UPGRADING APARTMENT RENTALS

by Joelle Steele

There comes a time when long-time property owners, as well as those who have newly-acquired properties, decide it's time to upgrade their units in order to increase their rental income. It's a great idea, it's good for tenants, and it's a sound business practice. If it's done correctly.

I first began renovating rentals for a landlord client in 1984. She had more than 100 houses and we upgraded 80 of those. Since that time, I have overseen the renovation of six apartment buildings and several duplexes on the Westside. It's a daunting task, to say the least. But, how to do it? That's the question. It's easy to look at a house or apartment and see what's wrong with it. The appliances might be out of date, the bathroom tile cracked, the floors and carpets badly worn, the paint faded or peeling. In other words, it looks downright unattractive. Your first inclination might be to simply gut the place and start from scratch. But this is a rental we're talking about, and gutting a rental could be a huge mistake, especially if it's an apartment.

Apartments are individual units, but they are part of a bigger building in a specific neighborhood This means that every building fits in with the other buildings in its neighborhood. It has a "personality" that attracts renters who have a specific standard of living in mind that matches the rents being charged for that building in that neighborhood. In other words, if you have a low-income building in a low-income neighborhood, with the average 2-bedroom apartment renting for $750, those units will attract renters who can only afford $750. Renters who can afford $1,200 for the same size apartment will automatically be looking elsewhere.

So how do you upgrade a $750 apartment in a building and neighborhood where $750 is the average rental price? The answer is, you upgrade it gradually. And that is how you should always upgrade any apartment building. Where do you begin? What do you upgrade when you upgrade gradually? What are the priorities? What can you upgrade that will give you the most bang for your buck and not force you to overprice the unit? Here are some answers.

The first step is to improve the overall appearance and functionality of your building. The exterior is what provides your potential renters with their first impression of their future home, and they will want to see well-maintained amenities too. Sprucing up the building and its common areas also helps encourage other landlords to do the same, and that generally leads to a neighborhood-wide improvement, paving the way for individual unit improvements and increased rents.

Clean up the property. Clean up the trash area and make it less visible. Clean out all the carports. Remove everything that is cluttering up the place. Put new lounge chairs and tables around the pool. Give the landscape an update. Hire a tree service to correctly trim and prune any overgrown plants and trees. Have the beds weeded and covered with decorative bark. Have the lawn re-seeded or fertilized and edged. Repair or replace the laundry machines. Fix wobbly railings. Make sure the fire sprinklers and alarms are working.

Paint is the cheapest investment that any landlord can make. It not only makes the building look better, but it also preserves the wood and stucco – the real reason we paint buildings in the first place. Paint the exterior of the building as well as any indoor common areas such as halls, stairwells, and laundry rooms. Pick colors that are associated with higher incomes, such as grays or pale greens and blues with white trim. Avoid the colors associated with lower incomes, such as dark browns and beiges, or bright colors like golds and pinks. It doesn't hurt to have a building look high-end, but if it looks low-income and you want to eventually attract middle- or high-income tenants, a poor color choice could send the wrong message and drive away those potential tenants.

The second step is to start upgrading the individual units. This is done in two ways: by upgrades to all the occupied units and by upgrades to the vacant units. Since landlords have to abide by federal and state housing laws, many upgrades are not as much about cosmetics as they are about livability, and so the infrastructure of the building should be your top priority, and it affects everyone. Your tenants can't see most infrastructure problems, but they will surely be inconvenienced when the roof leaks, the toilet overflows regularly, the sink faucets don't work, the hot water is rusty, the heat or air conditioning isn't working, the fuses or circuit breakers are always blowing, etc. And these constant repairs can add up, so correctly repair or replace whatever necessities are damaged or not working.

Think before you make some repairs because sometimes replacement is necessary or even cheaper in the long run. For example, buying toilets and appliances in bulk will generally give you a much better prices because of the  quantity discounts. Shop for these items at stores that cater to or offer substantial discounts to property owners. I once bought 36 toilets from a plumbing fixtures distributor for 65% less than the exact same toilets cost at a big home improvement chain. Delivery was free, and I had the toilets all installed within one day. I also bought 15 brand new gas stoves, complete with new tubes and fittings, for 48% less than the price charged by a local chain store. The seller removed all the old stoves free, and I had the new ones installed, again, all in the same day. It pays to shop around when you own rentals.

When you're making repairs, take a good look inside the individual units and make a list of all the other things that can be done to improve them. You can use that list to determine what things  need immediate attention and what can be done over time. In general, making gradual improvements requires some common sense. For example, replace toilets only if the existing floor is one you intend to keep. Otherwise, do the floor and toilet at the same time. The same goes for stoves and refrigerators. If you have broken sink fixtures or traps, replace them only if you're keeping the sink. Otherwise, replace the sink/counter/vanity and the plumbing fixtures at the same time.

Some things just can't be upgraded gradually, such as paint and floor coverings. Since most units are going to be occupied at any given time, it simply isn't practical to remove all the furniture or have the tenant remove their belongings and live elsewhere – usually at your expense – while the work is being done. So these are items that usually have to be done when a unit is vacant. Buy your carpeting, vinyl flooring, draperies/blinds, and paint in bulk. Stick to simple neutrals like grays and beiges, and keep your walls a simple shade of off-white. And when you're shopping for these things, remember who you're shopping for. Don't buy granite countertops or fancy fixtures unless your building is already catering to people who can afford the rent associated with such amenities. Remember, you can't expect any renter to pay $1,200/mo in a $750/mo building. You may be able to get $850 for that spruced-up vacant unit, but that's about as much as you can get until most of the building is going for $850, and then you can raise those rents again.

Upgrading a building is a balancing act between what is necessary, what is expected, and what is desirable. The law says you need to keep it habitable. The tenant expects it to look and function a certain way based on cost and location. And you want to keep costs down and still make more money. Doing it gradually – ideally from the moment you first purchase a building – will help you raise the rents every year and thereby improve the quality of your life, that of your tenants, and the structure of that valuable piece of real estate you own.