Adding value to apartment buildings: Sometimes more art than science

One of the problems we wrestle with is how much to spend on improvements to a building where the impact on rents in unquantifiable.

With most improvements, we have internal numbers we use to predict how much additional rent we’ll get. These internal numbers derive, in part, from so-called “natural experiments” we have conducted in the past, where we’ve been able to compare tenant demand for similar units with / without different features.

Because we have these numbers, it’s trivial to back-calculate how much we can spend on each of those improvements. For example, if we think adding a washer / dryer adds $50 / month to the rent and we’re targeting a 9GRM for the whole project, we know that we can spend up to $50 x 12 months x 9 = $5,400 to add that washer/dryer.

But what about improvements where the impact is impossible to quantify.

For example, take a look at the picture below. We could patch that stucco or re-stucco the whole building. The questions is, therefore, what is it worth to have all new stucco on a building?

stucco, exterior, apartment building



Well, all new stucco makes a building look brand-new, which is cool.

But it’s tough to estimate exactly what “looking brand-new” does to the rents. That’s because we can’t do the kinds of experiments we’ve done in the past… because new stucco affects the whole building, you really need to do building vs. building comparisons, and there are too many other variables at work (location, unit layouts, etc.) to draw really firm conclusions.

No matter how scientific you try to make this business, ultimately some decisions are going to come down to gut feel. And that’s where judgement, tempered by long experience, comes in.