In the previous issue, we discussed how to know when your multifamily property should be renovated and what level of renovation was appropriate. Once you have determined this, you will need to set a budget.
How much should you budget for your renovation?
Too often the renovation budget is set by an underfunded escrow account or is a result of mere guesswork. If the budget is set prior to a comprehensive understanding of the building’s existing conditions, the amount of space to be renovated, and the marketing challenges, the number will be inaccurate. Either method can set the owner up for disappointment.
Determining a budget is a task that should take place long before the renovation is to begin. The budget for repositioning a property is frequently determined in the year preceding the expected renovation. Depending on the level of the renovation planned, the budget may need to be determined farther out and the dollars allocated across multiple years. Collaborative discussions to prioritize the work will provide the best possibility for accurately setting the budget and obtaining future ROI. To assess the market, understand the conditions of the building, and develop a budget that is based upon real conditions, consider a team approach from the beginning. Involving your design professional, management/marketing consultant, building engineer and asset manager before the budget is set will help to alleviate unrealistic expectations.
Depending on many factors that cannot be controlled for your plans, construction pricing can vary from year to year. Even with the best planning, actual bids may come in higher than anticipated. It is best to have a phasing and VE plan in place in the event that this occurs.
Phasing of the construction can be a great way to manage a budget that needs to be spread over a few years. However, it is important to consider that there usually is a premium cost to phasing which will need to be considered in the budget.
Many owners frown at earmarking funding for renovation projects. They require management to meet the funding requirements from operational cash flow. This can be problematic for a variety of reasons. The cash flow requirements for renovation projects are frequently substantial, and the funds are, in most instances, required at the early stages. Professional and permitting fees, deposits, and advances need to be paid out before materials are procured and the contractor begins work. Additionally, during the renovation process, the property will not show at its best. This creates a tough selling situation for the marketing staff, which could mean a decline in revenue during construction. This will further limit the operational cash flow available for the renovation. To successfully meet your budgetary needs, you should consider setting aside funding specifically for the renovation. A well-thought-out budget that includes a construction timeline will help to manage funding and decrease strain on operational cash flow.
A cosmetic renovation may be considered an expense as it will serve to refresh and to maintain the look of the building for a period of time. A more comprehensive renovation will actually increase the life of the asset, so it would generally be considered a capital expenditure.
Keeping in mind that the core purpose of renovation is to improve revenue streams, it is important to consider that this will happen effectively only when the life of an asset is increased.
Owners and stakeholders will demand bang for their buck. Any renovation project is going to be tough to sell if there is uncertainty related to the return for the investment. Consequently, part of planning a renovation includes doing the math to obtain the estimated ROI.
So many variables impact rents – such as the age of the building, its location, the surrounding competition, and the tenant profile – that ROI will vary widely from market to market and from property to property within the same market. As a result, nationwide data is difficult to come by for multifamily housing renovations. However, skilled property owners say it’s reasonable to expect a 10 to 30% ROI on their renovation projects, with wood floors, kitchen upgrades, and improved interior lighting as some of the top ROI generators. For purely cosmetic renovations, a 25 to 30% return should be the target. It is important to analyze typical ROIs in your market before setting a budget and determining what upgrades to include in your renovation. The life span of your renovation will also have an impact on your ROI, so be sure to include this in your calculations.
By addressing these considerations, you can have a successful renovation that will increase the life and profitability of your property.
 Jason Van Steenwyk, Rental Property Renovations that Pay Off, (Sep. 2, 2015), http://www.allpropertymanagement.com/blog/2015/09/02/rental-property-renovations-and-improvements-that-pay-off/.
 John Caulfield, Rehab ROI: Which Upgrades Cause the Biggest Rent Bumps?, (May 28, 2014), Multifamily Executive, http://www.multifamilyexecutive.com/design-development/renovations/rehab-roi-which-upgrades-cause-the-biggest-rent-bumps_o.
 Harrison Willis, Repositioning a Multifamily Asset, (2016), Cornell Real Estate Review, 14(1), 62-69, http://scholarship.sha.cornell.edu/crer/vol14/iss1/12.
 Donald M. Davidoff, Rehab ROI: Do the Math, (Oct. 28, 2014), Multifamily Executive, http://www.multifamilyexecutive.com/business-finance/commentary/rehab-roi-do-the-math_o.
Check out the full renovation of Park Bethesda here: http://www.hartmandesigngroup.com/renovations/Residences-at-Capital-Crescent-Trail/
Written by Phyllis Hartman, ASID, LEED AP
POSTED ON MAY 6, 2017
We are absolutely delighted that The Bartlett has been recognized by the Washington Business Journal for the Best Real Estate Deal. This honor can only be accomplished through the continued dedication of our amazing design team and our loyal clients.
POSTED ON APRIL 25, 2017
We are honored to be recognized by Interior Design Magazine for raising to the 2017 Top 100 Giants! We are thankful for our wonderful team of designers and for our loyal clients who have made the journey possible
POSTED ON FEBRUARY 17, 2017
We are honored to be recognized by the Washington Business Journal’s 2016 Top Corporate Philanthropy List for the first time! This great achievement can only be accomplished through the continued dedication of our amazing team towards helping and giving back to the community.
POSTED ON DECEMBER 1, 2016
Lighting is one of the most important elements to consider when designing any space, and this important tool is continually evolving. Meeting the requirements of state, county and national regulations as well as the electrical engineer’s energy model necessitates evaluation of our client’s needs on a grand scale. This evaluation must balance many factors including budget, aesthetics and energy efficiency.
Though the first cost is still considerably more than conventional fluorescent and incandescent luminaries, LED lighting is the way to achieve both the low wattage requirements and the appealing effect. With this in mind, a realistic approach to the lighting budget is important. Considering that the savings over time will well out weigh the initial cost, LED lighting is an investment that pays off.
Not only will the cost of electricity be substantially lower, the greatly reduced labor (to re-lamp) and bulb replacement expense quickly help to recoup the initial cash outlay. Additionally, when renovating a building, consider the many retrofit LED lamps on the market. There could be no need to replace light fixtures and Pepco rebates may well be applicable. Whether using retrofit lamps for a renovation or new construction, choosing the right color temperature and rendition is critical to setting the mood and obtaining the desired ambiance. For calm, relaxing spaces, consider using soft, warm lights with orange and yellow hues (2700K or warmer). For a room that is intended to be livelier, like a fitness center, a slightly cooler temperature (3000 or 3100K) is ideal. Color rendition of 80 or higher is recommended for the best color interpretation.
To create the mood, many different types of lighting fixtures are required. Down lights provide general lighting and pooling of light on the floor, accent lighting is used for special features and art, while sconces and chandeliers are used for additional layering of light as well as decorative elements. The good news is that there are LED lamps for most fixture types today so you can easily achieve the look desired and contribute to the green initiative. If you’re working with an interior design firm, make sure everyone has a clear understanding of the mood you wish to create, the budget and required energy efficiency. Your interior designer will know the best way to utilize the natural light coming into the room, and how to properly support that light with general, task, accent, or a combination of all three types of lighting.
POSTED ON FEBRUARY 10, 2016