also potentially increase profitability. Some financial benefits come from reduced overall operating costs, while others come from tax breaks specifically designed for undertaking green improvements. For example, some buildings meeting certain heating and cooling efficiency standards can qualify for a tax break of $1.80 per square foot, according to the IRS. Additionally, buildings with environmentally friendly upgrades may attract new tenants and higher rents. So, which types of green initiatives make sense as capital improvements for multifamily assets? Here are just some of the many options available for real estate upgrades:
- Smart thermostats
- Low-flow plumbing fixtures
- Energy-efficient appliances
- Reflective roofing materials
- Updated HVAC systems
While these upgrades are designed specifically to lower energy and resource usage along with utility costs, other green initiatives can provide a better overall quality of life for tenants while still benefiting your bottom line. For example, adding electric car charging stations and sheltered bicycle storage may help promote a more environmentally friendly community and make a property more appealing to potential tenants.
Value-Add Improvements for Rental Units
Upgrades for individual units can go a long way toward making a property more attractive to new tenants, providing the potential for increased rents. Renovating units as they become vacant is one strategy for long-term growth. Whenever a tenant moves out, there is a need for some cosmetic upkeep, but there’s also the opportunity for easy updates to the look of each unit. A fresh paint color, new flooring, or updated cabinetry offer appealing aesthetics for potential tenants. Some upgrades may have a bit of crossover with the other categories of improvements discussed above. Smart door locks and thermostats are just two examples of in-unit upgrades with added benefits for investors. Here is a short list additional options for unit upgrades:
- Updated lighting fixtures and ceiling fans
- In-unit washer/dryer setups
- New kitchen or bathroom tile
- Updated kitchen counters
- New bath vanity and plumbing fixtures
Some in-unit updates may be more expensive than others, so investors must consider the cost versus any potential increase in rental income when determining which value-add strategies to implement.
Common Area Upgrades
Common areas are just as important as the apartments in a multifamily real estate asset. Lobbies and hallways create a first impression of the property, and shared amenities provide incentives for current and future tenants. Some fixes, such as painting the walls of the lobby and adding more lighting, are quick, easy ways to give an apartment building an affordable upgrade. However, there are other capital improvements that can have added benefits for investors and tenants alike. For example, building or renovating a playground and picnic area makes an apartment complex more attractive to tenants with young children. Renovated community rooms can be used for everything from family birthday parties to meeting spaces for executives who work from home. The one thing all these capital improvements have in common is the ability to make your property more desirable.
Return on Investment
Of course, any capital improvements should provide a return on the investment (ROI). It’s critical to weigh the cost of an upgrade against the potential profits. Some repairs, such as fixing a leaky roof or mending a broken HVAC system, provide opportunities for upgrades instead of simple replacement options. Other capital improvements require strategic thinking. Investors and investment groups can partner with property managers to determine which capital improvements might provide the best opportunity for increasing profitability.
The return on investment for upgrades can vary from one property to the next, and it can also depend on the strategy for the current owner. Investors looking to improve and flip a property may only look at renovations that increase the immediate value of the asset, while those looking to build long-term growth can opt for value-add strategies that take place over time. While some upgrades provide added value to the asset, others may provide tax benefits. All these factors must be taken into consideration when determining the overall value of a capital improvement project.
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