So I had an internal debate with my team today about what percentage of the units should be renovated on a value-add multifamily investment where none of the existing units have been touched.
For a 2-3 year hold, renovating a small percentage (20-40%) seems like the right way to go so that the value-add strategy is proven and that there is meat on the bone for the next guy. Similarly, with properties that are a long-term hold (10 years +), it makes more sense to renovate all of the product to maximize your ROI over the life of the investment.
The issue seems to lie with where we typically play (5 to 7 year hold). What are your thoughts for properties that are held for this duration: do you renovate all of the units to maximize NOI, some of the units to better ensure that you have a buyer at the end of the hold period, or something in-between?
Please explain your answer.
My experience has been two-fold and we either renovate 30-40% (18-24 month hold) or renovate 100% (3-5-year hold). That was because we were motivated by our promote to turnover 100% of the units on expiration, renovate, retenant, and sell asap.
I’ve seen it numerous times, an institutional owner buys a value-add deal, does a B+ reno in years 0-3, then sells in year 10 upon loan/fund maturity. The building is re-sold to the next buyer as a value-add because the amenities are now 5-10 years old and can use a cosmetic reno all over again.
My firm typically holds for 5 years and assumes a full reno, usually finished by end of year 3. If we are getting 15-20% return on our CAPEX dollars it makes sense for us to do as much as possible. The property is then positioned as a core-plus / light value-add.
It depends on the market. My firm renovates as many units as possible. Usually they turn everything within 3 years
I suppose we're an anomaly, but we renovate 100% of units within 12 months of ownership. We tend to do heavy value-add ($15,000+ / unit) and renovate units (if possible) on an occupied basis.
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