How to add value to your apartment building

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Some people take owning an apartment building as their opportunity to unleash their internal interior designer. It’s like the building becomes their personal canvas to show off their taste in decorating.

Don’t be one of those people.

The only way to make a rational decision about spending money to improve your building is to determine whether the expenditure will increase the value of your building by more than it costs.

Say you’re considering spending $4,000 to install a washer/dryer in a unit (the cost of the actual appliances plus the necessary plumbing work). You need to estimate the additional rent the W/D will generate. In my experience, having a private, in-unit W/D adds somewhere between $100-200 per month in rent. Let’s say it’s $150 / month.

To determine whether it makes sense to go forward, multiply the additional monthly rent by 12 months. So the $150 / month becomes $1,800 / year. Then, multiply that annual additional rent by the gross rent multiple for the neighborhood in which your building is located. In Northeast LA, that’s risen to right around 11x the annual rent. Which means the $1,800 / year adds $1,800 x 11 = $19,800 in value to your building.

If you had the chance to spend $4,000 to get $19,800, you’d do it, right? So there’s your answer on the W/D.

But let’s try the same math on putting in a set of custom cabinets for $10,000, when you could have used a set from IKEA for $2,500. The cost difference is $7,500. Can you justify it? Well, I think you’d struggle to get more than $50 in additional rent for fancy cabinets. The math is $50 x 12 months x 11 grm = $6,600. Not worth it.

In my experience, the things that add the most value to apartments are washer / dryer, dishwasher, replacing carpet with manufactured hard wood, and, for the whole building, painting and landscaping. Things to avoid include expensive light and plumbing fixtures, designer tile, and granite counter-tops.

Remember: If you can’t imagine a tenant paying more rent for it, don’t do it!

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