Multifamily Value-Add Strategy

Value-Add strategy is purchasing a worn-out/underperforming (below market rent rate, occupancy, or NOI ratio) property and renovating/improving it, expecting higher rents and an asset appreciation after holding for a short or mid-term period.

1) Profitability Ratio

To underwrite the value-add strategy, the most commonly used ratio is a return on investment ratio(ROI).

• ROI = Increased Revenue / Budget to Renovate

Although ROI rates vary depends on the extent of the renovation, location, market trend, etc., 12% is considered as a threshold to proceed.

However, ROI doesn't include the value of time. If the renovation execution period gets longer than usual the actual return rate wouldn't be attractive. Therefore I suggest using Modified ROI, which calculates the average annual return over the investment horizon, including the renovation period.

• Total Increased Revenue over the Holding Period(TIRoHP) = (Increased Rev x 50% x Renovatio Period) + (Increased Rev x Rest of the Holding Period)

• Average Annual Increased Revenue(AAIR) = TIRoHP / Holding Period

• Modified ROI = AAIR / Budget to Renovate

This simple metric would help investment decisions on value-add opportunities. Double-digits Modified ROI would be a good mark to move forward.

2) Budget

The total investment amount will be determined based on the depth of the renovation, vintage of the property, class of property, etc.

3) Execution Timing

Maintaining the current occupancy rate during the renovation period is critical for a successful value-add strategy. Rehab will be only executed to vacant units, it'd be easy to estimate a total process period with the current vacancy rate.

(On the assumption, interior renovation to each unit takes one month)

100% / (current vacancy rate) X (period to renovate each unit) = # of months for total process

4) Type of Renovation

Renovation can be subcategorized into exterior and interior. As interior has a bigger impact on the tenant's residential decision, most of the projects spend more on interior renovation.

a. Exterior: each rehab can be regrouped into different purpose

Branding/Marketing

• Signage ($100-300 per unit): More exposure to future tenants

• Leasing Office ($100-300 per unit): Improve the first impression of an apartment

• Model Unit ($15,000-$25,000 per model unit): Help potential tenants to visualize their residence (Staging costs $1 psf per month)

Amenity Improvement

• Smart Locker ($500 per compartment): One of the must-items for apartments today (Smart Locker Room cost $0 to install but only monthly fee)

• Pool Area ($200–$400 per unit): Upgrade pool furniture and deck

• Fitness Center ($100–$200 per unit): By providing a great gym, an apartment will be able to increase rent by $50+

• Dog Park ($100-$250 per unit)

• Smart System ($500-$700 per unit): Smart doorlock/HVAC system connected via mobile app

• BBQ Area ($100 per unit)

• Wifi Lounge / Business Lounge / Gaming Lounge ($200+ psf)

• Bike Rack Room ($50-$500 per bike)

• Laundry Room ($100-$150 per unit): One washer&dryer set per 10 residential unit

• Movie Room ($10,000-$50,000 total)

• Wifi Fiber Options System

Community Environment

• Parking Lot ($150-$400 per unit): Prevent non-residents from parking in the community

• Painting ($200-$650 per unit)

• Landscape ($150-$300 per unit): Irrigation / Tree Trim

• Window ($200-$1,000 per unit)

• Security Cameras ($100 per unit)

• Gated Community (Fence ($15-40 per feet) + Security Gate Entrance System ($25,000+))

• Hallway

• Roof ($200-2,000 per unit): Replacing roof / deck / gutter

Additional Revenue Opportunity

• Storage Unit ($25-40 per SF)Utilizing dead space, turning to an additional revenue opportunity

• Over Car Bonnet Storage Unit ($1,100 per space)

• Laundry Room ($100-150 per unit)

• Parking Lot ($150-400 per unit)

• Vending Machine ($1500-$8000 per machine)

Operational Improvement

• Roof ($200-2,000 per unit): Replace roof/deck/gutter, preventing leakage and future burden

• HVAC ($200-500 per unit

• Plumbing ($250-350 per unit): Leakage/water heater/drainage

• Retaining Wall: Preventing future natural hazards including landslide

• Smart Valves ($1,000 per valve): Remove pockets of air from the water, preventing overcharge of water bill

• Water Softener ($500 per unit): Turning hard water into soft

• Solar Panel: Install solar panels for a tax credit

• Parking Valet Service: Increase # of parking spaces and security of the community

• Trash Valet Service

b. Interior

Washer & Dryer

• Stackable ($800+ per set)

• Separate ($1200+ per set)

Kitchen

• Cabinet ($1.2+ per sf)

• Countertop ($2.2+ psf)

• Faucet ($400+ per sink)

• Backsplash ($0.3+ psf)

• Appliances ($2,000+ per unit)

• Kitchen Island ($200-$4000 per island): Cart, base cabinet, or table

Bathroom ($800 total per bathroom)

• Sink

• Showerhead

• Tub

• Wallpaper

• Towel Rack

Floor (General)

• Carpet ($1-$3 psf): Cost-effective with efficient soundproofing and smell absorption

• Vinyl or Linoleum($1.5-$7 psf): Affordable with low maintenance

• Hardwood ($6-$12 psf): Beautiful, but possible moisture damage

• Laminate ($2.7-$10 psf): Lower price than hardwood, but prone to moisture damage

• Bamboo ($5.5-$12 psf): Moisture resistant

• Cork ($5-$14 psf): Sound-blocking, fire-resistant

• Terrazzo ($25-$90 psf)

Floor (Bathroom or Kitchen)

• Marmoleum ($3.25-$9 psf)

• Porcelain or Ceramic Tile Floor ($13.5-$83 psf)

General

• Paint ($0.15+ psf)

• Ceiling Fan ($150 per fan)

• Door ($35+ per door)

• Plumbing ($100+ per unit)

• Fixtures ($350+ per set)

• Mudroom Bench ($300+ per unit)

Smart System

• Smart Home Package ($500-700 per unit)

• Smart Door Lock ($100+ per unit)

c. Other Things to Consider

City Permit: Sometimes permit is required depending on the jurisdiction, depth of renovation, or if the property is a historical heritage

Marketing Cost

Tenant Buyout ($20,000+ per unit)