Interior upgrades

It’s not uncommon for upgraded units to immediately attract higher rents, which can be done gradually to avoid high vacancy levels.

Interior upgrades can range from modest (new paint, carpet) to more substantial (unit reconfiguration). Updating old wiring and plumbing is also critical during any value-add renovation. 

Exterior upgrades

Painting, landscaping, replacing the roof and windows, and adding selective outdoor amenities (e.g., a fire pit area, outdoor kitchen, replacing a pool deck, or adding a dog run) can add value to any property. 

While exterior upgrades improve quality of life, this can be a less clear reason for landlords to attract higher rents as everyone in the community benefits equally and cannot be tied to individual apartments.

Creating more leasable space

Owners should be creative as they look for ways to create more leasable space. This could include, for example, finishing a basement that can be repurposed for resident use. 

An owner might also look at converting a garage into living space. In larger apartment communities, adding Amazon delivery lockers and/or adding storage cages has become more popular as tenants are willing to pay a premium for these amenities. 

The rise of Accessory Dwelling Units (ADUs) in Los Angeles provides a great example of creating additional leasable space.

Many multifamily operators have been acquiring smaller apartment complexes and adding ADUs to significantly enhance the value of the investment. For example, a simple ADU strategy could be:

• Find an apartment complex with ample yard or parking space that isn’t fully utilized
• Add two ADUs to the property, effectively increasing the number of rentable units from 10 to 12
• ADUs create an additional stream of rental income and increase the property’s overall Net Operating Income (NOI).

This approach is particularly relevant in markets like Los Angeles, where housing demand is high and recent changes to state law have made it easier to construct ADUs. By adding these units, the investor is not just creating more leasable space, but also significantly increasing the value of their initial investment.

Replacing the property management company

Many owners have long-time property managers in place who may not be performing their duties as effectively as they could in supporting a well-maintained and sought-after rental community. 

This may be evident in situations with low lease collections, high vacancy, and slow response times for repair and maintenance (R&M) requests. Re-bidding the contract can result in better service—oftentimes a lower price, reducing operating expenses. 

As an example, imagine you invest in a 20-unit apartment complex generating $500,000 in gross potential revenue, managed by a firm charging $30,000 annually, with slow lease collections and a 10% vacancy rate.

Deciding to re-bid the contract, you switch to a more efficient firm that charges $28,000 annually. With their improved management, the vacancy rate drops to 5%, increasing the annual rental income by $25,000.

Besides saving $2,000 in management fees, the change brings in $25,000 increased income and better tenant satisfaction, highlighting the benefits of periodically re-bidding property management contracts.

Improving the rent roll quality of the building

A rent roll is a management tool used by commercial real estate operators that details the lease information and helps landlords track the start and end dates of contracts and rental income.

With the new management team in place, tenants from underperforming units can be evicted, and the management company begins to enforce stricter policies to ensure on-time payments. 

As the quality of the rent roll improves – NOI can be increased or even become higher quality through the value add improvements of improving the rental and leasing management.

Repositioning the property

‍While an owner works to execute physical and operational improvements, they should simultaneously embark on a repositioning the property for a different use, or rebranding of the property away from its former tenant mix.

Building 77 in Brooklyn Navy Yard is a prime example of a repositioning value-add strategy. This former World War II storage facility was redeveloped into a vibrant, multi-tenant industrial hub, increasing its Net Operating Income significantly.

This transformation, which included major renovations and a rebranding, turned a once outdated warehouse into a bustling business center, attracting tenants from various sectors. The process, however, took several years, highlighting the importance of considering timelines in value-add investments.