Why I hate a partial renovation

And…. we’re back.

Want to talk today about partially renovated buildings.

This is a business model we see a lot:

  • Guy buys an older building with low rents
  • He turns over, say, 1/3 of the units and gets market rents for them
  • He markets the building at a very low cap rate (eg a high price) arguing that someone else can come in, replicate what he’s done with the rest of the units, and reap the benefits

And lots of people buy these deals.

Do you know why I hate them?

Think about it from the perspective of the seller. His strong incentive is to turn over as many units as he can, so long as he can turn them profitably (eg create more incremental value from turning a unit than it cost to do so).

If he’s left a bunch of units unturned, it’s a strong signal that he could not turn those units profitably.

So, as a buyer, why would you think that you could do something the existing owner, who has way more information than you do, couldn’t do?